1. 1
INTRODUCTION
NEED OF THE PROJECT
Study of Equity Analysis
Current scenario of banking sector
SCOPE OF THE PROJECT
The scope of this project is limited to only one
sector i.e. Banking sector. This project is concerned with only
one sector of companies in the stock market. The project does not
extend its scope to any other sector of companies.
Also, the project is concerned with only three banks among the major players
in the Banking sector i.e. YES BANK & KOTAK MAHINDRA BANK
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OBJECTIVES OF THE PROJECT
Comparative Study of equity research
To analyze the opportunities for the equity anyalsis sector and to identify the
challenges for the growth of equity anyalsis of banking industry
.
Future expