G.P On Portfolio Management With Respect To Banking Industry

Portfolio Management With Respect To Banking Industry
RESEARCH METODOLOGY
1.1 Problem Definition

The main aim of this project is to find out the best
banking stock listed on BSE. There are basically two main
reasons behind choosing this project. First, the banking
industry is a very important part of Indian financial
system and this project gives us the opportunity to
analyze the banking industry in detail and to get the
knowledge of different aspects of the banking industry.
Secondly taking investment decisions is a crucial
characteristic of a financial manager. Investment
decisions also include investment in the stock market.
Learning how to invest in the stock market helps not only
the financial manager but the individual investors also. In
addition to the above-mentioned opportunity, this project
also provides us an opportunity to learn the different
aspects of investment decisions related to stock market.
1.2 Sources of Data

The data collected in this project is all secondary data.
The data has been collected from various sites. The data
relating to the historical balance sheet and Profit and Loss
Account pertains to the Annual Reports of the respective
banks. The data of the monthly share prices of the banks
and sensex has been taken from the BSE website.
1.3 Objectives of the Project

 To analyze Indian economy and to find out its
impact on banking industry.
 To study banking industry with respect to
different parameters such as structure of banking
industry, government regulations, emerging patterns
etc.
1
 To scrutinize fundamentally strong banks listed

on BSE.
 To carry out qualitative and quantitative
analysis of selected banks.
 To apply the stock valuation models such as
CAPM, MV/BV approach, Discounted and Cash flow
technique to find out the best bank’s stock to invest.
1.4 Scope of the Study

In this study twenty-four Indian banks are taken which
were listed as on January 1, 2003 on the Stock Exchange,
Mumbai. The P&L, balance sheets and cash flows have
been projected for the year 2002-03 and 2003-04. This
project gives us the investment opportunities for the next
one year. The projections are based on the information
available in the annual reports of the banks and through
market information. While projecting the financials of the
bank some basic assumptions have been made. Due to
time constraints and resource constraints we were not
able to include some banks, which were good on the basis
of selection criteria.
Limitations
 This study is based on the secondary data only.
 The data for some banks was not available so we
can not say the banks that we scrutinized are only
fundamentally strong banks.
 The projections for different banks are based on
historical data only and we did not have the complete
information about the company’s future plans.
 Time constraint. We have selected the banks on the
basis of some limited criteria only.
2
INTRODUCTION TO BANKING INDUSTRY
Performance of banking industry is taken as barometer of

economy as a whole, due to banks wide spectrum of
exposure across industries. Unfortunately for India, the
banking sector has historically remained under the
impact of non-competitiveness, poor technology
integration, high NPAs and grossly under productive
manpower. In last few years, intense competition,
opening of economy, new entrants, new regulation and
standards has changed the macro-economic environment
for banks.
In ancient times, the Indian banking system existed

in the form of money lending. It was just over a century
ago that the country saw the evolution of proper banking.
During the British Raj, some agency house carried on
banking business. But, they were closed down between
1929-32. Following serious financial trouble, three
presidency banks were merged into the imperial bank of
India in 1919, which later became State Bank of India.
3
The first bank of limited liability merged by Indians was

Oudh Commercial founded in 1881. Subsequently, Punjab
National Bank was established in 1894. Also, the
swadeshi movement, which began in 1906, emerged the
formation of a number of commercial banks. In promoting
the banks and spreading the habit among savers leading
merchant communities in different parts of India have
played a major role. It helped them to promote trade with
neighboring countries like Burma, Malaysia and Sri Lanka,
besides their trading operations in India.
The banking system can be broadly classified as
organized and unorganized banking system. The
unorganized banking system comprises of moneylenders,
indigenous bankers, lending pawnbrokers, landlords,
traders, etc. Whereas the organized banking system
comprises of Scheduled Banks and Non-Scheduled Banks
that are permitted by RBI to undertake banking business.
Scheduled banks are those banks that are included
in the second schedule of the RBI Act 1934, subject to
fulfilling certain conditions. The scheduled banks
comprising of Scheduled Commercial Banks and
Scheduled Co-operative Banks enjoy certain privileges
like approaching the RBI for financial assistance,
refinance etc and correspondingly, they have certain
obligations like maintaining certain cash reserves,
submission of returns as prescribed by the RBI etc.
As of March 2002, there are about 294 Scheduled
Commercial Banks and 67 Schedule Co-operative Banks.
Of the 294 Scheduled Commercial Banks, 196 are
regional rural banks. These 294 Scheduled Commercial
Banks have an extensive branch network of 66,276
offices across the country, of which over 49% are in rural
areas, 22% in semi-urban areas, 16% in urban areas and
about 13% in metropolitan cities.
4
Non-Scheduled Banks are those joint stock banks,

which are not included in the second Schedule of the RBI
Act 134, on account of the failure to comply with the
minimum requirements for being scheduled. There were
16 Non-Scheduled Commercial Banks in June 1969. As on
March 2002, there are 5 Non-Scheduled Commercial
Banks, which are local area banks. However there are
more then 2000 Non-Scheduled Co-operative Banks,
which are concentrated in few states like Maharashtra,
Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu.
Further based on ownership, the Scheduled
Commercial Banks can further be classified as Public
Sector Banks, Private Sector Banks, Foreign Banks and
Regional Rural Banks. Public Sector Banks are sub-
classified into the State Bank of India (erstwhile Imperial
Bank of India nationalized by central enactment in 1955)
and its 7 associates nationalized in 1959 and other
Nationalized Banks which were nationalized in two
phases; 14 banks were nationalized on July 19, 1969 and
6 others on April 15, 1980.
Also the Private Sector Banks can be classified as old
private sector banks and new private sector banks,
wherein the latter enjoy superior discounting in the
bourses. After RBI reopened the banking sector to private
players, about eight private sector banks were licensed in
1995, which brought with them latest technology,
customer-oriented service, innovative products and
aggressive marketing.
Despite increasing competition, public sector banks
continue to dominate. This category currently accounts
for more than 81% of all deposits and over 79% of all
advances in the domestic banking industry. This scale of
operations bestows upon them a higher bargaining power
enabling them to play a dominant role in the liquidity and
5
interest rate levels in the system. However, the scenario

in the future may undergo a change with the growth of
the new private sector banks. These banks are in a more
advantageous position because of their superior
technology-based operations, lower manpower and a
lower non-performing assets (NPA) level.
2.1 Reforms in Banking Sector
The financial sector reforms were undertaken early in the
reform cycle. The reforms in the financial sector were
initiated in a well structured, sequenced and phased
manner with cautious and proper sequencing; mutually
reinforcing measures; complimentarily between reforms
in banking sector and changes in fiscal external and
monetary policies; developing financial infrastructure;
and developing financial markets.
The recommendations of the Narasimham
Committee-I in 1991 provided the blue print for the first
generation of reform of the financial sector. The period
1992-97 witnessed the laying of the foundations for
reforms in banking system. This period saw the
implementation of prudential norms pertaining to capital
adequacy, income recognition, asset classification and
provisioning, exposure norms, etc. The difficult task of
ushering in some of the structural changes accomplished
during this period provided the foundation for further
reforms. In fact, that India withstood the contagion in
1997 justify the stability of the banking system. While
these reforms were under way, cataclysmic changes were
taking place in the world economy, coinciding with the
movement towards global integration of financial
services. Against such backdrop, the report of
Narasimham Committee-II in 1998 provided the roadmap
for the ‘second generation’ reform process.
6
Some noteworthy developments in the banking sector are

as follows:
a) Interest rates have been deregulated, allowing
banks the freedom to determine deposit in lending
rates. Currently, on the deposit side, the interest rate
on saving deposit is administered; whereas, on the
lending side, while sub-PLR lending has been
permitted, the maximum spread in restricted to 4%
over the PLR of each bank and there is ceiling of PLR
on small loans up to Rs.2, 00,000.
b) The State Bank of India and other nationalized banks
enabled to access the capital market for debt and
equity.
c) Prudential norms for income recognition,
classification of assets and provisioning of bad debts
for commercial banks, including RRBs and FIs
introduced. They are required to adopt uniform and
sound accounting practices in respect of these matters,
and the valuation of investments. Banks are required
to mark to market the securities held by them.
d) The Performance Obligations and Commitments
obtained by RBI from each bank; they provide for
essential quantifiable performance parameters which
lay emphasis on increased but low cost deposits,
quality lending, generation of more income and profits,
compliance with priority sectors and export lending
requirements, improvement in the quality of
investments, reduction in expenditure, and stepping up
of staff productivity. The PO&C are meant to ensure a
high level of portfolio quality so that problems such as
heavy losses, low profits, and erosion of equity do not
recur.
e) Banks required to make their balance sheet fully
transparent and make full disclosures in keeping with
international accounts standard committee.
7
f) Banks given greater freedom to open, shift, and

swap branches as also to open extension counters.
g) The perceived constraints on banks such as prior
credit authorization. Inventory and receivable norms,
obligatory consortium lending and curbs in respect of
project finance relaxed.
h) The budgetary support extended for recapitalisation
of weak public sector banks.
i) Banks set free to fix their own foreign exchange
open position limit subject to RBI approval.
j) Steps have been initiated to strengthen PSBs
through increasing their autonomy. Several banks
capital base has been written off and some have
returned capital to the government. It was recognized
that restoration of health of banking system required
both a ‘stock’ solution (i.e. restoration of net worth)
and a ‘flow’ solution (i.e. an improvement in future
profitability). Restoration of net worth was achieved
through capital infusions from the budget. Competition
has been infused by allowing new private sector banks
and more liberal entry of foreign banks.
k) A set of micro-prudential measure have been
stipulated to impart greater strength to the banking
system and also, ensure their safety and soundness
with the stated objective of moving towards
international best practices.
l) Measures have also been taken to broaden the
ownership base of PSBs; consequently, the private
shareholding in PSBs has gone up, ranging from 23 %
( Bank of India) to 43.7 %(State Bank of India).
m) The banking system has also witnessed greater
levels of transparency and standards of disclosure.
n) As the banking system has liberalized and became
increasingly market oriented, the financial markets
have been concurrently developed, while the conduct
8
of monetary policy has been tailored to take into

account the realities of the changing environment
(switch to indirect instruments).
This set of measures, coupled with many others, did

have their positive impact on the system. There has been
considerable improvement in the profitability of the
banking system measured in terms of operating and net
profits. What is equally important is the fact the
intermediation process has improved. The profile of asset
portfolio and also the extent of the net non-performing
loans as percentage of total assets have shown
improvement. During this period, the supervisory strategy
has undergone a change, moving from opacity to
transparency.
2.2 Main Elements of Emerging Banking in India

A quiet revolution has been brewing on the banking front
in the country. The entry of private players has set the
market buzzing with activity. At the center of all this
frenzy is the customer who is being wooed with a blitz of
attractive schemes, home & phone banking and plenty of
other innovative products.
a) Trendy Moves
One of the most prominent factors to come to the fore
in Indian banking is that a large number of banks are
gravitating towards the retail customer. There are
several reasons for this. The first being that overall
credit off take has been quite low. And second, banks
found that there were not enough profitable and
creditworthy corporate customers for their funds. As far
as the benefits to the bottom-line are concerned, it will
take some time to become significantly visible.
According to bankers high initial infrastructure cost
9
would lead to a longer break-even period but once this

is through then the benefits would be high.
b) Earnings Pattern
It is important to consider the changing face of bank
profit and loss accounts. Traditionally, the main
earnings of banks have come from the core activity of
lending. This is reflected in the break-up of income
wherein interest/discount on advances/bills represents
a large part of income. With the normal credit off-take
of the bank on slower ground, many banks have
pumped an increasing amount into government
securities. Due to this, income on investments has
gone up significantly which is reflected in the
increasing investment deposit ratio. This has given
banks the required boost in tough times faced by the
economy.
The prevailing situation in the economy has led

to an increasing investor preference for bank deposits.
The fall in the equity markets resulted in investors
looking for low risk avenues to park their funds. With a
general fall in interest rates across the economy, the
rates on bank deposits too have fallen but the element
of safety associated with these deposits is proving to
be a comfort factor for lots of investors. At the same
time, the crisis faced by the cooperative sector
following the collapse of the Madhavpura Co-operative
Bank has led to a large number of depositors,
especially in the western states of the country, pulling
out their deposits from the cooperative banks and
shifting to commercial banks.
c) Mergers
10
In today’s scenario lot of mergers are taking place in

banking sector and the banks are moving towards
universal banking. The examples of mergers are the
merger between HDFC and times bank, PNB and New
Bank of India, ICICI and ICICI bank etc. among these
the merger between ICICI and ICICI bank has resulted
into the second largest bank in the country after SBI. It
is one of the biggest events in recent financial history
and a prime example of the concept of universal
banking.
d) Banks Entry into Insurance

Different banks are given permission to set up life
insurance subsidiary or to enter into joint venture with
insurance company or for strategic investment or to
act as insurance agents. For example, SBI has been
permitted to set up a life insurance subsidiary on risk
participation basis with 74 % equity holding. J&K bank
ltd., and Vysya Bank Ltd., have been accorded
approval to contribute 25% and 45% respectively to
the equity of insurance joint ventures on risk
participation basis. PNB and Vijya bank were permitted
to make strategic investment to the extent of 15% and
8%, respectively, in the life and non-life insurance joint
venture. Citibank, American Express, Standard
Chartered Bank, HSBC, ABN-Amro, HDFC Bank and
Deutsche bank have been given permission to act as
corporate agents of insurance companies fro
distribution of insurance products of fee basis.
e) Lead Bank Schemes

Under this scheme, a given bank is entrusted with the
responsibility of locating growth centers, assessing
deposit potential, identifying functional and territorial
credit gaps, and evolving co-coordinated programmes
11
of credit deployment is each district assigned to it, with

the help of other banks and credit agencies. The RBI
has allotted the districts, to nationalized banks and
each of these banks has been designated a lead bank
for the districts allotted to it. As at end of March 31,
2001, Lead Bank Scheme covered 576 districts in the
country.
f) Use of Information Technology

Economic integration within and across countries,
deregulation, advances in telecommunications, and the
growth of the internet and wireless communication
technologies are dramatically changing the structure
and nature of financial services. The use of IT is much
more in private sector banks than in public sector
banks. The state-of-the-art call centers and internet
banking has helped them to reach customers even at
far-flung locations. An important initiative currently
being witnessed is that public sector banks are
concentrating on information technology initiatives in
order to combat their private sector counterparts who
have made substantial gains on this front. The public
sectors banks are now increasing their IT spend to
make up for the loss of the first mover advantage. SBI,
for example, has committed Rs. 500 crore for its IT
initiative over the next few years to implement
‘anytime, anywhere’ banking.
g) Priority Sector Lending

Priority sector lending is the lending to agriculture,
small-scale industries, transport operators, etc. the
priority lending has been increased by all the three
types of banks that is by private sector, public sector or
foreign banks. In March 2001, the priority sector
advances of PSBs were 43% of the net bank credit, that
12
of private sector banks was 38.2% of NBC and of

foreign banks was 32% of NBC.
h) Food Credit
On the credit off take front, the only area, which has
been witnessing a rapid rise, is the food credit sector.
With procurement going up and the country go downs
overflowing with stocks; credit on this front has shown
a sharp increase. The total outstanding food credit
figure has jumped 40% over the past one year and
stood at Rs. 52,276 crore at the end of December
2001.
i) Interest Rate Deregulation

Interest rates have been deregulated, allowing banks
the freedom to determine deposit and lending rate.
Currently, on the deposit side, the interest rate on
saving deposits is administered; whereas pm the
lending side, while sub-PLR lending has been
permitted, the maximum spread is restricted at 4%
over the PLR of each bank and there is a ceiling of PLR
on small loans up to Rs.2 lakh. In the area of interest
on deposits/savings, there does not appear any
systematic architecture of the interest rate structure.
To substantiate, no defined time path or defined
preconditions have been identified in the area of
deregulation of saving bank rates. It is apparent that
banks, especially public sector banks are not ready for
this reform since there is a potential for instability in
the form of shifts in saving bank deposits between
banks, depending on the interest rates that emerge.
Thus, this is essentially a structural issue and
conditional on improvements in operational efficiency
of the public sector banks rather than an overall
interest rate issue in the macroeconomic sense. On the
13
overall interest rate structure in the financial system,

with different authorities setting different interest rate,
it might impinge upon the signaling mechanism of the
Bank Rate.
j) Non-Performing Assets
Non-performing assets of the banks include sub-
standard assets, doubtful assets, and loss assets as per
the classification used by banks. Although the NPAs
have declined over the years, they were and are still at
a worrisome level. The route problem is that there is a
sizable overhang component arising from the weak
debt recovery processes, inadequate legal structure,
weakness in underlying security, inadequate risk
management techniques, etc. the non-performing
loans can be categorized as loans to agricultural
sector, directed lending, loans to small enterprises and
loans to corporate sector. Many of the directed loans
are subsistence loans, where default rates are high and
recovery prospects not bright. As regards loan to
agricultural borrowers, legal impediments often prove
to be a challenging proposition for banks to recover
their dues. Loans to small enterprise become difficult
to recover due to inordinate judicial delays. Even if
court decrees can be obtained towards recovery, by
the time the charge of the assets is taken, its realizable
value is significantly diminished because of several
reasons including depreciation of the asset, lack of
borrower’s cooperation, limited market value of the
asset, with the concomitant effect that such decrees
are not executed. As regards corporate loans, suits
pending/referred to BIFR leave little headroom for
banks to affect recovery. Inadequate corporate
governance practices coupled with problems of fixation
of accountability leaves little maneuverability for banks
14
towards an all-out recovery drive. With the

environmental changes that are taking place, it seems
that the credit portfolio of banks is becoming
vulnerable and the issue of NPAs as a bane to the
system and one should be bold enough to bring out the
true position/tackle it ruthlessly.
k) Participation Certificates and Inter-Bank

Participations
The participation certificate is an instrument where a
bank can sell to third party a part or all of a
loan made by the bank to a client (the borrower). After
1979, the RBI advised to banks to achieve a significant
and lasting reduction in their recourse to PCs. As a
result, the use of PCs went down drastically after 1980.
The PCs scheme was replaced by two types of Inter-
Bank Participations, one on risk-sharing basis and the
other without it.
l) Credit Cards
The credit card is a convenient medium of exchange
which enables its holder to buy goods and services
from member-establishments without using money.
The credit cards are issued to people having a certain
minimum income. The cardholder is required to pay
neither an interest to the bank nor a higher price for
goods purchased, he pays only a fee to the bank for
the facility. The cost of arrangement is met from the
increase sales, which result from the use of credit
cards. The care-issuing bank pays to the seller as soon
as goods are sold but charges the buyer after 30 to 45
days, the bank also beats the risk that the cardholder
might default. For all this, the bank gets commission
from the seller which is about 2.5 to 5 percent of the
value of goods sold, the gain of the bank is the extent
15
of commission from the seller minus the risk and

interest factor, and administrative and advertising
expenses,. In addition banks earn by way of initial,
annual, add-on, and reissue fees from the prospective
cardholders. The volume of credit cards as a % of
population is 0.4 in India. The latest generation cards
available in India at present include ATM cards, Change
cards, Phone cards, Pre-paid Mobile SIM cards, and
Smart cards.
m) Consortium Approach
This approach requires that more than one bank would
finance a single borrower requiring large credit limit. It
(a) enables banks to spread risk of lending, (b) break
the monopoly of big banks to have large accounts, (c)
enables banks to share experience and expertise, (d)
introduce uniformity in approaches to lending, (e)
enables banks to pool their resources, and (f) checked
multiple financing of the same account.
16
PORTFOLIO MANAGEMENT
3.1 Introduction
In view of peculiar nature of stock exchange operations
most of the investors feel insecure in managing their
investment on the stock market because it is difficult for
an individual to identify companies that have growth
prospects conducive for investment. This is further
complicated by the volatile nature of the markets, which
demands constant reshuffling of portfolios to capitalize on
the growth opportunities.
Even if the investor is able to identify growth
oriented companies and their securities, the trading
practices are complicated, making it a difficult task for
investors to trade in all the exchanges and follow up post
trading formalities. That is why professional investment
advice through portfolio management services can help
the investor to make an intelligent and informed choice
between alternative investments opportunities without
the worry of post trading hassles.
3.2 Meaning of Portfolio Management

Portfolio management in common parlance refers to the
selection of securities and their continuous shifting in the
portfolio to optimize returns to suit the objectives of an
investor. This, however, requires financial expertise in
selecting the right mix of securities in changing g market
conditions to get the best out of the stock market. In
India, as well as in a number of Western countries,
portfolio management service has assumed the role of a
specialized service now a days and a high number of
professional merchant bankers compete aggressively to
provide the best to high net worth clients, who have little
17
time to manage their investments. The idea is catching

on with the boom in the capital market and an increasing
number of people are inclined to make profits out of their
hard-earned savings.
Portfolio management service is one of the
merchant banking activities recognized by Securities and
Exchange Board of India (SEBI). The portfolio
management service can be rendered either by the SEBI
authorized categories I & II merchant bankers or portfolio
mangers or discretionary portfolio manger as defined in
clauses (e) and (f) of Rule 2 of Securities and Exchange
Board of India Rules, 1993.
According to the definitions as contained in the
above clauses, a portfolio manger means any person who
pursuant to a contract or arrangement with a client,
advises or directs or undertakes on behalf of the client
(whether as a discretionary portfolio manager or
otherwise) the management or administration of a
portfolio of securities or the funds of the client, as the
case may be. A merchant banker acting as a portfolio
manager shall also be bound by the rules and regulations
as applicable to a portfolio manager.
Realizing the importance of portfolio management
services, the Securities and Exchange Board of India has
laid down certain guidelines for the proper and
professional conduct of portfolio management services.
As per guidelines, only recognized merchant bankers
registered with SEBI are authorized to offer the services.
Portfolio means the total holdings of securities belonging
to any person.
3.3 Objectives of Portfolio Management
 Security/safety of Principal: Security not only
involves keeping the principal sum intact but also
keeping intact its purchasing power.
18
 Stability of income so as to facilitate planning more

accurately and systematically the reinvestment or
consumption of income.
 Capital growth that can be attained by reinvesting in
growth securities or through purchase of growth
securities.
 Marketability i.e. the case with which a security can
be bought or sold. This is essential for providing
flexibility to investment portfolio.
 Liquidity i.e. nearness to money. It is desirable for
the investor so as to take advantage of attractive
opportunities upcoming in the mkt.
 Diversification: The basic objective of building a
portfolio is to reduce the risk of loss of capital and/or
income by investing in various types of securities
and over a wide range of industries.
 Favorable tax status: The effective yield an investor
gets from his investment depends on tax to which it
is subject. By minimizing the tax burden, yield can
be effectively improved.
19
ECONOMIC ANALYSIS
It involves analyzing the major factors that affects the

national economy. These major factors are GDP, inflation,
interest rates, forex reserves, monitory policy, fiscal
policy, monsoon etc. it is important to predict the course
of national economy because economic activity affects
the corporate profits, investors attitudes and expectations
and ultimately stock prices. An outlook of sagging
economic growth can lead to lower corporate profits, a
prospect that can engender investor’s pessimism and
lower security prices. Some industries might be expected
to hold up better, and stock prices of companies in these
industries may not decline as much as in general. The key
point is that overall economic activity manifests itself in
the behavior of stock in general. We have adopted two
approaches for analyzing the economy. First is the
20
indicator approach and another is using the major factors

of economy as mentioned above.
4.1 Indicator Approach

In this approach we have used two indexes named DSE-
ECRI Indian leading index and DSE-ECRI Indian coincident
index.
The DSE-ECRI Indian leading index, a precursor of
Indian economic recession and recoveries, rose to 181.1
in October 2002 from 172.3 in September 2002. Its
growth rate also jumped to 20.1% in Oct. from 11.5% a
month ago. This suggests that economic recovery is likely
to continue, at least for the near term. The leading index
has grown in double digits since May 2002 and has been
on the rise since the last quarter of 2001, which indicates
pick-up in economic activities.
Growth of economy can also be judged by the DSE-
ECRI Indian coincident index. It rose 6.5% in August, 2.8%
in September and 4.6% in October 2002. This confirms
the 5.7% GDP growth recorded in the July-September
quarter of fiscal year 2002-03.
4.2 Analyzing Economy using Different Parameters
 Monsoon
The dependence of Indian economy on agriculture
and monsoon is very high due to lack of infrastructure
facilities like irrigation network. It has lead to high
dependence on monsoon rains. Nearly 60% of
country’s gross cropped area under cultivation is
dependent on rains. Therefore poor monsoons are
21
bound to affect the overall economy. The lack of

monsoon hits the small farmers harder as they do not
have any irrigation facilities. Lack of income in the
hand of small farmers hits consumption in the rural
area. The industries that may be hit in such scenarios
will be consumer non-durables, consumer durables,
cement and automobiles, particularly two wheelers.
Over the past several years, monsoons have been
uniformly good leading to high consumption of some
goods in rural areas. One of the biggest beneficiaries of
better rural income was the automobile industry, which
saw an unprecedented jump in sales year after year. In
the current financial year the monsoon was bad and
there was drought in 14 states. According to the CSO
data, the overall agriculture growth for April-September
in 2002-03 has slipped to 2.5% in comparison to the
3.3% in the similar period in 2001-02. In particular, the
second quarter June-September, has shown zero
growth. There are estimates that the output of various
kharif crops would be significantly lower than the
previous year. Rice production is estimated to fall by
16%, that of coarse cereals by 27.5% and pulses by
16.9%. Even the production of commercial crops such
as cotton and sugarcane is due to decline significantly.
At the same time, the CSO has calculated that not
withstanding this dip, the overall agriculture sector
would register a zero growth, and particularly as part of
counter measures against drought, the government
was able to affect a higher output of horticulture and
livestock products.
Historically, a severe drought caused a major
economic crisis. When rainfall become below normal,
by say 15% or more, growth rate of both GDP from
agriculture and aggregate GDP declined and in
extreme cases both become negative. The incidence of
22
unemployment and underemployment increase,

essentially in the rural areas. Inflation rate shot up to
double-digits. The food imports necessitated by the fall
in domestic production led to foreign exchange crisis.
Finally, the burden of drought relief, borne mainly by
the government of India, increases the fiscal deficit.
The drought, therefore, became the most important
factor behind the economic crisis in 1965-66, 1966-67,
1972-73, 1974-75 and 1979-80. Even in this year also
the rainfall was well below the normal. But at this time
we had 60 million tones of food grains and above 60
billion $ of foreign exchange which have saved us from
the severe drought impact.
 GDP
National Income Accounts measures the value of
production in an economy, and how that produce is
disposed off by all the agents of that economy. Though
there are several components and categories in which
this output is measured are the GDP at market price,
and GDP at factor cost. There is the broadest maser of
output in the economy what the GDP measure is value
added. There are two ways in which GDP measured.
One way is to do so by measuring it at the production
stage and the other is to measure it as the sum total of
consumptions. Both should yield the some result. In
India, central statistical organization measures output
from the production side, broadly dividing it into three
sectors: agriculture, industry and services.
On 31st December 2002 the Central Statistic

Organization released latest data of actual economic
performance. This data covers the period April to
September, constituting the first half of 2002-03.
According to this, the overall economic growth, in
terms of GDP has shown 5.9% growth for the period. In
23
the first quarter, for the period April- Jun the GDP
showed 6% growth. More significant, in the 2nd quarter,
July – September, despite drought in many part of the
country, it slipped only marginally to 5.8. The first half
of the previous fiscal year 2001-2002 had witnessed
4.4 % growth. The July-September period of 2001-2002
had witnessed 5.3% growth.
The data for agricultural growth is given in the
previous topic. On the other hand, the service sector
has shown 7.5% growth in the first half of 2002-03.
This sector had shown 5.5% growth in the first half of
the previous financial year.
April-
PARTICULARS September
2002- 2001-
03 02
A Agriculture Sector 2.5 3.3
B Service Sector 7.5 5.5
a
) Financing, insurance, 8.9 7.6
Real estate & busi.
Services
b Trade, hotels,
) communication 8 2.4
C Industrial Sector 5.1 2.1
a
) Capital Goods 8.9 6.8
b
) Basic Engineering Goods 4.8 2.1
c
) Non-durable goods 14.8 2.8
d Consumer Durables -6.5
24
The industrial growth for the April-September

period in the current fiscal was 5.1%. The same period
for the previous financial year, 2001-02 witnessed
industrial growth at just 2.1%. The industrial sector has
demonstrated a fairly broad based recovery this year.
Thus the lower agriculture growth has been offset by
higher industrial production. Thus the overall economic
performance is very attractive for the first half of the
current financial year. Therefore we can say that the
country has acquired the capability to consistently
witness much higher growth rate. The higher GDP
indicates that the economy is on a strong footing and
the 8% growth premise for the tenth plan period (2002-
07) is very much achievable.
Even the import of capital good has increased
which itself give an indication about the expansion of
manufacturing industry. If we see growth of consumer
non-durable goods for this period, it is even more
striking. It is 14.8% while it was 2.8% in the April-
September period last year. According to experts, this
indicates a massive pick-up in consumer spending and
demand. Growth rates for various sectors have given
below.
GDP At Constant
Factor Cost
1990-91 5.60%
1991-92 1.30%
1998-99 6.50%
1999-00 6.10%
2000-01 4%
2001-02 5.40%
25
In 2001-02 gross and net domestic savings at

current prices grew by 11.8% and 13.3% respectively
to increase their share in GDP at market prices. Gross
(net) domestic savings, as a proportion of GDP (NNP) at
market prices, improved to 24(16) % in 2001-02, from
23.4% (15.4) in 2000-01. The household sector was the
best performer with the increase in its gross savings
exceeding the total savings in its gross domestic
savings. Households increased the share of financial
savings in their total savings from 48% in 2000-01 to
49.8% in 2001-02. Private corporate savings increased
roughly at half the rate of increase of household
savings. This shows better prospects for retail banking.
The higher industrial growth indicates that it
will be beneficial for the bank industry, as the
corporates loan’s demand will shoot up. During the last
year the agricultural growth was almost nil. Due to the
priority sector lending norms this may affect the NPA
levels of banking sector.
 Interest Rates
Interest rates have different meanings for different
people. For the man on the street it could mean the
rate of interest he earns on his deposits or the rate he
pays on his housing loans. For corporate it could mean
the rate of interest it pays for borrowing money from
banks and for bank traders it would mean the yields on
gilts.
During 2002-03, financial market in India

have been generally stable, liquidity has been
adequate and the interest rate environment favorable
to promote investments. Accordingly, there has been a
26
fall in interest rates all across the financial system and

maturity tenors. Banks have reduced their deposits and
lending rates. The maximum interest on bank’s fixed
deposits which used to be a high as 13-14% before 4-5
years ago has been consistently reduced to 6-6.5%.
Similarly, the lending rates of banks (PLR) reduced
from as high as 18-19% to 11-12% as of now. The
interest rate on government security has also fallen
significantly. The yield on 10-year benchmark
government paper reduced from 14% in March 1996 to
10.36% in March 2001. In 2001-02 it dropped by
whopping 300 basis points to 7.36% as on March 31,
2002. In the current financial year, the same has fallen
by around 100 basis points so far to 6.38% as of now.
Even large corporate could access market directly and
rise funds cheaply. The major drivers to the softening
of interest rate during the current year is comfortable
liquidity propelled by strong forex flows & CRR cuts by
75 basis points, appreciating rupees, slow credit off
take, low inflation and falling global interest rates.
The RBI announced a cut in the bank rate in the
midterm review of monetary policy. Classical economic
theory says that lower the interest rate, the better it is.
In a low interest rate regime many good things happen.
Demand for consumer goods like autos get a boost.
These goods are mostly bought under installment
purchase schemes and if interest rates are lowered,
more people can afford them. The stock market too
gets a boost. People shift their funds from fixed
deposits in banks to buy shares. Corporates on the
other hand reduce interest cost and invest such
savings in crediting new capacities. Most importantly,
the government can then cut taxes. The government’s
outgo on interest payments of its market borrowings
reduces, and this allows it to reduce taxes.
27
In other words, interest rates should go down

as much as possible. If the above argument is true, the
Japanese economy should have been booming. But it is
not the case. If we take the case of India, vast
majorities of our people have burnt their fingers in the
stock market, in buying real estates where prices have
gone down significantly. Even if we see the trend
during the 9th plan period, there is a shift in the
composition of financial assets of the household sector
from deposits and shares and debentures to long term
and less risky instruments. The decline in the share of
deposits is probable due to the falling interest rates
compared to other long-term instruments where
impact was partly cushioned by favorable tax
treatment. Thus not only the interest rates but the
perceived riskiness can also affect the investment
patterns in the economy.
According to the expertise the outlook on
interest rate appear to be optimistic with both the RBI
and finance ministry insisting on softer interest rates
regime to stimulate investment and revive demand in
the economy. If the U.S Federal Reserve adapts
tightening bias, it can affect the interest here.
Industrial recovery leading to credit pick up can also
affect the interest rates. Any strain on fiscal position
and the exchange rate may also put pressure on it. The
policy announcement in the budget and annual
monetary and credit policy announcement will chart
the direction of interest rate going forward. The lower
interest rates can contribute to the greater competitive
strength of the Indian industry through cost reduction.
The interest rate continues to be below rate of
growth of GDP, this is a sign of fiscal sustainability
even though the ratio of debt to GDP keeps rising.
28
 Inflation
Inflation rates for different years are as follow.
INFLATION
RATES
1998-99 6%
1999-00 3.30%
2000-01 7.10%
2001-02 3.60%
In simple terms inflation is the rise in prices. During

2001-02 the inflation rate declined in terms of
Wholesale Price Index. The 52-week average inflation
rate declined from 7% at the beginning of 2001-02 to
4.7% for the week ended January 2002.
The inflation rate is declining in these days. It
has remained in range of 4%. ETIG computed the
implied rate of inflation in the national account
statistics. The exercise reveals that the implicit
inflation rate in 2002-03 was just 2.3% down from 3.4%
in the previous year. The implicit inflation rate in
national account is considered to be the widest
measure of inflation in the economy, since unlike the
wholesale price index, it also incorporate the effect of
price rise in services. As the inflation rate is at nominal
level currently, so we can say that the savings will
increase which indicates good signal for banks.
 Forex reserve
FOREIGN DIRECT
INVESTMENT
1998-99 13339.84
1999-00 16867.79
29
2000-01 19341.73
2001-02 19265.1
It comprised mainly of foreign currency assets, gold

and SDRS with RBI. The FER held by the RBI have
crossed the market of 70 $ billion. Higher foreign
reserves maintain confidence in the external value of
the rupee. It assures economy agents that RBI has
necessary resources to prevent the rupee from
depreciating widely. In turn, this prevents any panic
buying of imports or sudden liquidation of portfolio
investment by foreigners. The rising reserves offer us
an unusual opportunity to complete our trade
liberalization program at rapid pace. Further
liberalization will stimulate imports and create the
necessary demand for dollars. This could help in the
contingencies such as war.
Fiscal Deficit
The fiscal deficit, as a proportion of GDP, has gone up
from 4.1% in 1996-97 to 5.9% in 2001-02 for the
central government and from 9.6% in 1999-00 to 9.9%
in 2001-02 for the general government (i.e.
consolidated centre and states).
The government’s failure to rein in fiscal deficit
has emerged as a major impediment threatening the
economy, nullifying benefits arising out of low inflation,
soft interest regime, high foreign exchange reserve
and upturn in the performance of manufacturing
sector. Inability to meet revenue growth targets and
lack of adequate control over expenditure, particularly
plan expenditure, as led to a situation where only
drastic steps could contain the deficit from going out of
hand. The situation has only worsened due to
uncertainty over disinvestments, which was expected
30
to generate Rs. 12000 crores during 2002-2003. The

main reasons for fiscal deficit are the areas like
subsidies, expenditure on account of wages, salaries
and pension, the interest burden on the centre and
defense spending.
While the rate of interest continues to be below
the rate of growth of the economy, high primary
deficits have led to progressive increase in both deficit
to GDP and debt to GDP ratios. During the first half of
the current fiscal, the fiscal deficit was marginally
higher than the previous year. If fiscal deficit is not
checked, interest rates would go up once investment
demands picks up and inflation would also surge.
Therefore the efforts made by the government to keep
prices in control will vanish. The vicious circle would
only end up making the economy uncompetitive.
As per the mid-year review presented in
parliament the govt. should adopt an expenditure
rationalization and reprioritizing program, which must
address the issue of subsidies, through a
rationalization of prices of food, fertilizers, LPG and
kerosene. As of today the government would manage
to deflate its fiscal deficit purely through reduced
interest cost, high loan recoveries from PSUs and
unspent capex budget without undertaking any real
expenditure restructuring, or increased revenue
realization.
Now lets look how the government would be

able to cut expenditure on account of falling interest
rates in global as well as domestic market. States are
paying back high cost loans to the centre and replacing
them with cheaper debt from small savings. The total
interest payments budgeted during 2002-03 are Rs.
1,17,390 crore. The actual interest paid could be no
31
more than Rs. 1,09,000 crores. Many PSUs whom the

government had lent at higher interest rates are
returning the money to the respective central
government departments and accessing much cheaper
money from the market. Finance minister Mr. Jaswant
Singh has also began the process of asking department
to return capex budget unspent. From the defense
ministry alone about Rs. 3000 crores could be
returned. All the above heads aggregated could save
the centre about Rs. 20,000 crore as against the
budgeted figure. This could take care of the expected
revenue shortfall of Rs. 12,000 crore as well as the
shortfall in disinvestments receipts of Rs. 6000 crores.
 Monetary and credit policy

Monetary and credit policy of RBI determines the
supply of money in the economy and the rate of
interest and availability of credit. It also contains an
economic overview and presents future forecasts.
Monetary and credit policy has stance of a soft
interest rate bias and efficient liquidity management. It
has also maintained the RBI‘s focus on improving the
regulatory and risk management framework for banks.
In the mid term review in October ’02, RBI reduce the
bank rate to 6.25%, CRR to 4.75% and reduce repo
rate by 25 basis point to 5.75%. Reduction in bank rate
and repo rate reinforces the RBI’s soft interest rate
policy.
The policy appears to aim at maintaining a
stable, low interest rate scenario while taking
measures to make the banking system more efficient,
in order to crate a platform for growth.
INDUSTRY ANALYSIS
32
When an economy grows, it is very unlikely that all

industries in the economy would grow at the same rate.
So it is necessary to examine industry specific factors, in
addition to economy-wide factors. An appraisal of
particular industry’s prospects is essential, since the basic
profitability of any company depends upon the economic
prospects of the industry to which it belongs.
5.1 Structure of Banking Industry

The banking system can be broadly classified as
organized and unorganized banking system. The
unorganized banking system comprises of moneylenders,
indigenous bankers, lending pawnbrokers, landlords,
traders, etc. Whereas the organized banking system
comprises of Scheduled Banks and Non-Scheduled Banks
that are permitted by RBI to undertake banking business.
As of March 2002, there are about 294 Scheduled
Commercial Banks and 67 Schedule Co-operative Banks.
Of the 294 Scheduled Commercial Banks, 196 are
regional rural banks. These 294 Scheduled Commercial
Banks have an extensive branch network of 66,276
offices across the country, of which over 49% are in rural
areas, 22% in semi-
There were 16 Non-Scheduled Commercial Banks in
June urban areas, 16% in urban areas and about 13% in
metropolitan cities. 1969. As on March 2002, there are 5
Non-Scheduled Commercial Banks which are local area
banks. However there are more then 2000 Non-Scheduled
Co-operative Banks which are concentrated in few states
like Maharashtra, Gujarat, Karnataka, Andhra Pradesh and
Tamil Nadu.
Further based on ownership, the Scheduled
Commercial Banks can further be classified as Public
Sector Banks, Private Sector Banks, Foreign Banks and
33
Regional Rural Banks. Public Sector Banks are sub-

classified into the State Bank of India (erstwhile Imperial
Bank of India nationalized by central enactment in 1955)
and its 7 associates nationalized in 1959 and other
Nationalised Banks which were nationalized in two
phases; 14 banks were nationalised on July 19, 1969 and
6 others on April 15, 1980.
Also the Private Sector Banks can be classified as old

private sector banks and new private sector banks,
wherein the latter enjoy superior discounting in the
bourses. After RBI reopened the banking sector to private
players, about eight private sector banks were licensed in
1995, which brought with them latest technology,
customer-oriented service, innovative products and
aggressive marketing.
Despite increasing competition, public sector banks
continue to dominate. This category currently accounts
for more than 81% of all deposits and over 79% of all
advances in the domestic banking industry. This scale of
operations bestows upon them a higher bargaining power
enabling them to play a dominant role in the liquidity and
interest rate levels in the system. However, the scenario
in the future may undergo a change with the growth of
the new private sector banks. These banks are in a more
advantageous position because of their superior
technology-based operations, lower manpower and a
lower non-performing assets (NPA) level.
Among all the commercial banks, SBI is the largest
bank, whereas ICICI Bank is the largest private sector
bank.
5.2 Cost Dynamics
34
Banking, everywhere in the world, is a highly regulated

industry. The banking industry is the repository of
savings of a nation contributed by millions of people.
Thus a bank basically acts as an intermediary between
savers and borrowers. Hence, costs to a bank are the
interest cost paid to savers and the establishment cost. A
bank's margin arises out of the difference in interest paid
to depositors and charged to borrowers. The funds raised
from savers are deployed in three ways - loans and
advances to industry and agriculture, investment in
government securities, investment in private sector
equity, debentures, commercial papers, etc.
A bank's sources of revenue are interest from loans
and advances, income from government securities and
dividend/interest from private sector equity investments
and debt instruments.
Apart from this, a bank also earns non-fund-based
income, also called as fee-based income for the various
services rendered by it as a banker or in the course of
banking activities. It includes treasury and forex
operations, income from trading in shares, guarantee
commission, etc.
The employee cost is about 9% of the normal
banking income of private sector banks, while it is over
16% in public sector banks. Recently, the over-staffed
public sector banks have rolled out a VRS package for
their employees.
Unlike in past where the bankers had practically
forgotten the significance and importance of profits in the
life and operations of a bank. They perceived that rules of
the game have changed. Instead of deposits and priority
sector lending, which were the yardstick for measuring
the banks performance hitherto, it will now to be the
35
profits. Innovative and unconventional methods of profits

are being learnt and devised.
With the economy engulfed in recession, many of
the bank advances to core industries like steel, textiles
have ended up as NPAs affecting the profitability, liquidity
of banks and in some case their very financial viability.
With prudential norms getting stringer, of late, banks
incur substantial costs on account of reversal of income
booked earlier in respect of non-performing assets, and
the provisions to be made thereof.
Further with the deregulation of interest rate
structure, pricing of loan and deposit products will be
determined by market forces as well as assets-liability
profile of specific banks. This versatile instrument of
interest rate can be very usefully employed to meet
different or changing objectives of a bank from time to
time.
5.3 Structural Changes

Banks have started accessing Tier - II capital like
preference shares and its deployment pattern has also
changed, with new avenues like bonds, debentures etc.
When funds are accessed as deposits, SLR (Statutory
Liquidity Ratio) and CRR (Cash Reserve Ratio) needs to be
maintained but if it is accessed as Tier II capital, it not
only improves the bank's capital adequacy but the bank
is also absolved of SLR and CRR requirements on such
Tier II funds. Likewise, when lending, a bank needs to
ensure priority sector lending does not fall below 40 % of
the total lending, while deployment through debentures
and other instruments is devoid of these restrictions.
Even corporates prefer to access funds through such
instruments, because, depending on their financial
36
strength, coupon rates gets finer, thereby reducing their

cost of funds.
5.4 Current Scenario

 Changing Face of Banking Industry
Since its inceptions, banking has continually evolved
but perhaps the pace of change has never been as
rapid as in the current time. New thinking is emerging
and focus has now changed in the banking industry.
Nowadays, the banks do not rely on the lending as one
of their main products. In today’s competitive
environment number of banks is increasing and the
number of bankable corporates is reducing. The growth
in number of banks has been fuelled by the emergence
of several private sector banks while the bankability of
more and more corporates is reducing owing to the
continued recession in most industries.
The stiff competition has reduced margins for
the banks. The banks are now trying to increase the
flow of transactions through their consumers which
provides fee based income a comparative lower risk.
The competition also makes relationship banking
essential. Relationship helps the banks to sell standard
products which are not very different from one bank to
another as well as it also helps to understand the
client’s need in time and working out structured
customized solutions. Several new products have been
evolved in this area during the last few years. This area
is witnessing growth at higher margin.
The other focus area for the baking industry is
channel finance. In this concept the bank use the
credit-worthiness of the major corporates and provide
funding to the channel partner viz. suppliers and
dealers at spreads better than what the corporate
37
offers but lower than what the channel partners get on

their own strength. Pure lending has also given way to
trade financing with structures to mitigate risk and
improve pricing. The service levels and the turnaround
times have also improved due to the increased
competition. This is mainly because of centralization of
processing and investment in technology. Banks are
now moving towards, providing Internet banking to
customers, which cannot only be used for inquiry but
also for transaction initiation.
Hence, banking is changing and the times are
exciting for all the corporates as well as the
professional bankers.
 Non-Performing Assets
The issue of NPA Management is the biggest challenge
before the banking sector. The higher competition has
led the banks to accumulate poor quality of assets.
The quantum of NPA is the true indicator of quality of
assets. NPAs are a serious strain on the profitability as
banks cannot book income in such accounts and they
are required to charge the funding cost and provision
requirement to their profits.
The total non-performing loans for the financial
sector were estimated at Rs. 110,000 crores. Banks
alone have about Rs. 70,900 crore worth of NPAs, were
estimated at approximately 10.4% of their gross
advances. The level of gross NPAs of all groups of
banks for the last three years is shown in the following
table.
TABLE : NPAs (Rs.

in Cr)
38
Gross NPAs*
200
Bank Group 0 2001 2002
Public Sector 5303 5477
Banks 3 3 56507
12.40 11.10
14% % %
Private Sector
Banks 4761 6039 11672
8.20 8.40
% % 9.70%
Foreign Banks 2614 3071 2726
6.80
7% 5.40% %
6040 6388
Total 8 70905 3
12.7 11.4
% 10.4% %
*% figures are gross NPAs as % of
gross
advances
Source: Professional Banker, March
2003
39
Chart 1 : Gross NPAs as % of total advances
12
10
8 Public Sector
6 Private Sector
4 Foreign Banks
2
0
Public Sector Private Foreign
Sector Banks
Chart 2 : Gross NPAs (Rs. in Billion)

27.26
116.72
Public Sector
Private Sector
Foreign Banks
565.07
However after passing of the ‘Securitization and

Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002’, the banks will be able to
reduce their NPA levels drastically. The reduction of the
NPA levels will increase the bottom-line of the banks.
And also the budget on Gilt-buyback will affect
positively on bank’s balance sheet. If the government
buyback the securities, banks will be able to show
stronger balance sheet from the next financial year by
providing for NPAs at the same time they can get rid of
investment, which though paying a higher return
40
cannot be off-loaded for an expected gain, simply

because the securities are illiquid and coupon rates on
such bonds are completely out of sync with prevailing
market yields. Thus, banks have ample opportunity to
reduce their NPAs.
 Spreads
The magnitude of spread measures the intrinsic profit
earning power of the banks. Spread is defined here
simply as the difference between the ratio of interest
earned to total assets and the ratio of interest
expended to total assets, which is the formula used by
the RBI in estimating a banks spread. By definition,
higher the spread the greater is the banks efficiency
and vice versa. According a recent study by RBI the
average spread of 97 scheduled commercial banks
both, Indian and Foreign, declined by 0.65% points
during the last 5 years from 3.22% in 1996-97 to
2.57% in 2001-02. During this period the interest rates
were falling at regular intervals. The fall in interest
rates affected both interest earnings and interest
expenditure of banks but its impact was higher on the
earning side.
Thus there is a steady decline in commercial
bank’s spread in recent years and this indicates a
decline in profit earning capacity.
 Technological Shift
After entry of Private Sector Bank into the banking
sector, the Public Sector Banks have loosened their
clients, who switched their loyalties on discovering the
joys of convenient banking. One of the biggest changes
that the Private sector has brought about is in the
application of modern technology like Internet banking
and just around the corner ATMs. This has benefited
41
both the banks and the customers and a lot of private

banks actually have more ATMs than physical
branches. And this has led many banks to invest
heavily on the technological aspects. Private sector
banks spend on technology goes in hand with their
expansion while Public Sector and medium sized
private banks focus on automating their urban
branches and networking them.
For instance, United Bank of India has
announced its intention to spent Rs.150 crores on
technology while Vysya Bank plans to spent Rs.60
crore on the same. The State Bank of India is going to
spent Rs.500 crore over a 3 years period. Even the
smaller banks like Bharat Overseas Bank and City
Union Bank are also planning to spend on the IT
aspect. The World Bank has also announced an
automation fund for Indian banks under which Indian
Bank, Dena Bank and Bank of Baroda will receive
around $25 million to spend solely on IT. The number
of fully computerized branches has increased from
5514 in Sep. 2000 to 11578 in March 2002. Therefore,
it is very important for any bank to spend on IT to
survive in the industry.
Banking sector scenario in government security

Bank has been warned that they cannot continue to
invest heavily in low holding government securities to
make up the commercial credit. The government is
concerned that banks could take body below once
interest rate start hardening. The concerned wise in
the economy survey comes a month after financial
ministry circulated report that said that only 10 of the
42 major banks in the country are hedged, in the since
of starting to gain or loss less than 25% of equity
42
capital in the event of a 320 basis point interest rate

stock.
Pointing out that bank are not passing on the
full benefit of the reduction in landing cost to
borrowers, the survey said that cuts in interest rate
and increase in forex inflows have fail to result in any
appreciable increase in credit flow to the commercial
sector.
The survey highlights that bank’s investment in
government securities rose by a record 35%to 85738
crore during the current fiscal up to January 10,2003
from Rs 63,082 crore in the corresponding period last
year and this was despite the fact there has been
sharp fall in yields on government securities. Bank’s
investment in G-Secs now amounts to 37.8% of banks
net demand and time liabilities as compared to the
statutory stipulation of 25%. As against this, bank
credit to the commercial sector rose only 9.7% till
January 10 this fiscal, compared to 11% in the year-ago
period.
 Lending Rate Cuts Not Matched by Cut In

Interest on Deposit
Alarms bells are ringing big time. This time over banks
lending below the primary lending rates. Though sub-
PLR lending by the commercial Banks has been
growing, the survey point out, taking up almost over
one third of the total lending pie, the rate cuts, haven’t
keep pace with the deposit rate snips. While the bank
rate cut of 75 basis point from 7% in march 2001 to 6
point 25% in January 10/2003, has been matched by a
cut in PLR by the bank from a band of 11%-12% in
march 30, 2001 to a band of 10.75% to 11.5% in
43
January 10/2003,the fall in deposit rate have been

sharper in comparing to the cut in the PLR.
The rates fill from a band of 8.5% to 10% in
March 30/2001 to band of 5.5% to 6.5% in January
10/2003. Indeed, if anything the stats only point to the
in efficiency of the banking sector. The interest spread
the difference between interest charge to the borrower
and interest paid to the deposit, increase by 6.8% in
2001-2002.
A higher spread means higher cost of
intermediation. But the ratio of interest spread to the
total assets has declining from 2.9% into 2000-2001 to
2.6% in 2001-2002, meaning that the yields on assets
have come down or that the repressing is thinner.
Sharp Raise in Provisioning by private banks

Private sector banks saw a share rise in provisions and
contingencies during 02-03, while this declined for
foreign banks, said the economy survey for 02-03.
Provision for entire banking sector rose by 36.6% to Rs
18242 crore, from Rs 13,353 crore in previous years.
While provisioning for new private sector bank
grew by 83.3%, for old generation private rose
by55.3% and public sector bank by 41% provision for
foreign banks declined by 6.7%. Provision for new
private banks rose to Rs 1337 crore, from Rs 730 crore.
For old generation private sector banks, it grew to Rs
1512 crore, from Rs 974 crore
Deposit the leap in provisions; the numbers of
private sector banks are much smaller than public
sector and foreign banks. Even though there has been
declined in percentage terms for foreign banks, the
provision for 01-02 was Rs2021 crore, compared to Rs
13372 crore, from Rs 9485 crore. In case of SBI group,
44
it rose by almost 50% to Rs5270 crore from Rs 3518

crore. The increase in provisioning reflects provisioning
for NPAs by banks to meet prudential requirements
said the economy survey. During 01-02 the proportion
of NPAs to net advances was the highest for public
sector banks at 5.8%, closely followed by private sector
banks (5.7%)
5.5 GOVERNMENT POLICY
 Securitisation Bill
An ordinance on Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
was promulgated on 24th June 2002. The same has
been passed by the Parliament in Nov. 2002. The
ordinance will help banks and financial institutions
improve their financial position in three ways. Firstly it
will help banks and FIs turn their assets into securities,
which could be traded in the market in smaller
bundles. This would bring immediate liquidity, which
can be lent, instead of waiting for loans to be realized.
The new law will also help them in setting up asset
reconstruction companies to recover their bad assets.
And finally, it will help in the enforcement of security
interest (i.e. right to the security in case of default by
the client). This ordinance creates a right environment
for faster recovery of dues and gives hope that the
huge the burden (now estimated at over Rs 1,100
billion) of NPAs on Indian financial sector will be
reduced to a more reasonable level. It also offers scope
for Public Sector Banks to clean up their balance sheets
faster.
Using this law, banks may make lesser
provisions for NPAs and recoveries may in fact result in
some write backs thereby adding to the bottomline
45
directly. No doubt this Act is a good thing to have

happen, but in reality it is not magic wand against the
mounted NPAs because of several reasons which are
explained below. In the case of ARCs, while they would
be in a position to make a concentrated efforts at
recovery after buying out the problem assets, the issue
of valuation of these assets and the role of the valuer
yet to be clear. Besides secured assets would also
include both tangible and intangible assets. Intangible
could be things like software, brands, goodwill, and the
like, valuation for which could be crucial. There is also
the issue of the banks paying insurance and providing
security to the assets. All these being highly manpower
intensive, banks are finding themselves inadequate in
dealing with this aspect. Besides, 75 percents of the
lenders in the value will have to agree to the decision
to attach the properties. Though banks may well go
and attach properties under the Act, selling them
would pose another problem since it is difficult to find
buyers. Another cause for confusion remains: banks
having to go to more than one forum for recourse. Most
public sector banks have already find cases for
majority of their NPAs with the debt recovery tribunals,
which they say have proved a rather defensive mode
of recovery. With the new Act some banks are now
wondering how to balance the two fora.
In conclusion, having got a powerful tool in
hands, banks will now have to learn how best to use it
to their advantage. On this Act, a lot of work remains to
be done, with clear policies and guidelines required
before the banks can truly reap its benefits.
 RBI Regulation
The Reserve Bank of India (RBI) in its recent credit
policy declared on 29th Oct. 2002 has decided to
46
reduce the bank rate; cash reserve ratio (CRR) and the
repo-rate by 25 basis points (bps) each. The bank rate
has been reduced from 6.5% to 6.25%. Likewise, the
repo-rate under RBI's liquidity adjustment facility (LAF)
has been reduced from 5.75% to 5.5%. CRR has been
reducing from 5% to 4.75%. However this will be
effective from the fortnight beginning 16th Nov. 2002.
RBI has also asked bank to maintain a minimum of
80% of the required CRR on a daily basis with effect
from the fortnight beginning 16th Nov. 2002. As per
industry estimate, the CRR reduction would infuse
further liquidity of around Rs 3,000 crore into the inter-
bank market.
While fiscal policies are the domain of the
government, the monetary policy is the domain of RBI.
It has taken various measures to adjust the money
supply in the economy in accordance with the internal
and external business environment prevailing. Banks,
which control sizeable flows of money of the nation,
are accordingly advised/ directed by RBI.
The Union Budget 2002 has furthered banking
reforms and facilitated improvement in the margins of
the sector. The finance minister announced that a new
law will be enacted to improve foreclosure and
enforcement of securities and also enable
securitization of long term loans. It also promised that
Asset Reconstruction Company would be formed by
June'02.
On direct taxes front, the Union Budget 2002
increased the provision for bad and doubtful debts
from 5% hitherto to 7.5% of their total income w.e.f.
accounting year 2002-03. Further, the optional
deduction of their NPAs categorized as loss or doubtful
debts has also been increased from 5% to 10%.
47
The Budget 2002 also provided an option to

foreign banks to either operate as branches of their
parent banks or to set up subsidiaries. Such
subsidiaries will however, have to adhere to all banking
regulations, including priority sector lending norms that
are applicable to other domestic banks.
The Deposit Insurance Credit and Guarantee
Corporation (DICGC) will be converted into the Bank
Deposits Insurance Corporation (BDIC) to make it an
effective institution for dealing with depositor's risks
and for dealing with distressed banks.
In Feb'02, RBI permitted FDI in private sector
banks up to 49%. Likewise, FDI and portfolio
investment in nationalized banks, SBI and its associate
banks are subject to overall statutory limits of 20%. FDI
in private sector banks will be under the automatic
route for shares acquired through IPOs, private
placements, ADRs/GDRs and acquisition oif shares
from existing share holders. However, FIPB approval is
required, followed by in principle approval from
Exchange Control Department of RBI, if the existing
shares of a bank are to be transferred from residents to
non-residents.
In Mar'02, the government clarified that the

portfolio investment by foreign institutional investors in
the private sector banks would be outside the FDI limit
of 49%. Hence, FII investments in private sector banks
can go upto 49% subject to approval of the respective
bank's board and its shareholders. Nevertheless, the
maximum voting rights for a shareholder continues to
be capped at 10% of the total voting rights of the bank.
48
The central bank has been selective in

approving establishment of new banks. In Jan'01, the
RBI directive was that the promoter's shareholding in
private sector banks should not exceed 40% and if they
so exceed, have to be disinvested after completion of
one year of banking operations. However, in June '02,
RBI had enhanced the maximum limit of promoter's
stake in private banks to 49%.
Recent RBI directives, which enables banks to
lend below prime lending rate (PLR) to premium
clients, is likely to lead to churning of creamy clients
amongst leading banks. SBI, Punjab National Bank,
Corporation Bank and Bank of India have started
offering loans priced about 100 basis points less than
their respective PLRs to select corporates.
RBI had formulated Prompt Correction Action
(PCA) in August 2000, wherein trigger points are
identified, for taking corrective actions, to prevent a
bank from liquidating. The parameters identified are
slippage of capital adequacy ratio (CAR) below 9%,
surge of NPAs above 10% and fall in return on assets
below 0.25%.
Recently, the Income Tax Department has held
that NPA provisioning as per RBI rules will not be
allowed as a deduction, but only the actual amount
written off will be allowed. This will increase the income
tax liability of old public and private sector banks
substantially, as they have to pay tax on NPAs
provided in the books, to the extent not written off.
Public sector banking is at the crossroads. The
government has already announced its intention to
reduce its share in the capital of the banks to around
33%, while retaining their public sector character. The
impact of this move, for which legislation is with the
49
Parliament, will go much beyond the financial impact.

Banks will have to change their operating style and
take into account the aspirations of the larger group of
shareholders.
RBI has directed the banks that their capital
market exposure should be restricted to 5% of
advances and 20% of their networth, whichever is less.
While about 5 banks exceeded the 5% advance limit,
nearly 25 banks have violated the limit of 20% of
networth norm. Nevertheless, RBI is likely to take a
case by case approach and give time to bring down the
exposures of these banks to the limit fixed.
5.6 Critical Success Factors

Asset liability management, effective monitoring of loans,
recovery of NPAs, reducing cost of deposits, controlling
establishment costs are critical success factors. Ensuring
capital adequacy, exposure norms and other prudential
norms in line with RBI guidelines are also critical.
Wresting blue chip accounts, expanding depositor base
and leveraging them for fee-based income are also
essential for growth and development.
Technology has already brought about revolutionary
changes. Services like Internet Banking, Mobile Banking,
Anywhere and Anytime Banking will not be added
features but promise to be a standardised banking
environment in the next few years. While on one hand it
has the potential to reduce the transaction costs, the
initial capital requirements will be heavy. Banks, which
have a legacy of a large workforce, will have to find ways
to offset these technology costs by reduction in staff
costs, if any meaningful reduction in transaction costs has
to be achieved.
5.7 Mergers and Acquisitions
50
The RBI on 14th November 2002 notified the draft

scheme for amalgamation of Nedungadi Bank (NBL) with
PNB and the bank merged in the first week of February
2003. Dutch financial giant ING's has proposed to hike its
stake in Vysya Bank by another 29% to 49%. In June
2002, the union government approved the amalgamation
of Benaras State Bank (BSB) with Bank of Baroda. The
former had total staff strength of 1400 and around 105
branches across the country. According to BOB, the
amalgamation of BSB is likely to be completed in two
months from the date of receipt of Center’s approval.
ICICI Bank has become the second largest bank in
India (next only to State Bank of India), with the merger
of its parent ICICI with itself wef March 2002. In Oct.
2001, LIC has picked up additional 15.28% stake in
Corporation bank, thereby increasing its stake in the
latter to 27%. The latest increase in stake comes on
account of picking up 2.4 crore shares in Corporation
Bank @ Rs 196 per share aggregating Rs 459.42 crore.
In November 1999, HDFC Bank merged Times Bank
with itself, starting off M&A activity in new private sector
banks. Standard Chartered Bank became one of the
world's leading emerging markets bank with the
acquisition of ANZ Grindlays Bank and Chase Consumer
Banking.
Merger, Acquisitions and Alliances can emerge as a
route to survival. The weaker banks would need to merge
entirely or sell some of their networks to other banks. In
this direction RBI directed PNB to takeover Nedungadi
Bank. Next from the regulator’s list is Centurion Bank
which is likely to be taken over by Andhra Bank.
5.8 Outlook of Indian Banking Industry
51
The banking scenario in the country has been undergoing

a qualitative shift towards internationalism. Global best
practices are finding greater acceptance and systemic
deficiencies, which are a legacy of the past, are being
addressed. The future, therefore, seems to be exciting,
but only for those who can withstand the stress and strain
that the reforms bring along.
The new Capital Accord, on which deliberations are
going on, will bring about changes in the CARs to provide
for newer risks. It is expected that banks will have to
improve their capital structure to meet these enhanced
requirements, or else restrict their ambition for asset
growth. The changes may call for conservation of capital
resources and, for some banks; it may need a fresh
infusion of funds.
The gross NPAs will go up in March 2004 when the
NPA recognition shift 180 days over due to 90 days.
Recoveries are however expected to improve with the
passing of new securitisation and reconstruction of
financial assets and enforcement of security interest bill,
2002. Bankers will have to focus on cleaning their
balance sheet and bring down their net NPAs to around
1% in the next 2-3 years, which may virtually impossible
for weaker banks. Overall the outlook of the banking
industry is looking optimistic. This will have a positive
impact on the share prices of the banks.
52
Table : 1 Bank of Baroda
DATE KEY FINANCIALS Rs. In Million

Industry : Banking Mar.2001 Mar.2002 Q.Sept.(U) '02
BSE Index : 3390.12 Operating Income 57573.4 59555.4 15477.2
P/E Ratio 3.8 Other income 7062.8 9931.7 3602.5
52 WK h/l : 78/35 Total Income 64636.2 69487.1 19079.7
Face Value : 10 Gross Profit 10364.7 13092.5 4488.2
CMP : 74.55 Tax 1851.4 2497.1 776
Listed at : BSE,NSE Provisions & Conting. 5766.7 5136.2 2340
BSE Group : A Net Profit 2746.6 5459.2 1372.2
BSE Code : 532134 Equity 2943.4 2943.4 2943.4
Market Cap. : 22067 Reserves 27851.5 32602.1 32602.1
Book Value : 129.4 CAR(%) 12.73 11.32
Volatility (%) 36.24 GPM % 16.03544 18.8416267 23.52343066
Price/BV : 0.576121 NPM % 4.249322 7.85642227 7.19193698
Book Closure : July EPS (Rs.) 9.28 18.44 4.64
Private Dividend (%) 40 40 NA
SHP (%) NPA/ Net Adv.(%) NA 5.7 NA
Promoters 66.22 Net Worth 33562.8 38277.6 NA
FI/FII 15.9
Public 13.25
Others 4.63
Table 2 :Bank of India
DATE 1/1/03 KEY FINANCIALS Rs. in Million
Industry : Banking Mar.2001 Mar.2002 Q Sept.(U) '02
CMP 36.5 Tax 660.6 1831.4 656.6
Listed at : BSE,NSE Provisions & Conting. 4540.8 7200.9 2041.8
53

BSE Code : 532149 Equity 6384.2 4880.8 4880.8
Book Value : 54.3 CAR (%) 12.23 10.68 10.12
Volatility (%) 35.03 GPM % 12.4947 21.037999 24.84042354
Price/BV : 0.672192 NPM % 4.0765329 7.5271717 10.40283359
Private Dividend (%) 15 25
SHP (%) NPA/ Net Adv. (%) 6
Promoters 69.3 Net Worth 24830.9 26518
FI/FII 6.94
Public 17.33
Others 6.43
Table 3 : Bank of Punjab
DATE 1/1/03 KEY FINANCIALS Rs.Million
Industry : Banking Mar.2001 Mar.2002 Q. Sept.(U)'02
CMP 14.7 Tax 60.08 222 10
Listed at : BSE, NSE Provisions & Conting. 238.68 165.31 241.03
BSE Group : B1 Net Profit 348.21 357.19 19.92
BSE Code : 500070 Equity 1050 1050 1050
Market Cap. : 1544 Reserves 743.08 863.37
Book Value : 18.2 CAR (%) 11.02 12.82 13.35
Volatility (%) 19.27 GPM % 16.88251 15.495083 22.81568931
Price/BV : 0.8076923 NPM % 9.086307 7.43410167 1.677388932
Book Closure : June EPS (Rs.) 3.32 3.4 0.19
SHP (%) NPA/ Advances NA NA NA
Promoters 37.66 Net Worth 1793.1 1913.4
FI/FII 4.44
Public 41.61
Others 16.29
Table 4 : Bank of Rajasthan

DATE 1/1/03 KEY FINANCIALS Rs.Million
Industry : Banking Mar.2001 Mar.2002 Q Sept.(U) 02
CMP 16.1 Tax 14.3 129.76 63.51
BSE Code : 500019 Equity 1003.67 1003.66 1003.66
Market Cap. : 1616 Reserves - 1104.79 NA
54
Book Value : 21 CAR (%) 10.57 12.07 13.6

Volatility (%) 46.79 GPM % 11.568 14.808126 27.11309344
Price/BV : 0.7666667 NPM % 6.458867 7.3321293 10.4065792
Book Closure : Jul/Aug EPS (Rs.) 3 4.02 1.55
SHP (%) : NPA/ Advances (%) 8.9 NA
FI/FII 0.36
Public 36.2
Others 20.93
Table 5 : Corporation Bank
DATE 1/1/03 KEY FINANCIALS Rs. In Million
Industry : Banking Mar.2001 Mar.2002 Sept.(U) '02
P/E Ratio 5 Other income 2920.9 3819.4 2519.6
52 WK h/l : 157/97 Total Income 20966.3 23276.3 12842
CMP 122.75 Tax 1351.5 1526.7 972.4
BSE Group : A Net Profit 2618.4 3081 2169.1
BSE Code : 532179 Equity 1200 1434.4 1434.4
Market Cap. : 17607 Reserves 12277 19028 21192.7
Book Value : 142.7 CAR% 13.3 17.9 22.2
Volatility (%) 21.21 GPM % 25.376914 26.762415 32.1351814
Price/BV : 0.860196 NPM % 12.488613 13.2366398 16.8906712
SHP% NPA/ Advances (%) 2.3 NA
Promoters 57.17 Net Worth 13477 20462.4 NA
FI/FII 37.32
Public 4.41
Others 1.11
Table 6 : Dena Bank

Industry : Banking Mar.2001 Mar.2002 Q Sept.(U)
BSE Index : 3390.12 Operating Income 17,163.80 17,084.00 4,279.90
P/E Ratio 5.4 Other income 1,990.80 3,529.60 1,063.00
52 WK h/l : 15/5 Total Income 19,154.60 20,613.60 5,342.90
Face Value : 10 Gross Profit 681.1 3,353.90 1,105.10
CMP 12.65 Tax -192 -203.7
Listed at : BSE,NSE Provisions & Conting. 3,342.30 -3,048.30 -985.6
BSE Group : B1 Net Profit -2,661.20 113.6 84.6
BSE Code : 532121 Equity 2,068.20 2,068.20 2,068.20
Market Cap. : 2616 Reserves 4,105.40 6,213.70 6,213.70
Book Value : 20.4 CAR% 7.73 7.64 7.71
Volatility (%) 38.8 GPM % 3.555804 16.2703264 20.68352393
Price/BV : 0.620098 NPM % -13.89327 0.55109248 1.583409759
55
Book Closure : Jul/Aug EPS (Rs.) 0.55 0.41

SHP%: NPA/ Adv.(%) 16.3
Promoters 70.99 Net Worth 3801 4209.3
FI/FII 13.08
Public 13.64
Others 2.29
Table 7: Dhanlakshmi Bank

BSE Index : 3390.12 Operating Income 1,770.50 472.9 481.3
P/E Ratio 4.8 Other income 259.4 230 146
52 WK h/l : 27/14 Total Income 2,029.90 702.9 627.3
CMP 17.6 Tax 10.5
BSE Code : 532180 Equity 137.4 137.4 320.6
Market Cap. : 563 Reserves 595.1 664.6 NA
Book Value : 35.1 CAR% 9.69 11.23 NA
Volatility (%) 50.52 GPM % 9.6014582 27.8275715 22.12657421
Price/BV : 0.501425 NPM % 3.3351397 2.36164462 2.757851108
Book Closure : Aug/Sep EPS (Rs.) 4.93 0.95 0.98
SHP %: NPA/ Net Adv.(%) 11.9 NA
Promoters Net Worth 781.5 849 NA
FI/FII 0.55
Public 84.5
Others 14.95
Table 8: Federal Bank

DATE 1/1/03 KEY FINANCIALS Rs.In Million
P/E Ratio 2.1 Other income 1,251.00 2,204.20 773.4
Face Value : 10 Gross Profit 1,870.40 3,054.00 1,036.30
CMP 87.3 Tax 226.6 443.3 197.7
BSE Code : 500469 Equity 217.2 217.2 217.2
Market Cap. : 1935 Reserves 3,849.70 4,186.60 NA
Book Value : 202.6 CAR% 10.29 10.63 10.56
Volatility (%) 31.13 GPM % 17.91107664 24.1841607 29.6653594
Price/BV : 0.430898 NPM % 5.845231597 6.49424696 9.710016317
Book Closure : Aug NPM % 28.11 37.76 15.62
56
SHP% NPA/ Net Adv (%) NA 8.7 NA

Promoters 0 Net Worth 4154.8 4487.9 NA
FI/FII 29.49
Public 61.08
Others 9.43
Table 9: Global Trust Bank
DATE 1/1/03 KEY FINANCIALS Rs.In Million
Industry : Banking Mar.2001 Mar.2002 QSept.(U) '02
Face Value : 10 Gross Profit 2,007.70 1,480.30 113.6
CMP 17.2 Tax 105 749 0.5
Listed at : BSE,NSE Provisions & Conting. 1,099.40 1,826.70 48.3
BSE Code : 500161 Equity 1,213.60 1,213.60 1,213.60
Book Value : 32.5 CAR% 12.71 11.21 10.64
Volatility (%) 31.43 GPM % 18.90596 15.52556 5.78205324
Price/BV : 0.529231 NPM % 7.564458 4.2225159 3.298213468
Book Closure : Aug/Sep EPS (Rs.) 6.62 3.32 0.53
SHP% NPA/ Advances (%) 9.2 NA
Promoters 21.96 Net Worth NA NA NA
FI/FII 1.16
Public 39.92
Others 36.95
Table 10: HDFC Bank

Q Sept.(U)
Industry : Banking Mar.2001 Mar.2002 02
P/E Ratio 18 Other income 1855.3 33332.5 1215.1
CMP 213.45 Tax 1049.4 1283.4 446.8
BSE, NSE,
Listed at : NYSE Provisions & Conting. 665.9 1191.7 364
BSE Code : 500180 Equity 2436 2813.7 2819.1
Market Cap. : 60759 Reserves 6694.9 16609.1 NA
Book Value : 69.2 CAR (%) 11.09 13.93 13.35
Volatility (%) 22.21 GPM % 26.41 26.742 28.3087992
Price/BV : 3.084538 NPM % 14.54 14.588 14.8680459
Book Closure : May EPS (Rs.) 8.64 11.01 3.18
SHP% Dividend (%) 20 25 NA
Promoters 24.43 NPA/ Advances (%) 0.5 NA
57
FI/FII 26.48 Private

Public 18.12
Others 30.97
Table 11: ICICI Bank
DATE 1/1/03 KEY FINANCIALS Rs in Million
CMP : 140.4 Tax 654.2 315 4430
Listed at : NSE,BSE Provisions & Conting. 636.5 2552.9 18052.2
BSE Group : A Net Profit 1611 2583 5382
BSE Code : 532174 Equity 2203.6 6130.3 6125.5
Book Value : 101.9 CAR% 11.44 12.32
Volatility (%) 38.03 GPM % 19.845569 19.991638 27.7154
Price/BV : 1.377821 NPM % 11.018097 9.4733715 7.849017
Book Closure : Sep EPS (Rs.) 8.13 11.61 8.78
SHP%: NPA/Net Adv.(%) NA 5.6 NA
Promoters 0 Net worth 12890.8 58559 NA
FI/FII 42.67
Public 9.58
Others 47.75
Table 12: IDBI Bank

P/E Ratio 7.9 Other income 695.8 1,225.40 314.1
Face Value : 10 Gross Profit 686.2 1,231.20 283.8
CMP 26.25 Tax 184.9 72
BSE Code : 532235 Equity 1,400.00 1,400.00 1,400.50
Market Cap. : 3676 Reserves 1,281.20 1,608.90
Book Value : 21.5 CAR% 11.72 9.59 9.05
Volatility (%) 38.19 GPM % 11.2735756 19.4856374 16.06112054
Price/BV : 1.22093 NPM % 3.18065322 8.29627285 9.105829089
SHP%: NPA/ Advances (%) 2.2
FI/FII 10.38
Public 14.47
Others 3.75
58
Table : 13 Indian Overseas Bank

BSE Index : 3390.12 Operating Income 27934.16 31,706.85 8762.58
P/E Ratio 2.5 Other income 3024.17 5,308.01 1152.25
52 WK h/l : 16/7 Total Income 30958.33 37,014.86 9914.84
Face Value : 10 Gross Profit 3066.04 6,163.59 2016.96
CMP 15.2 Tax 67.02 552.56 354.33
Listed at : BSE, NSE Provisions & Conting. 1839.75 3,308.94 782.96
BSE Group : A Net Profit 1159.27 2,302.09 879.67
BSE Code : 532388 Equity 4448 4,448.00 4448
Market Cap. : 761 Reserves 3592.84 5,199.19 5199.19
Book Value : 21.7 CAR % 10.24 10.82 10.48
Volatility (%) 24.68 GPM % 9.903764 16.65166 20.34283962
Price/BV : 0.7004608 NPM % 3.744614 6.219367 8.872256133
Book Closure : Jun/Jul EPS (Rs.) 2.6 5.18
SHP % Dividend (%) 10 12
Promoters 75 Net Worth 7620.2 9647.2
FI/FII 3.37 Private
Public 19.73
Others 1.9
Table 14 : Indusind Bank

Industry : Banking Mar.2001 Mar.2002 Q Sup(U) '02
P/E Ratio 3.6 Other income 1,165.50 1,843.70 720
CMP 15.5 Tax 150.4 272.9 57.9
BSE Code : 532187 Equity 1,590.30 1,590.30 1,590.40
Book Value : 35.2 CAR% NA 12.51 15.75
Volatility (%) 31.21 GPM % 20.436074 28.228033 24.9626105
Price/BV : 0.440341 NPM % 4.7961007 5.6740047 11.5023793
Book Closure : Sep EPS (Rs.) 2.53 3.17 1.59
SHP %: NA NPA/ Advances NA NA NA
Net Worth 5444.5 5619.3
Table 15 : Karnataka Bank
59
DATE 1/1/03 KEY FINANCIALS Rs in Million

Industry : Banking Mar.2002 Q. Sept.(U) '02
BSE Index : 3390.12 Operating Income 7433.73 1,979.50
P/E Ratio 1.6 Other income 2,410.20 547.5
52 WK h/l : 78/37 Total Income 9,842.60 2,527.00
Face Value : 10 Gross Profit 2,508.80 661.9
CMP 47.8 Tax 818.5 208.1
Listed at : BSE,NSE Provisions & Conting. 1668.7 372.8
BSE Group : B1 Net Profit 911.3 322.3
BSE Code : 590002 Equity 135 135
Market Cap. : 1598 Reserves 4,284.90
Book Value : 163.7 CAR % 12.96 12.82
Volatility (%) 43.57 GPM % 25.4892 26.19311436
Price/BV : 0.291998 NPM % 9.2587324 12.75425406
Book Closure : Aug EPS (Rs.) 67.57 23.9
Private Dividend (%) 60
SHP % NA NPA/ Net Adv. (%) 6
Net Worth 4419.9
Table 16 : Karur Vysya Bank

Industry : Banking Mar.2002 Q Sep.(U) '02
BSE Index : 3390.12 Operating Income 4823.1 1273.2
P/E Ratio 2.9 Other income 1047 203.8
52 WK h/l : 176/106 Total Income 5870.1 1477
Face Value : 10 Gross Profit 1617.6 370.3
CMP 144 Tax 352.7 138.7
BSE Group : B1 Net Profit 1085.1 249
BSE Code : 590003 Equity 60 60
Book Value : 245.6 Capital Adequacy Ratio% 16.9
Volatility (%) 41.88 GPM % 27.5566004 25.07109005
Price/BV : 0.586319 NPM % 18.48520468 16.85849695
Book Closure : July EPS (Rs.) 180.85 41.5
SHP % NA NPA/ Net Advances (%) 6.3
Net Worth 4301.1
Table : 17 Oriental Bank of Commerce

Industry : Banking Mar.2001 Mar.2002 Q Sep.(U) '02
52 WK h/l : 53/33 Total Income 30264.5 35143.8 9686
60
Face Value : 10 Gross Profit 5341 9170.9 2928.6

CMP 50.1 Tax 786.2 2488.8 800
Listed at : BSE,NSE Provisions & Conting. 2526 3476.6 998.5
BSE Code : 500315 Equity 1925.4 1925.4 1925.4
Market Cap. : 9646 Reserves 13561.2 14271.9 -
Book Value : 84.1 CAR % 11.81 10.99 -
Volatility (%) 21.56 GPM % 17.647739 26.095357 30.23539129
Price/BV : 0.595719 NPM % 6.7035636 9.1210968 11.66735495
Book Closure : Jun EPS (Rs.) 10.54 16.65 5.87
Private Dividend (%) 35 35 -
SHP % NPA/ Advances (%) 3.2
FI/FII 16.44
Public 15.63
Others 1.45
Table 18 : Punjab National Bank

Industry : Banking Mar.2002 Q Sept.(U) '02
BSE Index : 3390.12 Operating Income 66,478.70 19,703.70
P/E Ratio 2.7 Other income 9,777.20 3,278.90
52 WK h/l : 74/35 Total Income 76,255.90 22,982.60
Face Value : 10 Gross Profit 14,738.00 6,064.10
CMP 65.15 Tax 1,981.50 1,230.00
BSE Group : B1 Net Profit 5,623.90 2,089.40
BSE Code : 532461 Equity 2,122.40 2,653.00
Market Cap. : 17284 Reserves 26,658.20 26,658.20
Book Value : 110.5 CAR % 10.7
Volatility (%) 34.55 GPM % 19.327029 26.38561346
Price/BV : 0.589593 NPM % 7.3750359 9.091225536
Book Closure : July EPS (Rs.) 26.5 7.88
SHP % NPA/ Net Advances (%) 5.3
Promoters 80 Net Worth 28780.6
FI/FII 8.9
Public 9.99
Others 1.1
Table 19 : State Bank of India

BSE Index : 3390.12 Operating Income 260033.7 298,100.90 78,595.60
P/E Ratio 5.3 Other income 40178.2 41,744.80 11,328.30
52 WK h/l : 306/185 Total Income 300211.9 339,845.70 89,923.90
Face Value : 10 Gross Profit 39667.8 60,448.30 17,285.60
CMP 284.2 Tax 9713.6 16,030.20 4,529.30
61
Listed at : BSE,NSE Provisions & Conting. 13911.7 20,101.90 4,404.30

BSE Group : A Net Profit 16042.5 24,316.20 8,352.00
BSE Code : 500112 Equity 5263 5,263.00 5,263.00
Book Value : 289.3 CAR % 12.79 13.35 13.99
Volatility (%) 20.91 GPM % 13.213267 17.786984 19.22247589
Price/BV : 0.982371 NPM % 5.3437255 7.1550707 9.287853396
SHP % NPA/ Net Adv. (%) 5.6
Promoters Net Worth 134615 152244
FI/FII 90.45
Public 7.85
Others 1.7
Table : 20 State Bank of Travencore

CMP 385 Tax 251 469.7 245.3
BSE Group : B1 Net Profit 974.9 1,209.27 248.6
BSE Code : 532191 Equity 500 500 500
Book Value : 1220.3 CAR % 11.79 12.54 12.24
Volatility (%) GPM % 15.25128 19.07653 21.8300625
Price/BV : 0.315496 NPM % 6.457925 7.180597 5.432929761
Book Closure : June EPS (Rs.) 194.98 241.86 49.72
SHP % NA NPA/ Net Adv. (%) NA 5.7 NA
Net Worth 5146.3 6101.4 NA
Table : 21 Syndicate Bank

DATE 1/1/03 KEY FINANCIALS Rs. Million
Industry : Banking Mar.2001 Mar.2002 Q. Sept.(U) '02
Face Value : 10 Gross Profit 2,978.00 3,552.30 1,569.00
CMP 16.45 Tax 222 225 350
BSE Group : B1 Net Profit 2,349.40 2,505.50 641.3
BSE Code : 532276 Equity 4,719.40 4,719.50 4,719.40
62
Book Value : 25.5 CAR % 11.72 11.72 12.71

Volatility (%) 31.05 GPM % 9.688964 11.24701 19.55554448
Price/BV : 0.6451 NPM % 7.643805 7.932714 7.992970473
Book Closure : May EPS (Rs.) 4.98 5.31 1.36
FI/FII 1.55
Public 22.74
Others 2.19
Table 22 : United Western Bank

Industry : Banking Mar.2001 Mar.2002 Q. Sept.(U) '02
BSE Index : 3990.12 Operating Income 47247.3 4924 1207.5
CMP 23.1 Tax 45.2 51
Listed at : BSE, NSE Provisions & Conting. 589.8 1231.7 217.6
BSE Code : 500430 Equity 298.9 298.9 298.9
Market Cap. : 690 Reserves 1778 1990.7
Book Value : 76.6 CAR % 9.59 9.79 10.03
Volatility (%) 39.29 GPM % 11.9516 23.79107 19.322223
Price/BV : 0.3015666 NPM % 3.021136 3.99386 0.592706227
Book Closure : Dec EPS (Rs.) 8.62 1.14
FI/FII 7.16
Public 63.08
Others 29.51
Table 23 : UTI Bank

P/E Ratio 5.3 Other income 1630 4158.7 1183.7
52 WK h/l : 47/26 Total Income 10526.2 15954 4857.3
Face Value : 10 Gross Profit 1325 4099.3 1135.3
CMP 43.55 Tax 179.5 792.3 234.6
Listed at : BSE,NSE Provisions & Conting. 284.3 1965.6 459
BSE Code : 532215 Equity 1319 1918.8 1918.1
Book Value : 32.1 CAR % 9 10.65
Volatility (%) 30.86 GPM % 12.5876 25.6945 23.37306734
63
Price/BV : 1.356698 NPM % 8.18149 8.407923 9.093529327

SHP % NA NPA/ Net Adv. (%) 3.5
Net Worth 3014.5 6147.6
64
Table 24 : Vijaya Bank

CMP 14.15 Tax 63.6 100 70
Listed at : BSE, NSE Provisions & Conting. 1013.9 1116 329.4
BSE Code : 532401 Equity 3592.4 3335.2 3335.2
Market Cap. : 4719 Reserves 1669 2621.1 2521.1
Book Value : 17.9 CAR % 11.5 12.25 12.37
Volatility (%) 28.9 GPM % 11.8007 14.618515 16.88475416
Price/BV : 0.7905028 NPM % 4.67652 7.5787487 8.203277833
Book Closure : Jul/Aug EPS (Rs.) 2.48 3.65 NA
SHP % NPA/ Net Adv.(%) NA 6 NA
FI/FII 4.09
Public 22.73
Others 3.16
6.2 Selection of the Banks Having Strong

Fundamentals
65
Table 25 : Selection parameters for banks

* NPA/NA- Non Performing Assets/ Net Assets,
Div.
BANKS NPA/NA* Net Worth CAR P/E P/BV OI/TI** EPS %
Bank of Baroda 5.7 38277.6 11.32 3.8 0.58 85.71 18.44 40
Bank of India 6 26518 10.68 2.9 0.67 83.56 7.91 25
Bank of Punjab 1913.4 12.82 4.3 0.81 75.59 3.4 13
Bank of Rajasthan 8.9 2108.5 12.07 3.2 0.77 82.32 4.02 0
Corporation Bank 2.3 20462.4 17.9 5 0.86 83.6 23.65 40
Dena Bank 16.3 4209.3 7.64 5.4 0.62 82.88 0.55 0
Dhanlakshmi Bank 11.9 849 11.23 4.8 0.5 67.23 0.95 15
Federal Bank 8.7 4487.9 10.63 2.1 0.43 82.55 37.76 35
Global Trust Bank 9.2 11.21 5.4 0.53 75.96 3.32 10
HDFC Bank 0.5 13.93 18 3.08 83.63 11.01 25
ICICI Bank 5.6 58559 11.44 12.9 1.38 78.92 11.61 20
IDBI 2.2 3009.1 9.59 7.9 1.22 80.61 3.74 10
Indian Overseas
Bank 6.3 9647.2 10.82 2.5 0.7 86.12 5.18 12
Indusind Bank 5619.3 12.51 3.6 0.44 79.39 3.17 15
Karnataka Bank 6 4419.9 12.96 1.6 0.29 75.53 67.57 60
Karur Vysya Bank 6.3 4301.1 16.9 2.9 0.59 82.16 180.9 70
Oriental bank of
Commerce 3.2 16197.3 10.98 2.6 0.6 86.52 16.65 35
PNB 5.3 28780.6 10.7 2.7 0.59 87.18 26.5 30
SBI 5.6 152244 13.35 5.3 0.98 87.72 46.2 60
State Bank of
Travancore 5.7 6101.4 12.54 1.4 0.32 86.33 241.9 30
Syndicate Bank 4.6 12044.9 11.72 2.9 0.65 91.26 5.31 12
United Western
Bank 7.9 2289.6 9.79 2.6 0.3 76.34 8.62 15
UTI Bank 3.5 6147.6 10.65 5.3 1.36 73.93 9.34 20
Vijaya Bank 6 5956.3 12.25 3.1 0.8 89.07 3.65 12
66
** OI/TI- Operating Income/ Total Income

The above table shows the different parameters of the all
the banks listed on BSE as on the 1-1-2003. This table is
used to find out the banks, which are fundamentally very
strong. The parameters which are used to select the
banks are NPA/Net Advances ratio, Net worth, Capital
Adequacy Ratio, Price/Earnings Ratio, Price/ Book Value
Ratio, Operating Income/ Total Income, EPS, Dividend.
Non-Performing Assets/ Net Advances: The sum of sub-
standard and lost loans net of loss provisions expressed
as a percentage of Net Advances. This ratio directly
affects the profitability of the bank. Lower the ratio,
better for the bank.
Net Worth: Net worth of the bank could be found by
adding share capital and reserves and surplus. Net worth
should be higher. This can be better aspect for the
liquidity as well as for the expansion purpose.
Capital Adequacy Ratio: The capital-to-risk weighted
assets ratio, as submitted to the RBI for 2001-2002. The
prescribed level for the capital adequacy ratio, as per RBI,
is 9%. If CAR of any bank is between 6 and 9 then that
bank has to submit a plan to reinforce its capital base.
And they will have to face restrictions such as contraction
of its risk weighted assets, no entry in new lines of
business, either skip or reduce dividend, to cut cost. For
the banks with a CAR below 6% but above 3%, RBI has
said that recapitalisation will be ordered immediately. For
this purpose RBI can change the management, appoint
consultant for restructuring, change the shareholding
pattern or can force a merger. Banks where the CAR is
below 3% may be placed under an moratorium in addition
to the measures prescribed earlier.
67
Price/ Earnings Ratio: It is found by dividing price per

share by the earnings per share. The average P/E ratio of
the banking industry is 6. Higher the P/E ratio, better the
stock because this indicates strong market expectation
about the bank.
Price/ BV: it is found by dividing price per share by book

value per share. Higher the ratio better for the bank.
Operating Income/ Total Income: this ratio could be
helpful to find whether the bank has gained the profit
from its operating income or from treasury income.
EPS: Earnings per Share could be found by dividing the
profit after tax by the total no. of outstanding equity
shares. Higher the ratio better for the shareholders.
We have taken the 24 banks, which are listed
on the BSE as on 1-1-2003. Based on the parameters
given above, we have chosen six banks, which according
to us are fundamentally strong. These are: ICICI bank,
State Bank of India, Corporation bank, IDBI, UTI bank, and
HDFC Bank.
ICICI bank has the highest net worth among the
private sector banks. The CAR of the bank is also higher
than the prescribed level. The bank’s P/E ratio and P/BV is
also attractive which indicates the market has the good
faith in the management of the bank. EPS are also very
high which attracts the shareholder to invest in ICICI
bank. The only negative factor is the higher NPA levels
but by looking at the factors we feel that the bank would
be able to overcome this point especially after the
passing of securitisation bill.
SBI bank has the highest net worth among the
all banks. The CAR is also very high. The bank’s P/E ratio
68
is at par with industry average. The P/BV ratio is also very

good. Higher EPS and higher dividend rate gives a good
picture for the investor. Here again, the negative point is
only the higher NPA, which could be reduced by the bank
due to reason as prescribed in the above paragraph.
Corporation bank has low the NPA/ Net
Advances ratio. Even the capital adequacy ratio is the
highest. The P/BV ratio is the lowest among the six
selected banks but higher than the other banks. The P/E
ratio is 5, which is not very below the industry average,
so this factor could not affect that much. The EPS and
Dividend are also attractive.
IDBI bank’s NPA/Net Advances ratio is low and
the CAR is slightly higher than the RBI norms. P/E ratio is
higher than the industry average. P/BV ratio is also high.
However the bank’s EPS and dividend are low, this bank
would be able to give the average return to the investors.
The above parameters for the UTI bank are
above the required level. So the fundamentals of the
bank are even though not very strong , it is on an
average satisfactory.
HDFC bank has the strongest fundamentals on
the basis of above parameters. Its NPA/Net Advances
ratio is only 0.5%, which is lower than the international
standard also. Its CAR is also higher than the prescribed
level. Its P/E and P/BV ratio are the highest among all the
listed banks. Its EPS and dividend ratio is also quiet
satisfactory.
69
FUNDAMENTAL ANALYSIS
7.1 Introduction
To select a company for investment purposes a number
of qualitative factors have to be seen. Before purchasing
the shares of a company, relevant information must be
collected and properly analysed. An illustrative list of the
factors, which help the analyst in taking the investment
decision, is given below. However, it must be
emphasized that past performance and information is
relevant only to the extent it indicates the future trends.
Hence, the investment manager has to visualize the
performance of the company in future by analyzing its
past performance.
 Size and Ranking:
A rough idea regarding the size and ranking of the

company within the economy, in general, and the
70
industry, in particular, would help the investment

manger in assessing the risk associated with the
company. In this regard the net capital employed, the
net profits, the return on investment and the sales
figure of the company under consideration may be
compared with similar data of other companies in the
same industry group. It may also be useful to assess
the position of the company in terms of technical know-
how, research and development activity and price
leadership.
 Growth record:
The growth in sales, net income, net capital employed
and earnings per share of the company in the past few
years should be examine. The following three growth
indicators may be particularly looked into : (i) Price
earnings ratio, (ii) Percentage growth rate of earnings
per annum, and (iii) Percentage growth rate of net
block.
The price earnings ratio is an important
indicator for the investment manager since it shows
the number of times the earnings per share are
covered by the market price of a share. By a
comparison of this ratio pertaining to different
companies the investment manager can have an idea
about the image of the company and can determine
whether the share is under-price or over-price.
The percentage growth rate of net blocks
shows how the company has been developing its
capacity levels. Obviously, a dynamic company will
keep on expanding its capacities and diversify its
business. This will enable it to enter new and
profitable lines and avoid stagnation in its growth.
In this context, an evaluation of future growth
prospects of the company should be carefully made.
71
This requires an analysis of existing capacities and

their utilization, proposed expansion and diversification
plans and the nature of the company’s technology.
The existing capacity utilization levels can be known
from the quantitative information given in the
published profits and loss accounts of the company.
The plans of the company, in terms of expansion or
diversification, can be known from the Directors’
Reports, the Chairman’s statements and from the
future capital commitments as shown by way of notes
in the balance sheets. The nature of technology of a
company should be seen with reference to
technological developments in the concerned fields,
the possibility of its product being superseded or the
possibility of emergence of a more effective method of
manufacturing.
Growth is the single most important factor in
company analysis for the purpose of investment
management. A company may have a good record of
profits and performance in the past; but if it does not
have growth potential, its shares cannot be rated high
from the investment point of view.
 Financial Analysis:
An analysis of its financial statements for the past few
years would help the investment manager in
understanding the financial solvency and liquidity, the
efficiency with which the funds are used, the
profitability, the operating efficiency with which the
funds are used, the profitability, the operating
efficiency and the financial and operating leverages of
the company.
From the investment point of view, the most

important figures are earnings per share, price
72
earning ratios, yield, book value and the intrinsic

value of the shares. The five elements may be
calculated for the past 10 years or so and compared
with similar ratios computed from the financial
accounts of other companies in the industry and with
the average ratios for the industry as a whole. The
yield and the asset backing of a share are important
considerations in a decision regarding whether the
particular market price of the share is proper or not.
Various other ratios to measure profitability,
operating efficiency and turnover efficiency of the
company may also be calculated. To examine the
financial solvency or liquidity of the company, the
investment manger may work out current ratio,
liquidity ratio, debt-equity ratio, etc. These ratios will
provide an overall view of the company to the
investment analyst. He/she can analyze its strengths
and weaknesses and see whether it is worth the risk
or not.
 Quality of Management:
This is an intangible factor. Yet it is a very important
bearing on the value of the share. Every investment
manager knows that the shares of certain business
houses command a higher premium than those of
similar companies managed by other business
houses. This is because of the quality of
management, the confidence that investors have in a
particular business house, its policy vis-à-vis its
relationship with the investors, dividend and financial
performance record of other companies in the same
group, etc. This is perhaps the reason that an
investment manager always gives a close look to the
management of a company in whose shares he/she is
to invest. Quality of management has to be seen with
73
reference to the experience, skills and integrity of the

persons at the helm of affairs of the company. The
policy of the management regarding relationship with
the shareholders is an important factor since certain
business houses believe in very generous dividend
and bonus distributions while other are rather
conservative.
 Location and Labor-Management Relations:

The location of the company’s manufacturing facilities
determines its economic viability, which depends on
the availability of crucial inputs like power, skilled labor
and raw materials, etc. Nearness to markets is also a
factor to be considered. In the past few years, the
investment manager has begun looking into the state
of labor management relations in the company under
consideration and the area where it is located.
 Pattern of Existing Stock Holding:

An analysis of the pattern of existing stock holdings of
the company would also be relevant. This would show
the stake of various parties in the company. An
interesting case in this regard is that of the Punjab
National Bank in which the Life Insurance Corporation
and other financial institutions had substantial
holdings. When the bank was nationalized, the residual
company proposed a scheme whereby those
shareholders, who wish to opt out, could receive a
certain amount as compensation in cash. It was only
at the instance and the bargaining strength, of
institutional investors that the compensation offered to
the shareholders, who wished to opt out of the
company, was raised considerably.
74
 Marketability of the Shares:

Another important consideration for an investment
manager is the marketability of the shares of the
company. Mere listing of a share on the stock
exchange does not automatically mean that the share
can be sold or purchased at will. There are many
shares, which remain inactive for long periods with no
transactions being effected. To purchase or sell such
scrip is a difficult task. In this regard, dispersal of
shareholding with special reference to the extent of
public holding should be seen. The other relevant
factors are the speculative interest in the particular
scrip, the particular stock exchange where it is traded
and the volume of trading.
Fundamental analysis thus is basically and

examination of the economic and financial aspects of a
company with the aim of estimating future earnings
and dividend prospects. It includes an analysis of the
macro-economic and political factors, which will have
an impact on the performance of the firm. After having
analyzed all the relevant information about the
company and its relative strength vis-à-vis firms in the
industry, the investor is expected to decide whether he
should buy or sell the securities.
75
FUNDAMENTAL ANALYSIS OF ICICI BANK
8.1 Qualitative Analysis of ICICI Bank

ICICI bank is the biggest private sector bank and the
second largest bank in the country. Their product
range covers everything from housing loans to auto
loans. The total capital employed is Rs.
1,041,099,204,000 as on March 31, 2002. The net
profit of the bank for the year 2001-02 was Rs.
2,582,990,000. Thus though the bank has a huge
capital but its net profit is lower than the other banks.
The return on investment is just 0.25%, which is very
low compared to other banks. There are 500 branches
of ICICI. It also ranks second in terms of network. ICICI
76
is spending very high on the IT aspect. It has 1200

ATMs and the largest call centre with 1700 seats. IT
has played an important role in creating a strategic
differentiation for their products and distribution
channels. It plays a major role in bringing efficiencies.
Thus though ICICI bank stand at no 2 in terms of size,
its net profit and return on capital employed is low
compared to the other scrutinized banks.
 Growth Record
For assessing the growth record of the company we
have taken three indicators, which are percentage
growth rate of earnings per annum, price earnings
ratio, and percentage growth rate of net block. If we
look at the past data of ICICI bank, we can find that EPS
is continuously increasing.
Year EPS (Rs.) % Growth
1995 0.13 -
1996 1.14 77.69
1997 2.68 135.08
1998 3.04 134.32
1999 3.84 26.30
2000 6.38 66.14
2001 8.13 27.43
2002 11.61 42.80
However, EPS calculation cannot be the sole basis of
deciding about an investment. The P/E ratio of the bank
on January 1, 2003 was 12.9, which is quiet higher than
the industry average of six. As per the theoretical basis
we should choose the stock with less P/E ratio. But the
market decides P/E ratio and higher P/E ratio indicates
that the market has strong view about the company.
The market has the information about the company,
which as an investor we do not have.
77
In the year 2000-01, ICICI acquired Bank of

Madura Limited. In the year 2001-02, ICICI was merged
with ICICI bank, which made ICICI bank the largest
private sector bank. Recently, ICICI Bank announced
plans to acquire retail financial services company
Transamerica Apple Distribution Finance for around Rs
74 crore. The deal will be finalized after the completion
of the audit of accounts of TADF for April-November
2002. Total assets of TADF stood at Rs 218 crore (Rs
2.18 billion) as on 31 March 2002, and the company
had reported a net profit of Rs 4.6 crore. TADF is
primarily engaged in financing two-wheelers and
tractors. Thus, ICICI bank is continuously looking for
the growth opportunities. This point is the main point
for an investor.
 Quality of Management
This is an intangible factor. However, if we look at the
past performance of the bank, we would find that the
bank is continuously growing. This gives a good sign of
the management. If we compare the P/E ratio of ICICI
bank with that of the industry average, we will find that
the P/E ratio of bank is higher than that of the industry.
It means that the shares of ICICI command higher
premium than the industry. This is because of the
quality of management, the confidence that investors
have in a particular business house. If we look this
point with reference to experience and qualification, all
the directors are highly qualified with high degrees
such as MBA, CA, law etc. and also they are highly
experienced people having experience of more than 25
years in the same institution.
Year Dividend
78
(%)
1997 10
1998 10
1999 12
2000 15
2001 20
2002 20
The policy of the management regarding relationship

with the shareholders is moderate since they are
declaring the dividend in a limited range.
 Pattern of existing stock holding

Category No. of Shares held % shareholding
Non Promoter's Holding
Institutional Investors
Mutual Funds and UTI 27944529 4.56
Banks,Financial Institutions,Insurance Co. 108094663 17.63
FIIS 125556172 20.48
Sub Total 261595364 42.67
Others
Private Corporate Bodies 29875700 4.87
Indian Public 58735791 9.58
NRIs/OCBs 1277784 0.21
Any Other
Foreign Companies 128698 0.02
ADS Holders 160022118 26.1
Shares in Transit 101395949 16.54
Sub Total 351436040 57.33
Grand Total 613031404 100
79
In the shareholding pattern of ICICI bank the

institutional investors have very high share. This is
good for an individual investor because this group
prevents company to take any decision which is not in
favour of shareholders.
 Marketability of the shares
This factor is basically related to the public
shareholding in the bank. In ICICI bank, public holding
is 9.58%, which is moderate. The average trading
volume is also moderate. This scrip is mainly traded on
BSE and NSE.
80
8.2 Financial Statements of ICICI bank
PROFIT AND LOSS ACCOUNT (Rs. Million)
PARTICULARS 2000 2001 2002

Interest on Advances 3479.1 5709.1 7716.7
Interest on Investments 4097.1 5557.3 12338
Interest on Balances 946.2 1086.7 1226.2
Others 6.4 68.2 238.4
Interest Earned, Operating
income 8528.8 12421.3 21519.3
Other Income 1940.5 2200.1 5746.6
Total Income 10469.3 14621.4 27265.9
Interest Expended 6669.5 8376.7 15589.2

Payment/provision for
employees 363.7 517.1 1471.8
Other operating expenses 1169.4 2825.9 4754
Operating Expenses 1533.1 3343 6225.8
Total Expenditure 8202.6 11719.7 21815
Operating Profit 2266.7 2901.7 5450.9

Profit Before Tax 2266.7 2901.7 5450.9
Tax 266 654.2 315
Provision and Contingencies 947.8 636.5 2552.9
Profit After Tax 1052.9 1611 2583
Net Profit 1052.9 1611 2583
Profit/loss brought forward 1.4 8 8.3
Total 1054.3 1619 2591.3
APPROPRIATIONS/
TRANSFERS
Statutory Reserve 250 800 650
Investment fluctuation Reserve **** 65 160
Special Reserve *** *** 140
Revenues & Other Reserves 528.2 260 960
Proposed Dividend 247.5 440.7 ***
Interim Dividend Paid *** *** 440.7
Corporate Dividend Tax 27.2 45 45
Balance carried to Balance
Sheet 1.4 8.3 195.6
Total 1054.3 1619 2591.3
The above table shows the profit and loss account of ICICI
bank for the last three years. The balance sheet for the
last three years is shown in the next table.
81
BALANCE SHEET (Rs. in Million)

CAPITAL & LIABILITIES
Capital 1968.2 2203.6 9630.3
Reserves and surplus
1844.
Statutory Reserve 1038.6 3 2494.3
Debenture Redemption reserve *** *** 100
Special Reserve *** *** 10940
8045.
Share Premium 7690.3 4 8045.4
Investment Fluctuation Reserve *** 113.4 273.4
Revenue and other Reserve 796.6 911.2 34306.7
Balance in P & L account 1.4 8.3 195.6
Total 9526.9 10922.6 56355.4
Deposits 98660.2 163782.1 320851.1
Borrowings 4914.7 10327.9 492186.6
Other liabilites and provisions 5656.3 10129.7 162075.8
TOTAL 120726.3 197365.9 1,041,099.2
ASSETS
Cash and balance with RBI 7219 12316.6 17744.7
Balances with banks and
money 26932.7 23620.3 110118.8
at call and short notice
Investments 44166.8 81868.6 358910.8
Advances 36573.4 70314.6 470348.7
Fixed Assets 2221.2 3847.5 42393.4
Other Assets 3613.2 5398.3 41582.8
TOTAL 120726.3 197365.9 1041099.2
8.3 Financial Ratios
 Return on Equity (ROE):

ROE = Profit after taxes
Net Worth
For the year 2000, ROE= 1052.9/11495.1=0.092 or

9.2%
2001, ROE= 1611/13126.2= .123 or 12.3%
2002, ROE= 2583 /62485.7= 0.041 or 4.1%
82
The ratio of ROE has declined drastically in the year 2002;

this is mainly because of merger of ICICI with ICICI bank.
 Earning per share (EPS):

EPS = Profit after Tax
No. of common shares outstanding
For the year 2000, EPS = 1052900000/

2001, EPS = 1610974000/ 198237717 = Rs.
8.13
2002, EPS = 2582990000/22510311 = Rs.
11.61
The bank’s earnings per share have increased over the

last three years. This is a good indication as a point of
view of shareholders.
 Return on Investments
Return on Investments = PAT/ Total Assets
For the year 2000, ROI = 1052.9/ 120726.3 =

0.00872 or 0.88%
2001, ROI = 1611/ 197365.9 = 0.00816 or
0.82%
2002, ROI = 2582.9/ 1041099.2 =
0.00248 or 0.24%
The ratio of this year is not comparable with the last
year’s ratio because of the merger of ICICI and
ICICI bank.
 Total Working Funds
Total Working Funds = Paid up share capital +

Reserves and surplus + Deposits +
83
Borrowings + Other liabilities and

provisions
For the year 2000, TWF = Rs. 120726.2 million

2001, TWF = Rs. 197365 million
2002, TWF = Rs. 1041099.2 million
 Interest income to working funds (per cent)
For the year 2000, interest income to working

funds = 10.59
2001, interest income to working
funds = 10.07
funds = 8.44
As we can see from the above ratio, the total working
funds of ICICI bank has increased but the proportion of
interest income to that of working funds has declined in
the last three years.
 Non-interest income to working funds (per cent)
For the year 2000,non- interest income to working

funds = 2.41
2001, non-interest income to working
funds = 1.78
funds = 2.25
The non- interest income has increased in the last
year. Thus from the above two ratios, we can say that
the total income of ICICI bank forms a little portion of
the total working capital.
84
8.4 Projections of Future Earnings of ICICI Bank

When a person invest in shares of any company, it
becomes very important for him/her to know whether the
company is a growth company or not. A person should
have the information about the future earnings of the
company. Therefore it is very important to predict the
future earnings of the company.
In this project we have predicted the profit and loss
account, balance sheet and cash flow of all the four
selected banks. While predicting, some assumptions have
been taken which are disclosed with the respective
projected statements of each bank. The general
procedure followed to predict the future earnings is to use
the historical growth of each component. The historical
growth is found by taking the average of growth of the
each component in the year 2000-01 and 2001-02.
Since in 2000-01, Bank of Madura was merged with

the ICICI bank and in 2001-02 ICICI was merged with the
ICICI bank, it is not possible to predict the future earnings
based on the historical data. Therefore we have taken the
quarter results of 2002-03 as the base for predicting the
earnings in the year 2002-03. While for the year 2003-04
the historical base is used since ICICI does not have any
plan to acquire a large company so that its balance sheet
can increase by considerable numbers.
Bases for the projections
For the year 2002-03

 Since ICICI bank Ltd. Does not have any plan of
acquisition of any big company; we have assumed that
its share capital will remain constant.
85
 We have assumed that bank would be able to

provide dividend of 25%. Therefore, total proposed
dividend would be dividend per share multiplied by
weighted average no. of equity shares outstanding.
The weighted average no. of equity shares outstanding
are 222510311.
 Corporate dividend tax is taken as 10.2% of
proposed dividend.
 The appropriations are done on the basis of last
year’s appropriation. According to that the proposed
dividend and the corporate dividend tax is subtracted
from the total profit available and the remaining
amount is appropriated using following percentage
rates.
Particulars %
Statutory Reserve 30
Investment fluctuation
Reserve 8
Special Reserve 7
Revenues & Other
Reserves 46
Balance carried to
Balance Sheet 9
 For other liabilities and provisions, the average

of growth of other liabilities and provisions of last three
years is equal to 540 %. The growth rate for other
liabilities and provisions was 41%, 79% and 1500% in
the years 2000, 2001 and 2002 respectively. This
growth rate is very unreasonable therefore we have
taken it as 75% based on the data available for the last
ten years.
86
 In the year 2001, the fixed assets of ICICI bank

increased by 72% due to the amalgamation of bank of
Madura with ICICI bank while it increase by 1012% due
to the reverse merger of ICICI with ICICI bank. In 1999
and 2000, the fixed assets increased by 8% and 11%
respectively. Therefore we have assumed that the
fixed assets of ICICI bank will increase by 10% in 2003
and 2004.
 For other assets, the average of growth of other
assets of last three years is equal to 275%. The growth
rate for other assets was 110%, 50% and 665% in the
years 2000, 2001 and 2002 respectively. This rate is
found very unreasonable; therefore we have taken it as
90% based on the data available for the last ten years.
 Since the detailed information of the fixed assets
of ICICI bank is not given, we have taken the
depreciation amount as a 1.51% of the total fixed
assets, which is equivalent to last year’s.
For the year 2003-04
 In the year 2002-03, the income and others

factors of icici bank increased drastically because of
merger. We have assued that after 2002-03 the bank
will have normal growth rate and which is found from
the historical data. From the historical data, we have
found that the bank’s interest income has increased
60% in the last three years on average basis. So we
have assumed that the bank’s interest income will
increase by 60% in the year 2003-04.
87
 The growth rates for each component are given

below in the table.
PARTICULARS %
Interest on
Advances 50
Interest on
Investments 80
Interest on
Balances 14
Others 300
Other Income 95
Interest Expended 55
Payment/provision
for employees 110
Other operating
expenses 100
Provision and
Contingencies 135
 Other bases regarding the tax, dividend,

transfer to reserves, corporate dividend tax are similar
to that for the year 2002-03.
88
PROJECTED PROFIT AND LOSS ACCOUNT (Rs. in Million)
PARTICULARS 2003 2004

Interest on Advances 59418.6 89127.9
Interest on Investments 32572.3 58630.14
Interest on Balances 2606.9 2971.866
Others 1287.4 5149.6
Interest Earned, Operating income 95885.2 155879.5
Other Income 37467.8 73062.21
Total Income 133353 228941.7
Interest Expended 87923.1 136280.8

Payment/provision for employees 8093.3 15134.471
Other operating expenses 16887.2 31579.064
Operating Expenses 24980.5 46713.54
Total Expenditure 112903.6 182994.3
Operating Profit 20449.4 45947.38

Profit Before Tax 20449.4 45947.38
Tax 1226.96 2756.843
Provision and Contingencies 9192.2 21601.67
Profit After Tax 10030.24 21588.86
Net Profit 10030.24 21588.86
Profit/loss brought forward 195.6 865.15
Total 10225.84 22454.01
APPROPRIATIONS/ TRANSFERS
89
Statutory Reserve 2,883.85 6515.92

Investment fluctuation Reserve 769.03 1737.579
Special Reserve 672.90 1520.381
Revenues & Other Reserves 4,421.90 9991.077
Proposed Dividend 556.28 667.53
Corporate Dividend Tax 56.74 66.75
Balance carried to Balance Sheet 865.15 1954.776
Total 10225.84 22454.01
PROJECTED BALANCE SHEET (Rs. In Million)

Capital 9630.3 9630.3
Statutory Reserve 5378.15 11894.07
Debenture Redemption reserve 100 100
Share Premium 8045.4 8045.4
Investment Fluctuation Reserve 1042.43 2780.01
Revenue and other Reserve 38728.6 39719.68
Balance in P & L account 865.15 1954.78
Total 65772.63 77627.22
Deposits 1827968.6 2833365
Borrowings 2545590.1 3945807.1
Other liabilites and provisions 293528.95 473051.72
4,742,490.
TOTAL 6 7,339,481.3
ASSETS
Cash and balance with RBI 6669.734 13011.76
Balances with banks and money 40971.23 79929.4
Investments 947523.93 1705543.074
90
Advances 3621685.6 5432528.39

Fixed Assets 46632.74 51296.014
Other Assets 79007.32 150113.908
TOTAL 4742490.55 7339481.386
PROJECTED CASH FLOW STATEMENT (Rs. In Million)

2003 2004
Cash flow from Operating Activities
Net Profit Before taxes 20449.4 45947.4
Adjustments for:
Depreciation on fixed assets 704.15 774.57
Adustments for:
(Increase)/ Decrease in Investments(-) 588613.1 758019.1
(Increase)/ Decrease in Advances (-) 3151337 1810843
Increase/(Decrease) in Borrowings 2053404 1400217
Increase/(Decrease) in Deposits 1507118 1005396
(Increase)/ Decrease in Other Assets(-) 37424.52 71106.59
Increase/(Decrease) in Other liabilities & Prov. 121556.9 241087.8
Direct taxes paid(-) 1226.96 2756.84
Net Cash Generated from Operating Activities -75370.18 50697.76
Net Cash Generated from Investing

Activities(-) 4239.34 4663.274
Net Cash Generated from Financing
Activities(-) 613.02 734.28
91
Net increase/(decrease) in cash & cash equiv. -80222.54 45300.2
Cash and Cash Equivalents as at April1 127863.5 47640.96

Cash and Cash Equivalents as at March 31 47640.96 92941.16
Returns of ICICI Bank

0.3
0.2
0.1
-0.1
-0.2
-0.3
Returns
The above figure shows the variability of the ICICI Bank’s

share returns. A wide variation in the ICICI returns could
be noticed.
92
Market returns Vs.ICICI return
0.3
0.2
0.1
Return
0 ICICI
Return
-0.1 BSE
-0.2
-0.3
Nov-01
Nov-02
May-01
May-02
Sep-01
Sep-02
Mar-02
Jul-01
Jan-02
Jul-02
Jan-03
The above figure shows ICICI’s monthly returns against

the market returns. We can observe that there is a
positive movement between ICICI return and market
return. That is generally an increase in the market returns
is followed by an increase in the ICICI’s return and vice
versa.
Month/Year Price BSE Price ICICI Return BSE(X) Returns ICICI X*Y X^2
Bank Bank (Y)
Mar-01 3911.865 179.175
Apr-01 3386.665 172.45 -0.134258212 -0.037533138 0.005039132 0.01802
May-01 3590.05 150.6 0.060054656 -0.126703392 -0.007609129 0.00360
Jun-01 3469.63 137.625 -0.033542708 -0.086155378 0.002889885 0.00112
Jul-01 3377.725 122.425 -0.026488415 -0.11044505 0.002925514 0.00070
Aug-01 3300.095 116.55 -0.022982925 -0.047988564 0.001102918 0.00052
Sep-01 2931.4 88.2 -0.111722541 -0.243243243 0.027175753 0.01248
Oct-01 2901.03 91.475 -0.010360237 0.037131519 -0.000384691 0.00010
Nov-01 3190.88 104.5 0.09991279 0.142388631 0.014226445 0.00998
Dec-01 3300.385 90.95 0.034318119 -0.129665072 -0.004449861 0.00117
93
Jan-02 3351.745 93 0.015561821 0.022539857 0.000350761 0.0002

Feb-02 3524.055 116.375 0.051409042 0.251344086 0.012921359 0.0026
Mar-02 3606.27 128.75 0.023329659 0.106337272 0.002480812 0.00054
Apr-02 3417.685 121.225 -0.052293644 -0.058446602 0.003056386 0.00273
May-02 3287.875 131.8 -0.03798185 0.087234481 -0.003313327 0.00144
Jun-02 3263.225 149 -0.007497244 0.130500759 -0.000978396 5.62087
Jul-02 3149.545 146.175 -0.034836703 -0.018959732 0.000660495 0.00121
Aug-02 3058.43 138.3 -0.028929576 -0.053873781 0.001558546 0.0008
Sep-02 3100.795 138.9 0.013851878 0.004338395 6.00949E-05 0.00019
Oct-02 2933.7 134 -0.053887793 -0.035277178 0.001901009 0.00290
Nov-02 3087.305 124.625 0.052358796 -0.069962687 -0.003663162 0.00274
Dec-02 3300.225 141.7 0.068966299 0.137011033 0.009449144 0.0047
Jan-03 3308.05 143.6 0.00237105 0.01340861 3.17925E-05 5.62188
Feb-03 3279.99 146.15 -0.008482339 0.01775766 -0.000150626 7.19501
Total -0.141130078 -0.068261515 0.065280853 0.06812
8.5 Application of Different Models

 Application of Capital Asset Pricing Model to
ICICI Bank
Calculation of Beta
N ∑XY − (∑X )( ∑Y )
Beta =
N ∑X 2
− (∑X ) 2
24 (0.065281) - (-0.141130 078)(-0.06 8261515)
=
24(0.06812 1) - (-0.141130 078) 2
= 0.964
94
ICICI has a beta of 0.964 based on the monthly returns

during March 2001 to March 2003, which is
approximately equal to one. A beta of 0.964 means
that the ICICI shares are as risky as market.
Calculation of Alpha
Alpha =α =Y − β X
=-0.0028442 3 - (-0.005880 42)(0.964)
=0.00275
The alpha (intercept) is 0.00275(0.275%). It shows

ICICI’s returns when the market return is zero. ICICI’s
expected monthly return is 0.275% when the market
earns nothing. If the monthly market return is expected
to be 1%, ICICI’s expected monthly return is
R =α + β R m = 0.00275 + 0.964*0.01 = 0.01239
Calculation of Coefficient of correlation
N∑ X -(∑ X ∑ Y ) () The coefficient of correlation is

0.483. The positive correlation
C to c f eon = f r 2fr i e 2 c l i2a e t2 n1/i2 o indicates that when the market
[ ∑ {Y ) − (∑ Y) }N ∑ X{ − (∑ X) } ] sensex return goes up ICICI

return also goes up.
Coefficient of
(2 0 4 .-( 0 - 060 785. 1 82 4 )68 (1 1 - 1 05) 3 .1 0 0 5 6 )
Determination
= 2 2 1/ 2
The squared coefficient of
correlation is 0.23(23%). It
[ *{0 (. -( 2 - 5640 } 218. { 0457-1 ( 6()-5 0 08 }3 .7 .2 0])1 8 6 6 4 ) 1 8 1 1 1 2 3 0
indicates the percentage of
variance of ICICI Bank’s returns
= 0.4 8 3
explained by the changes in
the market returns. Thus, 23%
of ICICI’s risk is explained by
95
the market. It is called the market risk and therefore it

is undiversifiable. 77% unexplained variance is the firm
specific it is called unsystematic risk and it is
diversifiable.
 Discounted Cash Flow Approach For ICICI Bank

Risk free rate: we have assumed it at 7%.
Market premium: The difference between expected
market rate of return and the risk free rate of return is
the expected market premium. There are no estimates
of market premium available in India. The average
monthly sensex return during the period March 2001 to
March 2003 has been -0.22%, this implies an annual
market rate of return of -2.64% which appears
unreasonable. If we take a relatively recent period, say
November 2001 to March 2003, and then the average
market return works out to be 1% on monthly basis
and 12% on yearly basis. Thus the calculated market
return is sensitive to the period chosen for the
calculation. So we can say that 12% market return is
reasonable. If we assume that the investor expects to
earn this rate of return then the risk premium is 0.12-
0.07=0.05.
Bank Beta
ICICI Bank 0.964
State Bank of India 1.158
Corporation Bank 0.88
HDFC Bank 0.32
As indicated in the previous chapter risk-free rate is

equal to 7% and the market premium is 5%. The value
of Beta of ICICI bank is 0.964.
96
Therefore, the cost of equity for ICICI bank can be found

by the following formula.
k e = r f + ( rm − r f ) β
Which can be written as following

Cost of equity = Risk-free rate + (Market rate– Risk free
rate)* ICICI’s Beta
Therefore,
Cost of equity of ICICI bank= 0.07 + (0.12 – 0.07) * 0.964
= 0.1182 or 11.82%
Thus, the cost of equity of ICICI bank is 11.28%. For
determining total economic value, we will discount its
cash flows by 11.28%. For the year 2002-03, the bank has
net cash outflow of Rs. 80222.54 million and for the year
2003-04 it has net cash inflow of Rs. 45300.204 million.
Therefore,
Economic value of equity = Present value of cash flow of
ICICI bank
= - 80222.54 + 45300.204
(1+0.1128)
=-38514.23303
As the cash flows are negative it is difficult to apply

discounted cash flow model.
 Market-To-Book Value Approach for ICICI Bank
The market value per share of ICICI bank was Rs. 128.75 in March
2002, while its book value per share is Rs. 101.90.
Therefore,
MV/BV = 128.75/101.90
= 1.26
A firm is said to create shareholder value when its market value per
share is greater than its book value per share. Here MV/BV > 1 for ICICI
bank, this implies that the firm is creating value of shareholders.
97
FUNDAMENTAL ANALYSIS OF HDFC BANK
9.1 Qualitative Analysis of HDFC Bank

HDFC bank is one of the India’s leading private sector
banks has established its distinctive identity to the
market. The bank has extended its presence to cover
85 cities with over 183 branches and more than 520
ATMs. It is also the first bank in India to get the ISO
9001:2000 certification for depository service at the
central processing unit and back-end processing of
retail liabilities and direct marketing operations. This
bank is also aggressively cross selling product under
HDFC bank name. Their product range covers
everything from housing loans to auto loans. The bank
has over 2.2 million retail customers. The net profit of
the bank for the year 2001-02 was Rs. 2970.4 million.
IT and its management have played an important role
in creating a strategic differentiation for their products
and distribution channels. It plays a major role in
bringing efficiencies.
 Growth Record
The growth record of the company we find from two
parameters, which are percentage growth rate of
earnings per annum and price earnings ratio. If we look
at the past data of HDFC bank, we can find that EPS is
between ranges, which is not very low and not very
high.

1995 14 -
1996 16 14.28
98
1997 20 25
1998 24 20
1999 28 16.66
2000 34 21.42
2001 40 17.64
2002 48 20
However, EPS calculation cannot be the sole basis of

deciding about an investment. The P/E ratio of the bank
on January 1, 2003 was 18 which is highest among all
banks As per the theoretical basis we should choose
the stock with less P/E ratio. But P/E ratio is decided by
the market and higher P/E ratio indicates that the
market has strong view about the company. The
market has the information about the company, which
as an investor we do not have. So, HDFC bank is
continuously looking for the growth opportunities. This
point is the main point for an investor.
However, if we see the Quality of management than it
is world class. It is also the first bank in India to get the
ISO 9001:2000.If we see NPA/Net Advances ratio is
only 0.5%, which is lower than the international
standard also. Its CAR is 13.93also higher than the
prescribed level of RBI. Its P/E and P/BV ratio are 18
and 3.08 respectively. Which is highest among all the
listed banks. So we can say market has very high
expectation from bank due to its high manageability in
all the criteria. Its EPS and dividend ratio is also quiet
satisfactory. Its human resource management is very
good the high Quality workers are working with high
efficiency. If we judge from past trends than we see
that PAT, EPS, Deposits, Borrowings, etc are managed
perfectly. Which shows good management of bank
99
 Pattern of Existing Stock Holding
Individuals
% Of shareholding
5.412 Companies
18.532
18.695 Promoters
8.027
ADS Issue
11.564
Chase group
13.297 24.473
FIIs, NRIs, OCBs
Mutual Fund, Banks,

In the shareholding pattern of HDFC FIs bank the
Promoters, individual and FIIs, NRIs, OCBs have more
or less same share. This is good for an individual
investor because no one group force its decision to the
bank.
shareholding in the bank. In ICICI bank, public holding
is 18.53 %, which is high. But if we see the trading
volume than it is very low. This scrip is mainly traded
on BSE and NSE.
100
9.2 Financial Data of HDFC
PROFIT AND LOSS ACCOUNT of HDFC (Rs. In Millions)
PARTICULARS 1999-02 2000-01 2001-02

Income
Operating income 19376.5 22737.1 25802.1
Fees and other charges 757 1028.2 1122.1
Other income 22.1 58.2 77.4
20155.6 23823.5 27001.6
Expenditure and charges
Interest and other charges 14369.5 16896.1 18712.4
Staff expenses 273.3 346.1 406.8
Establishemnt expenses 108.9 124.6 159.5
Other expenses 280 363.4 412.8
Depreciation 435.8 456.8 318.3
Provisions for contingencies 80 80 82.5
15547.5 18267 20092.3
101
Provision for tax 590 820 1109.2

PAT available for appropriations 4018.1 4736.5 5800.1
Appropriations
Special reserve 1000 1250 1750
General reserve 466 1592.3 967.3
Debenture redemption reserve 0 200 0
Shelter assistance reserve 40 40 40
Interim dividend (millennium) 1191.1 0 0
Interim dividend 1072 0 0
Proposed dividend 0 1501.1 3042.8
Additional tax on dividend 248.9 153.1 0
Total 4018 4736.5 5800.1
BALANCE SHEET (Rs. In Millions)

Share Capital 1191.1 1200.8 1217.1
Special Reserve 5954.9 7003.0 8403.0
General Reserve 4975.8 6199.8 7651.5
Debenture Redemption reserve 0.0 200.0 200.0
Share Premium 8248.1 8506.0 8937.2
Employe stock option outstanding 18.3 26.9 23.5
Capital redemption reserve 500.0 500.0 500.0
Shelter assistance reserve 71.0 82.5 95.7
Capital reserve 0.4 0.4 0.4
Total 19768.5 22518.6 25811.3
Loan Funds
Loans 46425.7 52946.4 61385.0
Bonds 7514.1 7041.8 6250.0
102
Debentures 13707.1 22211.3 35011.7

Deposits 62238.5 72498.2 84910.2
129885.4 154697.7 187556.9
TOTAL 150845.0 178417.1 214585.3
ASSETS
Loans 100630.0 132246.7 171692.0
Investments 33343.3 30430.5 29310.3
Deferred tax assets 0.0 0.0 545.2
Current asset, loans & advances 25328.3 25252.4 32043.2
Less : current liab and Prov. 10586.6 12727.9 14271.1
Net current assets 14741.8 12524.6 8772.1
Fixed assets
Gross Block 4243.5 5620.6 6921.4
Less : Depreciation 2113.6 2405.1 2655.7
Net Block 2129.9 3215.5 4265.6
TOTAL 150845.0 178417.3 214585.2

Net Worth
For the year 2000, ROE= 4018.1/20959.6= 0.1917 or

19.17%
2001, ROE= 4736.5/23719.4= 0.2 or 203%
2002, ROE= 5800.1 /27028.4= 0.2146 or
21.46%
The ratio of ROE has increased in the year 2002; so we
can say that the bank is using its equity efficiently.
 Earning per share (EPS) :

103

For the year 2000, EPS = Rs.34
2001, EPS = Rs.40
2002, EPS = Rs.48
The bank’s earnings per share has increased over the

last three years. This is a good indication as a point of
view of shareholders.
For the year 2000, ROI = 4018.1/ 150845 =

0.0266 or 2.66%
2001, ROI = 4736.5/ 178417.1 = 0.0265
or 2.65%
2002, ROI = 5800.1 / 214585.3 =
0.027 or 2.7%
The Bank’s ROI has remained almost same for the last
three years.

provisions
For the year 2000, TWF = Rs. 150845 million

2001, TWF = Rs. 178417.1 million
2002, TWF = Rs. 214585.3 million
104

funds = 12.85
funds = 12.74
funds = 12.02

funds of HDFC bank has increased but the proportion of
interest income to that of working funds has declined
in the last three years.

funds = 0.015
funds = 0.03
funds = 0.036

the total income of HDFC bank forms a little portion of
the total working capital.
9.4 Projections of Future Earnings of HDFC Bank
105
Basis For Projections

 We have assumed that the operating income of
HDFC Bank will increase by 16% in next two years.
 Fees and other charges will increase by 22%.
 Other income will increase by 98%.
 Interest and other expenses will increase by 14%.
 Staff expenses will increase by 22%.
 Establishment expenses will increase by 21%.
 Other expenses will increase by 22%.
 Provisions and contingencies will remain constant.
 Provisions for tax is 15%.
 Share capital will remain constant for the next two
years.
 Fixed assets will increase by 28% and the
depreciation rate 38.4%.
 Investments will increase by 6%.
 One basic assumption is taken that interest rate
which the bank will earn or spent will remain same.
 The proportion of interest on investments and
advances and balances is taken constant for the
projected P & L.
106
PROJECTED PROFIT AND LOSS ACCOUNT of HDFC (Rs. In Millions)
PARTICULARS 2002-03 2003-04

Income
Operating income 29930.44 34719.31
Fees and other charges 1368.962 1670.134
Other income 153.252 303.439
31452.7 36692.88
Expenditure and charges
Interest and other charges 21332.14 24318.64
Staff expenses 496.296 605.4811
Establishemnt expenses 192.995 233.524
Other expenses 503.616 614.4115
Depreciation 318.3 318.3
Provisions for contingencies 82.5 82.5
22925.8 26172.85
Provision for tax 1279.02 1578.004
Profit after tax available for
appropriations 7247.79 8942.023
Appropriations
Special reserve 2475.68 3550.979
General reserve 1368.42 1962.778
Debenture redemption reserve 0 0
Shelter assistance reserve 40 40
Interim dividend (millennium) 0 0
Interim dividend 0 0
Proposed dividend 3042.8 3042.8
Additional tax on dividend 304.3 304.3
Total 7247.79 8942.023
107
Projected Balance Sheet (Rs. In Million)

Share Capital 1217.1 1217.1
General Reserve 9019.9 10982.68
Debenture Redemption reserve 200 200
Employee stock option outstanding 23.5 23.5
Capital redemption reserve 500 500
Shelter assistance reserve 135.7 175.7
Capital reserve 0.4 0.4
Total 29695.4 35249.16
Loan Funds
Loans 69978.9 79775.95
Bonds 7125 8122.5
Debentures 39913.34 45501.21
Deposits 127933.2 174890.3
244950.5 308290
TOTAL 275863 344756.2
ASSETS
Loans 223199.6 290159.5
Investments 27551.68 25898.58
Deferred tax assets
Current asset, loans and advances 36208.82 40915.96
Less : current liab and Prov. 16554.48 19203.19
Net current assets 19654.34 21712.77
Fixed assets
Gross Block 8859.392 11340.02
Less : Depreciation 3402.007 4354.568
108
Net Block 5457.385 6985.453

TOTAL 275863 344756.3
CASH FLOW SATEMENT OF HDFC BANK (Rs. In Million)
2003 2004
Adjustments for :
Adjustments for:
(Increase)/ Decrease in Loans 8593.9 9797.046
(Increase)/ Decrease in Bonds 875 9975
Increase/(Decrease) in Deposits 11887.4 13551.87

(Increase)/ Decrease in Loans (Assets) 51507.6 66959.88
Increase/(Decrease) in Investments 1758.6 1653.1
Increase/Decrease in Current Assets 4725.672 5244.8
Direct taxes paid (-) 1279.021 1578.004
Net Cash Generated from Operating Activities -26403.3 -28911
Increase/(Decrease) in Debentures 4901.6 5587.867

Net Cash Generated from Financing Activities 7944.4 8630.667
Net cash generated from Investing activities 1191.8 1528.1
Net increase/(decrease) in cash and cash equivalents -17267.1 -18752.3
Cash and Cash Equivalents as at April1 9041.8 -8225.3

Cash and Cash Equivalents as at March 31 -8225.3 -26977.6
109
Returns of HDFC Bank
0.15
0.1
0.05
-0.05
-0.1
-0.15
Series1
The above figure shows the variability of the HDFC Bank’s

share returns. A wide variation in the HDFC returns could
be noticed.
Market returns Vs.HDFC Bank returns

0.15
0.1
0.05
0
Returns HDFC
Return BSE
-0.05
-0.1
-0.15
Nov-02
Nov-01
May-01
Sep-01
May-02
Jul-02
Sep-02
Jul-01
Mar-02
Jan-02
Jan-03
110
The above figure shows HDFC’s monthly returns against

the market returns. We can observe that there is a
positive movement between HDFC return and market
return. That is generally an increase in the market returns
is followed by an increase in the HDFC’s return and vice
versa.
Average HDFC Returns HDFC Bank

Month/Year Average BSE Bank Return BSE(X) (Y) X*Y
1-Mar 3911.865 245
Apr-01 3386.665 231.875 -0.134258212 -0.053571429 0.007192
May-01 3590.05 236.45 0.060054656 0.019730458 0.001185
Jun-01 3469.63 215.75 -0.033542708 -0.087544936 0.002936
Jul-01 3377.725 217.5 -0.026488415 0.00811124 -0.00021
Aug-01 3300.095 233.5 -0.022982925 0.073563218 -0.00169
Sep-01 2931.4 212.125 -0.111722541 -0.091541756 0.010227
Oct-01 2901.03 221.525 -0.010360237 0.044313494 -0.00046
Nov-01 3190.88 223.5 0.09991279 0.008915472 0.000891
Dec-01 3300.385 225.525 0.034318119 0.009060403 0.000311
Jan-02 3351.745 236.775 0.015561821 0.049883605 0.000776
Feb-02 3524.055 238.175 0.051409042 0.005912786 0.000304
Mar-02 3606.27 236.25 0.023329659 -0.008082292 -0.00019
Apr-02 3417.685 227.75 -0.052293644 -0.035978836 0.001881
May-02 3287.875 221.275 -0.03798185 -0.028430296 0.00108
Jun-02 3263.225 217.075 -0.007497244 -0.018980906 0.000142
Jul-02 3149.545 210.25 -0.034836703 -0.031440746 0.001095
Aug-02 3058.43 207 -0.028929576 -0.015457788 0.000447
Sep-02 3100.795 217.025 0.013851878 0.048429952 0.000671
Oct-02 2933.7 201.75 -0.053887793 -0.070383596 0.003793
Nov-02 3087.305 194 0.052358796 -0.038413879 -0.00201
Dec-02 3300.225 205.45 0.068966299 0.059020619 0.00407
Jan-03 3308.05 227.425 0.00237105 0.106960331 0.000254
Feb-03 3279.99 244 -0.008482339 0.07288117 -0.00062
111
Total -0.141130078 0.026956288 0.032074
9.5 Application of Different Models

 Application of Capital Asset Pricing Model to HDFC
Bank
Calculation of Beta
N ∑ XY − (∑ X )(∑ Y )
Beta =
N ∑ X 2 − (∑ X ) 2
24(0.032074) - (-0.141130078)(0.026956288)
=
24(0.068121) - (-0.141130078) 2
= 0.32.
HDFC has a beta of 0.32 based on the monthly returns

during March 2001to March 2003. A beta of less than
one indicates that the share is less risky than the
market. Therefore, we can say that the HDFC’s shares
are less risky than the market.
Alpha = α = Y − β X
= 0.001123179 - (0.32)(-0.00588042)
= 0.003
The alpha (intercept) is 0.003(0.3%). It shows HDFC’s

returns when the market return is zero. HDFC’s
expected monthly return is 0.275% when the market
earns nothing. If the monthly market return is expected
to be 1%, HDFC’s expected monthly return is
R = α + β R m = 0.003 + 0.32*0.01 = 0.0062
112
N ∑ XY - (∑ X)(∑ Y)
Coefficient of correlation =
[{(N∑ Y 2 ) − (∑ Y ) 2 }{N ∑ X 2 − (∑ X ) 2 }]1 / 2
24(0.032074) - (-0.141130078)(0.026956288)
=
[{(24 * 0.062196) - (0.026956288) 2 }{24(0.068121) - (-0.141130078) 2 }]1 / 2
= 0.41
The coefficient of correlation is 0.41. The positive

correlation indicates that when the market sensex
return goes up HDFC return also goes up.
Coefficient of Determination
The squared coefficient of correlation is 0.17(17%). It
indicates the percentage of variance of HDFC Bank’s
returns explained by the changes in the market
returns. Thus, 17% of HDFC’s risk is explained by the
market. It is called the market risk and therefore it is
undiversifiable. 83% unexplained variance is the firm
specific it is called unsystematic risk and it is
diversifiable.
 Discounted Cash Flow Approach for HDFC Bank
As indicated in the previous chapter risk-free rate is
equal to 7% and the market premium is 5%. The value
of Beta of HDFC bank is 0.32.
Therefore, the cost of equity for HDFC bank can be
found by the following formula.
k e = r f + ( rm − r f ) β

Cost of equity = Risk-free rate + (Market rate– Risk
free rate)* HDFC’s Beta
Therefore,
113
Cost of equity of HDFC bank = 0.07 + (0.12 – 0.07) *

0.32
= 0.086 or 8.6%
Thus, the cost of equity of HDFC bank is 8.6%. For

determining total economic value, we will discount its
cash flows by 8.6%. For the year 2002-03, the bank has
net cash outflow of Rs. 80222.54 million and for the
year 2003-04 it has net cash inflow of Rs. 45300.204
million.
Therefore,
Economic value of equity = Present value of cash flow
of HDFC bank
= - 80222.54 + 45300.204
(1+0.1128)
= -38514.23303
As the cash flows are negative, it is difficult to apply
discounted cash flow model.
 Market-To-Book Value Approach for HDFC Bank
The market value per share of HDFC bank was Rs. 236.25 in March
2002, while its book value per share is Rs. 69.2
Therefore,
MV/BV = 236.25 / 69.2
= 3.41
A firm is said to create shareholder value when its market value per
share is greater than its book value per share. Here MV/BV > 1 for
HDFC bank, this implies that the firm is creating value of
shareholders.
114
FUNDAMENTAL ANALYSIS OF THE CORPORATION

BANK
 Size and Ranking

The corporation bank is one of the largest banks in
Indian economy. The corporation bank is shredded in
Metro, Port Town & Urban, Semi-Urban, and Rural
areas to satisfy need of different segments of the
country. The following is the table of different branches
in past and in present.
Category Branches
No Presen
t
115
Metro 173 26
Port Town & 169 26
Urban
Semi-Urban 152 23
Rural 165 25
Total 659 100
The following table include branch category-wise

Business as on 31-03-2002
Branches % Of business
Metro 18068 (60.41%)
Port Town & 5789 (19.35%)
Urban
Semi Urban 3868 (12.93%)
Rural 2186 (7.31%)
The Metro branches, with 26 percent in terms of

number of branches, handle over 60 percent business
of the Bank, which is highest. The future plan of the
bank also indicate increase its network through
different ways. So size wise Corporation is one of the
successful giant in banking industry.
 Growth aspect
For assessing the growth record of the company we
have taken two indicators, which are percentage
growth rate of earnings per annum and price earnings
ratio, and percentage growth rate of net block.

1995 6.48 -
1996 9.35 44.29012
116
1997 15.26 63.20856

1998 13.91 -8.84666
1999 16 15.02516
2000 19.37 21.0625
2001 21.82 12.64843
2002 32.65 49.63336
If we look at the past data of Corporation bank, we can

find that EPS is continuously increasing except some
years. However, EPS calculation cannot be the sole
basis of deciding about an investment. The P/E ratio of
the bank on January 1, 2003 was 5%, which is quiet low
than the industry average of six. So we can say market
have moderate expectation from bank. But the net
profit and its investment of the bank is continuously
increasing so the past trend of the bank predict good
growth of the bank
Quality Of Management
In the corporation bank total no of director is 14 from
that 11 are non-executives director which are
independent director not engaged in day-to-day
operation. But its effect cannot find in the performance
of Corporation bank. If we see the CAR of the company
than it is highest among the all listed banks. Which
shows good capital-to-risk weighted assets position of
the bank. The NPAs level is also under control. The
bank is also rewording to its shareholders in good
terms. The management is not only worried about the
profit but they also doing social good also. If we see
the cautious trend of the bank than wee find the bank
cautiously improving its CAR and also managing its
NPAs level properly. The net profit of bank is also
cautiously increasing. The bank has comparatively
young workforce. Out of the total staff 77% are with in
117
45 ages, of which 28% are in office cards. To improve

quality of there labor they organize different trainings
programs and different motivational schemes. The
industrial relation in the bank continued to remain
cordial and harmonious during the year. So the
company labor management is quit well. So we can say
the quality of management is good in all faces of
economy
 Pattern Of Shareholdings
The pattern of shareholding in corporation bank is as
follow.
Category of % Of
Shareholders total
holding
Government of India 57.17
Life Insurance 27.02
Corporation of India
Indian Financial 2.31
Institutions & Banks
Mutual Fund, & UTI 4.78
Bodies Corporate 0.67
Foreign Institutional 3.39
Investors (FIIs)
Overseas Corporate 0.04
Bodies (OCBs)
Overseas Corporate 0.33
Bodies (OCBs)
Resident Individuals 4.29
On the corporation bank government has major share

holding. The government has higher control over the
118
decision taken by the bank. So the government is more

committed towers management. The life corporation of
India is also major stakeholder of corporation bank.
 Marketability of share
Liquidity: The Bank's shares are included in the
Specified Group in BSE and CNX Nifty Junior Index of
NSE. The fair volume of trading provides enough
entry/exit opportunities to the shareholders. The share
price of the Bank which was Rs.109.90 as at 31st
March 2001 in BSE, moved up to Rs.134.00 as on 31st
March 2002.
119
10.2 Financial Data of Corporation Bank

PROFIT AND LOSS ACCOUNT (Rs. In Million)

Interest on Advances 8060.1 9340.7 9968.7
Interest on Investments 6890.5 7438.4 8237.1
Interest on Balances 944.3 937 913.4
Others 149 329.3 337.7
Interest Earned, Operating income 16043.9 18045.4 19456.9
Other Income 2708.1 2920.9 3819.4
Total Income 18752 20966.3 23276.3

Payment/provision for employees 1772.6 2000 2139
Other operating expenses 1267.3 1413.6 1703.2
Operating Expenses 3039.9 3413.6 3842.2
Total Expenditure 14500.8 15645.7 17047
Operating Profit 4251.2 5320.6 6229.3

Tax 1351.5 1526.7
Provision and Contingencies 1926.8 1350.7 1621.6
Profit After Tax 2324.4 2618.4 3081
Net Profit 2324.4 2618.4 3081
Total 2324.4 2618.4 3081
Statutory Reserve 622 656.9 772.4
Staff Welfare Fund 60 60 70
Investment fluctuation Reserve 66 -35.8 825.9
120
Proposed Dividend 480 480 521.1

Corporate Dividend Tax 83.4 49
Transfer to General Reserves 1013 1408.3 891.6
Total 2324.4 2618.4 3081
BALANCE SHEET (Rs. In Million)

Capital 1200 1200 1434.4
Statutory Reserve 2833.1 3490 4262.5
Capital Reserves 0.3 0.3 0.3
Share Premium 2659.7 2659.7 7019.6
Investment Fluctuation
Reserve 107.5 71.8 897.7
General Reserves 4647 6055.2 6848
TOTAL 10247.6 12277 19027.9
Deposits 142796 165601 189242.7
Borrowings 2962.8 5949.5 14235.5
Other liabilities and
provisions 10416.2 12004.2 12101.5
TOTAL 167623 197032 236042
ASSETS
Cash & balance with RBI 11616.7 10877.7 13362.4
Balance with banks& 12916.7 20966.1 20098.8
money at call&short notice
Investments 57909.2 68603.4 80,564.9
Advances 77774.7 86661 109874
Fixed Assets 1434.7 1552.2 1993.4
Other Assets 5970.8 8371.6 10148.4
121
TOTAL 167623 197032 236042

Net Worth
For the year 2000, ROE= 2324.4/11447.6 = 20.30%

2001, ROE= 2618.4/13477 = 19.42%
2002, ROE= 3081 /20462.3= 15.05%
The ROE has declined in the last three years. The main
reason behind this is the increase in the capital base of
the firm.
 Earning per share (EPS) :

For the year 2000, EPS = 2324400000/ 120000000 =
Rs 19.37
2001, EPS = 2618400000/ 120000000 = Rs
21.82
2002, EPS = 3081000000/120000000 =
Rs 25.68
The earnings per share of Corporation bank is
increasing . EPS is a good measure for the shareholder
because one can know how much one can earn on a
share. The increased EPS gives good indication for the
investors.
122
For the year 2000, ROI = 2324.4/ 167623 = 1.5

2001, ROI = 2618.4/ 197032 = 1.55
2002, ROI = 3081/ 236042 = 1.6
The Corporation Bank’s ROI remained almost same in
the last three years. This indicates that the bank has
constant growth rate.
provisions
For the year 2000, TWF = Rs. 167622.8million

 Interest income to working funds

For the year 2000, interest income to working funds
= 9.57% 2001, interest income to
working funds = 9.51% 2002, interest
income to working funds = 8.24%

funds of Corporatioan bank has increased but the
proportion of interest income to that of working funds
has declined in the last three years. But the profit of
the bank has increased. This indicates that the firm’s
non-operating income has played main role in boosting
its profit.
123
 Non-interest income to total income (per cent)

For the year 2000,non- interest income to total
income = 2.41
2001, non-interest income to total income
= 1.78
2002, non-interest income to total income
= 2.25

year. The above ratio supports the statement made in
the previous ratio.
 Net NPA to Net Advances
For the year 2000, Net NPA to Net Advances = 1.92

2001, Net NPA to Net Advances = 1.98
2002, Net NPA to Net Advances = 2.31
The Net NPA to Net Advances of the Corporation bank

has increased but it is very less compared to the other
banks such as ICICI and SBI which are the top large
banks in India. This indicates the bank’s
management’s ability. This also gives us an indication
about the quality of the assets the firm has. When
investing into shares one must see the quality of the
assets the firm has.
 Book value per share

The corporation bank’s book value per share is Rs.
142.44 .
124
10.4 Projections Of Future Earnings Of Corporation

Bank
 For projecting the future earnings of Corporation
bank, we have used the technique of projecting the
earnings using the historical growth data. For that we
have taken some assumptions which are as following.
The no. of shares outstanding are 13027500.
Bases For Projections

 One basic assumption is taken that the interest rates
that the bank will earn or spend will remain same.
 The proportions of interest on advances, interest on
investments and balances is taken constant for the
projected period.
 The tax rate is taken as 25% of net profit.
 The Corporation bank has paid 40% dividend for the
last three years, so we have assumed that it will pay
40% dividend for the next two years also.
 The corporate dividend tax is taken as 10.2%.
 Other liabilities will increase by 8.2%.
 Fixed assets will increase by 18%.
 The other assets will increase by 30%.
 The depreciation rate is 14%.
PROJECTED PROFIT AND LOSS ACCOUNT (RS in Million)

Interest on Advances 11065.26 12282.44
Interest on Investments 9007.269 9849.448
Interest on Balances 898.3289 883.5065
Others 540.32 864.512
Interest Earned, Operating income 21511.17 23879.9
125
Other Income 4545.086 5408.652

Total Income 26056.26 29288.55

Payment/provision for employees 2352.9 2588.19
Other operating expenses 1975.712 2291.826

Tax 1899.628 2322.591
Provision and Contingencies 1540.52 1463.494
Profit After Tax 4158.365 5504.278
Net Profit 4158.365 5504.278
Total 4158.365 5504.278

Statutory Reserve 1075.23 1479
Staff Welfare Fund 107 147.9
Investment fluctuation Reserve 1146.9 1577.61
Corporate Dividend Tax 53.1522 53.1522
Transfer to General Reserves 1254.983 1725.516
Total 4158.365 5504.278
PROJECTED BALANCE SHEET (Rs. In Million)

Capital 1434.4 1434.4
126
Capital Reserves 0.3 0.3

General Reserves 8102.98 9828.496
Total 22505.21 27287.34
Deposits 201860.4 215990.7
Borrowings 32559.29 34838.38
Other liabilities and provisions 13093.82 14167.52
TOTAL 271453.2 293718.3
ASSETS
Balances with banks & money 26880.4 50091.22
Investments 88366 98097
Advances 120918.3 134232.9
Fixed Assets 2352.212 2775.61
Other Assets 13192.92 17150.8
TOTAL 269630 335741.7
PROJECTED CASH FLOW STATEMENT ( Rs. In Million)

2003 2004
Adjustments for :
127
Adjustments for:
(Increase)/ Decrease in Investments (-) 7801.1 9731
(Increase)/ Decrease in Advances (-) 11044.2 13314.6
Increase/(Decrease) in Borrowings 18323.79 2279.09
(Increase)/ Decrease in Other Assets (-) 3044.52 3957.879
Increase/(Decrease) in Other liabilities & Provisions 992.323 1073.693
Direct taxes paid 1899.628 2322.591
Net Cash Generated from Operating Activities 52252.84 -2164.08
Net Cash Generated from Investing Activities(-) 358.81 423.3982

Proposed
Net increase/(decrease) in cash & cash equivalents 53185.9 -3161.73

128
Returns of Corporation Bank
0.2
0.15
0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
Series1
The above figure shows the variability of the Corporation

Bank’s share returns. A wide variation in the Corporation
returns could be noticed.
M arket return Vs. Corporation Bank returns
0.2
0.15
0.1
0.05
Returns Corp.
0 Bank
-0.05 Return BSE
-0.1
-0.15
-0.2
Nov-01
Nov-02
Jul-01
Jul-02
Jan-03
Jan-02
May-02
May-01
Sep-01
Mar-02
Sep-02
The above figure shows Corporation bank monthly returns

against the market returns. We can observe that there is
a normally same movement between Corporation banks
return and market return. That is generally an increase in
129
the market returns is followed by an increase in the

corporation bank return and vice versa.
Returns
Month Price BSE Price corp. Bank Return BSE(X) Corp.Bank(Y) X*Y X^2 Y^2
Mar-01 3911.865 126.875
Apr-01 3386.665 122.3 -0.134258212 -0.036059113 0.004841 0.018025 0.0013
May-01 3590.05 129.2 0.060054656 0.056418643 0.003388 0.003607 0.003183
Jun-01 3469.63 140.35 -0.033542708 0.08630031 -0.00289 0.001125 0.007448
Jul-01 3377.725 148.55 -0.026488415 0.058425365 -0.00155 0.000702 0.003414
Aug-01 3300.095 140.5 -0.022982925 -0.054190508 0.001245 0.000528 0.002937
Sep-01 2931.4 120.925 -0.111722541 -0.139323843 0.015566 0.012482 0.019411
Oct-01 2901.03 119 -0.010360237 -0.015918958 0.000165 0.000107 0.000253
Nov-01 3190.88 130.5 0.09991279 0.096638655 0.009655 0.009983 0.009339
Dec-01 3300.385 132 0.034318119 0.011494253 0.000394 0.001178 0.000132
Jan-02 3351.745 118.1 0.015561821 -0.10530303 -0.00164 0.000242 0.011089
Feb-02 3524.055 130.7 0.051409042 0.106689246 0.005485 0.002643 0.011383
Mar-02 3606.27 142.7 0.023329659 0.091813313 0.002142 0.000544 0.00843
Apr-02 3417.685 140.375 -0.052293644 -0.016292922 0.000852 0.002735 0.000265
May-02 3287.875 130.95 -0.03798185 -0.067141585 0.00255 0.001443 0.004508
Jun-02 3263.225 117.475 -0.007497244 -0.102901871 0.000771 5.62E-05 0.010589
Jul-02 3149.545 113.25 -0.034836703 -0.035965099 0.001253 0.001214 0.001293
Aug-02 3058.43 106.85 -0.028929576 -0.056512141 0.001635 0.000837 0.003194
Sep-02 3100.795 105.325 0.013851878 -0.014272344 -0.0002 0.000192 0.000204
Oct-02 2933.7 101.225 -0.053887793 -0.03892713 0.002098 0.002904 0.001515
Nov-02 3087.305 104.75 0.052358796 0.034823413 0.001823 0.002741 0.001213
Dec-02 3300.225 119.9 0.068966299 0.144630072 0.009975 0.004756 0.020918
Jan-03 3308.05 141.3 0.00237105 0.178482068 0.000423 5.62E-06 0.031856
Feb-03 3279.99 144.25 -0.008482339 0.020877565 -0.00018 7.2E-05 0.000436
Total -0.141130078 0.203784357 0.057806 0.068121 0.154309
130
10.5 Application of Different Models to Corporation

Bank

Corporation Bank
Calculation of Beta
N ∑XY − (∑X )( ∑Y )
Beta =
N ∑X 2
− (∑X ) 2
24 (0.057806) - (-0.141130 078)(0.203 784357)
=
24(0.06812 1) - (-0.141130 078) 2
= 0.88
Corporation Bank has a beta of 0.88 based on the

monthly returns during March 2001to March 2003,
which is approximately equal to 1. A beta of 0.88
means that the corporation bank shares are as risky as
market.
Alpha =α =Y −β X
= 0.00849101 5 - (-0.005880 42)(0.88)
= 0.0137
The alpha (intercept) is 0.0137(1.37%). It shows

Corporation bank’s returns when the market return is
zero. Corporation bank’s expected monthly return is
1.37% when the market earns nothing. If the monthly
market return is expected to be 1%, Corporation
bank’s expected monthly return is
R = α + β R m = 0.0137 + 0.88 *0.01 = 0.0225
131
N∑ X -(∑ X ∑ Y ) )(
C t o c f eon = fr f2 r i e 2 c l i2a e t 2 n1/i2 o The coefficient of correlation is
[ ∑ {Y )− (∑ Y) }N ∑ X{ − (∑ X) } ]
indicates that when the market
sensex return goes up ICICI
(2 0 4 .-( 0 - 050 7 . 1 8 4 )04 (1 360 1 5) . 32 7 0 ) 3
= 2 2 1/ 2
Coefficient of Determination
[ *{0 (.-( 12 0 54 .} 2 274 { 4 0)3-1 ( ()-30 0 0 7}9 7. 08]1) 8 64 ) 831 1 1 2 3 0

The squared coefficient
of
= 0.5 8 variance of corporation Bank’s

returns explained by the changes
in the market returns. Thus, 36% of corporation bank’s
risk is explained by the market. It is called the market
risk and therefore it is undiversifiable. 66%
unexplained variance is the firm specific it is called
unsystematic risk and it is diversifiable.
 Discounted Cash Flow Approach For Corporation Bank
The value of Beta of Corporation Bank is 0.88.

Therefore, the cost of equity for Corporation bank can
be found by the following formula.
k e = r f + ( rm − r f ) β
Cost of equity = Risk-free rate + (Market rate– Risk

free rate)* Corporation’s Beta
= 0.07 + (0.12 – 0.07)*0.88
= 0.144 or 14.4%
132
Thus, the cost of equity of Corporation bank is 14.4%.

For determining total economic value, we will discount
its cash flows by 14.4%. For the year 2002-03, the
bank has net cash outflow of Rs. 53185.9 million and
for the year 2003-04 it has net cash inflow of Rs
-3161.73 million.
Therefore,
Economic value of equity = Present value of cash flow
of Corporation bank
= 53185.9 - 3161.73
(1+0.144)
= 50422.15
Economic Value per share is found by dividing the total

economic value by the no. Of shares. The total no. Of
shares outstanding of Corporation Bank are
120000000.
Therefore,
EVPS = 50422150000 = Rs. 420.18

120000000
The market price of Corporation Bank is Rs.139

whereas the economic value per share is Rs.420.18, so
the share price is undervalued. So it will be profitable
to purchase the shares of Corporation Bank.
 Market-To-Book Value Approach for Corporation Bank
The market value per share of Corporation bank was

Rs. 142.7 in March 2002, while its book value per share
is Rs. 142.7
Therefore,
MV/BV = 142.7 / 142.7
=1
133
Here, MV/ BV ratio is 1 which indicates that it neither

create nor destroy the shareholder’s value.
ANALYSIS OF STATE BANK OF INDIA

11.1 Qualitative Analysis
Size and Ranking of SBI
State Bank of India is the largest bank in the country
with a towering presence of over 9,000 branches and a
staff in excess of 2,00,000. it is planning to take on the
private players on their turf with an increase
concentration on technology. On of the first result in
this direction has been the fact that in the short period
of time, it has already built up a thousand plus ATM
network but that’s not all. The bank proposes to spent
Rs.500 crores on IT which will be implemented in the
next few years in the era of branch networking, ATMs
and so on. SBI has become a major player in Home
Loans segment and bank has already disbursed fresh
home loans amounting to merely Rs.800 crores in the
current financial year.
 Growth records
134

1999-00 38.98 -
2000-01 30.48 (21.8)
2001-02 46.20 51.6
The earnings per share have reduced from 38.98 to

30.48 in the year 1999-00 to 2000-01. The reason may
due to the reduction in EPS may that the company was
facing stiff competition from the private sector banks
and so it had decided to compete them by investing
more in technology. In the year 2001-02 the EPS has
increased to 46.20Rs. Which shows the growth of
51.6%, which shows a good indication of improvement.
The P/E ratio of the bank on January 1, 2003 was 5.3,
which is less than the industry average of six but is
close of the average. So it is better to purchase the
shares of SBI because the future prospects are good
and currently the shares are getting at a lower price.
In the year 2001 and 2002 SBI has given dividend of
Rs.50 and Rs.60 respectively, which shows an increase
of 12%. SBI has wide network of branches i.e.13000 all
over India. SBI is at the top position in India. Having a
wide network SBI is able to maintain its position in the
banking industry. SBI also updates the skills and
knowledge of its employees by providing training to
them. So we can say that the quality of management is
good. SBI bank has the highest net worth among the all
banks. The CAR is also very high. The bank’s P/E ratio
is at par with industry average. The P/BV ratio is also
very good. The only negative factor is the higher NPA
levels but by looking at the factors we feel that the
bank would be able to overcome this point especially
135
after the passing of securitisation bill. So over all the

management of bank is good.
 Pattern of Share Holding
RBI
7.87
1.47 Non-Residents
4.32
7.2 Bank,Fis
including
Insurance Co.
MF/UTI
19.41 59.73
Domestic
co./Pvt.Corporat
Bodies/Trusts
Resident
Individuals
If we look in to the shareholding pattern of SBI the maximum shares

are held by RBI, which is the governor of the Financial system in
India. So the decision making power lies in the hands of RBI
according to the rules and regulations and which won’t be against the
shareholders.
 Industrial Relations
In the area of industrial relations, the Bank aims at
development of a collaborative culture and resolving
issues through joint consultations/negotiations. Well-
established and on-going consultative machinery is
functioning at various tiers of the administration in the
Bank for achieving these objectives. The industrial
relations during the year remained peaceful and
cordial.
136

shareholding in the bank. In SBI, public holding is
7.87%, which is moderate. But if we see the trading
volume of SBI in BSE and NSE then it is high so the
marketability of shares is high.
11.2 Financial Data of State Bank of India

Profit and Loss account of SBI (Rs. In million)
Particulars 2000 2001 2002

Interest earned, Operating income 222009.3 260033.7 298100.9
Interest on Advance 95539.5 111432.5 110634.1
Interest on Investment 95061.6 112297.2 142718.7
Interest on balances 15733.5 17032.5 30548.8
Others 15674.6 19271.5 14199.3
137
Other Income 35693.3 40178.2 41744.8

Total Income 257702.5 300211.9 339845.7

Operating Expenses 62951.7 82988.3 72109.0
Provisions for Employees 44778.7 60116.5 51527.8
Other Operating Expenses 18173 22871.8 20581.2
Total Expenditure 215677.5 260544.1 279337.4
Operating Profit 42025 39667.8 60508.3

Profit before tax 42025 39667.8 60508.3
Tax 9713.6 16030.2
Provisions and Contingencies 21509.5 13911.7 20101.9
Profit after tax 20515.5 16042.5 24316.2
Net Profit 20515.5 16042.5 24316.2
Profit brought forward 3.4 3.4 3.4
Total 20518.9 16045.9 24319.6
Appropriations
Transfer to Statutory reserves 14870.6 11937.2 14573.6
Transfer to other reserves 2579.2 1205.4 1350
Transfer to proposed dividend 2631.5 2631.5 2631.5
Transfer to tax on dividend 434.2 268.4 250
Balance carried over to B/S 3.4 3.4 3.4
20518.9 16045.9 24319.6
BALANCE SHEET (Rs. In Millions)

Capital 5263.0 5263.0 5263.0
Statutory Reserve 65958.3 77895.5 96815.9
138
Capital Reserve 531.0 1100.7 1100.7

Share Premium 35105.7 35105.7 35105.7
Investment Fluctuation Reserve 0.0 4473.6 6711.5
Revenue and other Reserve 14611.5 10773.5 7243.5
Balance in P & L account 3.4 3.4 3.4
Total 116209.8 129352.4 146980.8
Deposits 1968210.7 2428283.8 2705601.4
Borrowings 92780.7 107010.4 93239.4
Other liabilites and provisions 432585.4 486532.5 531197.8
TOTAL 2615049.6 3156442.1 3482282.5
ASSETS
Cash and balance with RBI 189030.5 184958.7 218725.3
Balances with banks and money
at call and short notice 282334.0 422133.2 430576.3
Investments 918786.9 1228764.9 1451420.3
Advances 981019.7 1135902.7 1208064.7
Fixed Assets 24776.1 25933.0 24152.3
Other Assets 219102.6 158749.6 149343.6
TOTAL 2615049.6 3156442.1 3482282.5

Net Worth
For the year 2000, ROE= 0.1688 or 16.88%

2001, ROE= 0.1191 or 11.91%
139
2002, ROE= 0.1598 or 15.98%

The ratio of ROE has declined drastically in the year
2001; this is mainly because of decline in net profit of
SBI.
 Earning per share (EPS):

For the year 2000, EPS = Rs.38.9
2001, EPS = Rs.30.48
2002, EPS = Rs. 44.62
The bank’s earnings per share for 2002 is 44.62, which

is a good indication as a point of view of shareholders.
For the year 2000, ROI = 0.0078 or 0.78%
2001, ROI = 0.00508 or 0.51%
2002, ROI = 0.00698 or 0.70%
The ratio of this year is good comparable with the last
year’s ratio and if we compare with other banks than
also it is good.

Borrowings + other liabilities and
provisions
140
For the year 2000, TWF = Rs. 2515049.6 million

2001, TWF = Rs. 3156442.1 million
2002, TWF = Rs. 3482282.5 million

funds = 8.49
funds = 8.24
funds = 8.56

funds of ICICI bank has increased but the proportion of
interest income to that of working funds has almost
remain same in the last three years.

funds = 1.36
funds = 1.28
funds = 1.20
The non- interest income has decreased in the last
the total income of SBI bank forms a little portion of the
total working capital.
141
11.4 Projections of Future Earnings of State Bank

of India
Basis for Projections
 We have assumed that the interest earned and

operating income will increase by 16% in the next
two years.
 Interest on advances will increase by 8% and
interest on investment by 23%.
 Interest on balances will increase by 44%.
 Other income will increase by 10%.
 Interest expended will increase by 16.5% in the next
two years.
 Operating expenses will increase by 9%.
 Provisions for employees will increase by 10%.
 Tax rate is 25%.
 Provisions and contingencies will increase by 5%.
 We have assumed the bank will not issue any
additional shares in the coming two years.
 Cash and balance with RBI will increase by 33% in
the next two years.
 Balances with banks and money at short notice will
increase by 67%.
 Fixed asset will remain constant in both the years.
 Other assets will reduce by 10%.
142
Projected Profit and Loss account SBI (Rs. In Million)
Particulars 2003 2004

Interest earned, Operating income 345797 401124.6
Interest on Advance 119484.8 129043.6
Interest on Investment 175544 215919.1
Interest on balances 43990.27 63345.99
Others 13915.31 13637.01
Other Income 45084.38 48691.13
Total Income 398018.8 470636.9

Provisions for Employees 56680.58 62348.64
Other Operating Expenses 21918.23 23324.06

Profit before tax 77998.9 103708.6
Tax 19499.73 25927.15
Provisions and Contingencies 21107 22162.34
Profit after tax 37392.18 55619.11
Net Profit 37392.18 55619.11
Profit brought forward 3.7 5.1
Total 37395.88 55624.21
Appropriations
Transfer to Statutory reserves 30326.1 46622.6
Transfer to other reserves 3592.8 5475.8
143
Transfer to proposed dividend 3157.8 3157.8

Transfer to tax on dividend 315.8 315.8
Balance carried over to B/S 5.1 7.82
37397.6 55579.82
PROJECTED BALANCE SHEET (Rs. In Millions)

Capital 5263.0 5263.0
Capital Reserve 1100.7 1100.7
Revenue and other Reserve 7243.5 7243.5
Balance in P & L account 5.1 7.8
Total 180900.9 233002.1
Deposits 3165553.7 3703697.8
Borrowings 94638.0 96057.6
Other liabilities and provisions 589629.6 654488.8
TOTAL 4035985.2 4692509.3
ASSETS
Balances with banks& money
at call and short notice 498139.3 552451.4
Investments 1828789.6 2304274.9
Advances 1340951.8 1488456.5
Fixed Assets 24152.3 24152.3
Other Assets 123955.2 102882.8
TOTAL 4061340.3 4744320.7
144
PROJECTED CASH FLOW STATEMENT OF SBI BANK (Rs. In Million)
2003 2004
Adjustments for :
Adjustments for:
(Increase)/ Decrease in Investments (-) 377369.28 475485.3
(Increase)/ Decrease in Advances (-) 132887.1 147504.7
Increase/(Decrease) in Borrowings 1398.591 1419.6
(Increase)/ Decrease in Other Assets 25388.4 21072.4
Increase/(Decrease) in Other liabilities and Provisions 58431.8 64859.3
Direct taxes paid (-) 19499.73 25927.15
Net Cash Generated from Operating Activities 97663.396 84536.42

Net increase/(decrease) in cash and cash equivalents 94189.803 81062.83

145
Returns of SBI
0.2
0.15
0.1
0.05
-0.05
-0.1
-0.15
-0.2
Returns
The above figure shows the variability of the SBI’s share

returns. A wide variation in the SBI returns could be
noticed.
Market return Vs.SBI return
0.2
0.15
0.1
0.05
Returns SBI
0
Return BSE
-0.05
-0.1
-0.15
-0.2
Se 01
J a 01
Ja 0 2
Se 02
Ju 1
M 02
Ju 2
03
N 01
N 02
M 02
-0
-0
-
-
l-
l-
n-
n-
p-
p-
-
ov
ov
ay
ay
ar
M
146
The above figure shows SBI’s monthly returns against the

market returns. We can observe that there is a positive
movement between SBI return and and market return.
That is generally an increase in the market returns is
followed by an increase in the SBI’s return and vice versa.
Average
Month/Year BSE Average SBI Bank Return BSE(X) Returns SBI Bank (Y) X*Y X^2 Y^2
1-Mar 3911.865 237.75
Apr-01 3386.665 207.75 -0.134258212 -0.126182965 0.016941 0.018025 0.015922
May-01 3590.05 227.95 0.060054656 0.09723225 0.005839 0.003607 0.009454
Jun-01 3469.63 219 -0.033542708 -0.039262996 0.001317 0.001125 0.001542
Jul-01 3377.725 218.45 -0.026488415 -0.002511416 6.65E-05 0.000702 6.31E-06
Aug-01 3300.095 204.15 -0.022982925 -0.065461204 0.001504 0.000528 0.004285
Sep-01 2931.4 169.325 -0.111722541 -0.170585354 0.019058 0.012482 0.029099
Oct-01 2901.03 182.675 -0.010360237 0.078842463 -0.00082 0.000107 0.006216
Nov-01 3190.88 201.575 0.09991279 0.103462433 0.010337 0.009983 0.010704
Dec-01 3300.385 189.2 0.034318119 -0.061391542 -0.00211 0.001178 0.003769
Jan-02 3351.745 203.85 0.015561821 0.07743129 0.001205 0.000242 0.005996
Feb-02 3524.055 237.875 0.051409042 0.166911945 0.008581 0.002643 0.02786
Mar-02 3606.27 229.725 0.023329659 -0.034261692 -0.0008 0.000544 0.001174
Apr-02 3417.685 233.75 -0.052293644 0.017520949 -0.00092 0.002735 0.000307
May-02 3287.875 224.05 -0.03798185 -0.041497326 0.001576 0.001443 0.001722
Jun-02 3263.225 238.225 -0.007497244 0.063267128 -0.00047 5.62E-05 0.004003
Jul-02 3149.545 232.8 -0.034836703 -0.022772589 0.000793 0.001214 0.000519
Aug-02 3058.43 232.2 -0.028929576 -0.00257732 7.46E-05 0.000837 6.64E-06
Sep-02 3100.795 234.325 0.013851878 0.009151593 0.000127 0.000192 8.38E-05
Oct-02 2933.7 230.85 -0.053887793 -0.01482983 0.000799 0.002904 0.00022
Nov-02 3087.305 248.3 0.052358796 0.07559021 0.003958 0.002741 0.005714
Dec-02 3300.225 282 0.068966299 0.135722916 0.00936 0.004756 0.018421
Jan-03 3308.05 288.15 0.00237105 0.021808511 5.17E-05 5.62E-06 0.000476
Feb-03 3279.99 300.325 -0.008482339 0.042252299 -0.00036 7.2E-05 0.001785
Total -0.141130078 0.307859753 0.076117 0.068121 0.149283
147
11.5 Application of Different Models to SBI

SBI
Calculation of Beta
N ∑XY − (∑X )( ∑Y )
Beta =
N ∑X 2
− (∑X ) 2
24 (0.076117) - (-0.141130 078)(0.307 859753)
=
24(0.06812 1) - (-0.141130 078) 2
=1.158
SBI has a beta of 1.158 based on the monthly returns

during March 2001to March 2003, which is more than
1. A beta of 1.158 means that the SBI shares is as risky
as market.
Alpha =α =Y − β X
=0.01282749 - (-0.005880 42)(1.158)
=0.0196
The alpha (intercept) is 0.0196(1.96%). It shows SBI’s

returns when the market return is zero. SBI’s expected
monthly return is 1.96% when the market earns
nothing. If the monthly market return is expected to be
1%, SBI’s expected monthly return is
R = α + β R m = 0.0196 + 1.158*0.01 = 0.03118
148
Calculation of Coefficient of Correlation
N∑ X -(∑ X ∑YY ) ()
C to c f eon = f r f2r i e 2c l i a2 e t 2 n1i/2 o The coefficient of correlation is
[ ∑ {Y )− (∑ Y) }NN∑ X{ − (∑ X) } ]
indicates that when the market
sensex return goes up SBI
(2 0 4 .-( 0 - 070 768. 1 815 4 )19 (1 7 0 1 )5 . 3 3 0 ) 7

= 2
Coefficient
Determination
of
2 1/ 2
[ *{0 ( .-( 12 0 54 }. 2 39 { 4 0)-1 2( ( )-7 8 0 0 8}3 .7. 05]1 8 694 ) 871 1 1 2 3 0
The squared coefficient of
= 0.7 8 9 variance of SBI Bank’s returns
explained by the changes in
the market returns. Thus, 62% of SBI’s risk is explained
by the market. It is called the market risk and therefore
it is undiversifiable. 38% unexplained variance is the
firm specific it is called unsystematic risk and it is
diversifiable.
 Discounted Cash Flow Approach For SBI

Given a risk free rate of return of 7%, risk premium of
5% and Beta of State Bank of India of 1.158, the cost of
equity of SBI is
SBI’s cost of equity= Risk free rate + (Market rate-Risk

free rate) SBI’s Beta
=0.07+(0.12-0.07) * 1.158
=0.1279 or 12.79%
149
In this method for determining the shareholder’s

economic value is to calculate the value of equity by
discounting Cash flows available to shareholder by the
cost of equity. The cash flows of SBI for the year 2002-
03 and 2003-04 are 743491.466 and 824554.3
respectively.
Therefore, economic value of equity = Present value of

equity cash flows
= 94189.803 +
81062.83
(1+0.1279)
= 94189.803 +
71870.5825
= 166060.3855
(million)
Economic Value per share is found by dividing the total

economic value by the no. of shares. The total no. of
shares outstanding of SBI is 526298878.
Therefore,
EVPS = 166060385500 = Rs. 315.53

526298878
The current market price of SBI is Rs. 313.19. Thus an

investor would be able to get 12% return on SBI’s
share after one year.
 Market-To-Book Value Approach for SBI
The market value per share of SBI was Rs. 229.7 in

March 2002, while its book value per share is Rs. 289.3
Therefore,
MV/BV = 229.7 / 289.3
= 0.79
150
Here, MV/ BV ratio is less than one which indicates that

it is destroying the value of shareholders.
COMPARATIVE ANALYSIS
PARTICULARS ICICI Bank HDFC Bank Corporation Bank SBI

Return on Equity(%)
2002-03 13.3 23.45 17.37 20.09
2003-04 24.74 24.52 19.16 23.34
Return on Assets(%)
2002-03 0.21 2.63 1.53 0.93
2003-04 0.03 2.59 1.87 1.19
Cost of Equity 11.82 8.6 14.4 12.79
DCF NA NA Underpriced Fairly valued
MV/BV 1.26 3.41 1 0.79
Beta 0.964 0.32 0.88 1.155
Alpha 0.01239 0.003 0.0137 0.0196
Coeff. of Correlation 0.483 0.41 0.58 0.789
Coeff. of Determination 0.233289 0.1681 0.3364 0.622521
Table 26: Comparison of Selected Banks
The above table shows the comparison of selected

banks. From the above table, it is apparent that HDFC
151
bank is stronger than the other banks. The return on

equity of HDFC bank is the highest among all other banks
for both years which indicates that the shareholders will
earn more per share. Return on Assets of HDFC bank is
also the highest among all the banks. This indicates that
the firm is utilizing its assets more efficiently. Whereas
the cost of equity of HDFC bank is the lowest, which is
also a positive point. MV/BV ratio of HDFC bank is higher
above one. It indicates that the firm is creating value for
the shareholders. Beta shows the riskiness of the firm and
it should be lower than one. Among the four banks beta
for HDFC bank is lower than any other bank therefore it is
less risky than the other three banks. The positive
correlation shows that the HDFC’s return is positively
related with the market. The bank’s coefficient of
determination is also the lowest among the banks. This
means that the firm’s major risk is unsystematic and it
could be diversified.
Recommendation
 ICICI bank’s return on equity is expected to increase
drastically, however its higher beta value indicates that
it is a riskier share. So we recommend that the person
with riskier nature can buy these shares.
 As indicated above, HDFC bank is the strongest
among all the four banks. Therefore we recommend
buying its share.
 Corporation bank’s share is under priced that may
attract an investor. But the other aspects are not in
favour of this share. Its beta is very high which shows
its riskiness and it is also not creating value for
shareholders, its return on equity is also lower than the
other three banks.
 SBI’ s return on equity is attractive but it is very
risky share. Its beta is greater than one and even its
152
most part of the risk is explained by the market. So

according to us it is not worth to invest in this share.
CONCLUSION
From this study, we can conclude that the Indian
economy is standing on the strong foothold. This can be
attributed to lower interest rate, lower inflation rate, high
forex reserves and favorable monetary and fiscal policy.
153
This study also highlights the outlook for the

banking industry. The passing of the securitization bill has
accelerated the growth for the banking industry. Even the
monetary policy has also been in favor of banking
industry. Lowering interest rates also affects the
profitability of the banks. The banking industry is now
moving towards technology. Overall, the outlook for the
banking industry is also good.
From the last part of the study we can find that

ICICI bank, SBI, HDFC bank and Corporation bank have
strong fundamentals. From the application of different
valuation models we can conclude that HDFC bank is
stronger than the other three banks. So one can buy
HDFC’s share. However, the investment decision for an
investor depends on it risk nature.
BIBLIOGRAPHY
154
Books
 Financial Management, I.M.Pandey.
 Financial Management, Theory and Practices.
 Management Accounting & Financial Analysis, CA
Final.
 Security Analysis and Portfolio Management, Fischer
& Jordan.
Annual Reports
 Annual Report of ICICI Bank, 2000-01 and 2001-
2002.
 Annual Report of Corporation Bank, 2000-01 and
2001-2002.
 Annual Report of SBI, 2000-01 and 2001-2002.
 Annual Report of HDFC Bank, 2000-01 and 2001-
2002.
Sites
 www.bseindia.com
 www.hdfcsec.com
 www.indiamart.com
 www.5paisa.com
 www.businessworld.com
 Capitalline 2002
Articles
 The journal of Indian Institute of Bankers, Bank
Quest, “Accounting and Auditing Standards for
Banks-Contemporary issues in Corporate
Governance”
 The journal of Indian Institute of Bankers, Special
feature Basel Committee-Consultative Document-
implication of credit risk and capital allocation.
 SBI Monthly review, Feb.2002 – “Definition of Capital
funds”
155
 Business India, Jan. 2003 – “A new Beginning”
Magazines
 The banking and Investment Review, 12 Aug. 2002.
 Report on Bank Economist’s conference, 2002.
 Professional Banker, March 2003 – Management
Challenges in Banking.
 Business Standard, 16 Dec. 2002 – The smart
Investor.
156

G.P On Portfolio Management With Respect To Banking Industry

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

G.P On Portfolio Management With Respect To Banking Industry

Hochgeladen von

Copyright:

Verfügbare Formate

Portfolio Management With Respect To Banking Industry

1.1 Problem Definition

1.2 Sources of Data

1.3 Objectives of the Project

 To scrutinize fundamentally strong banks listed

1.4 Scope of the Study

INTRODUCTION TO BANKING INDUSTRY

Performance of banking industry is taken as barometer of

In ancient times, the Indian banking system existed

The first bank of limited liability merged by Indians was

Non-Scheduled Banks are those joint stock banks,

interest rate levels in the system. However, the scenario

Some noteworthy developments in the banking sector are

f) Banks given greater freedom to open, shift, and

of monetary policy has been tailored to take into

This set of measures, coupled with many others, did

2.2 Main Elements of Emerging Banking in India

would lead to a longer break-even period but once this

The prevailing situation in the economy has led

In today’s scenario lot of mergers are taking place in

d) Banks Entry into Insurance

e) Lead Bank Schemes

of credit deployment is each district assigned to it, with

f) Use of Information Technology

g) Priority Sector Lending

of private sector banks was 38.2% of NBC and of

i) Interest Rate Deregulation

overall interest rate structure in the financial system,

towards an all-out recovery drive. With the

k) Participation Certificates and Inter-Bank

of commission from the seller minus the risk and

3.2 Meaning of Portfolio Management

time to manage their investments. The idea is catching

 Stability of income so as to facilitate planning more

It involves analyzing the major factors that affects the

indicator approach and another is using the major factors

4.1 Indicator Approach

4.2 Analyzing Economy using Different Parameters

bound to affect the overall economy. The lack of

unemployment and underemployment increase,

On 31st December 2002 the Central Statistic

The industrial growth for the April-September

In 2001-02 gross and net domestic savings at

During 2002-03, financial market in India

fall in interest rates all across the financial system and

In other words, interest rates should go down

In simple terms inflation is the rise in prices. During

It comprised mainly of foreign currency assets, gold

to generate Rs. 12000 crores during 2002-2003. The

Now lets look how the government would be

more than Rs. 1,09,000 crores. Many PSUs whom the

 Monetary and credit policy

When an economy grows, it is very unlikely that all

5.1 Structure of Banking Industry

Regional Rural Banks. Public Sector Banks are sub-

Also the Private Sector Banks can be classified as old

5.2 Cost Dynamics

Banking, everywhere in the world, is a highly regulated

profits. Innovative and unconventional methods of profits

5.3 Structural Changes

strength, coupon rates gets finer, thereby reducing their

5.4 Current Scenario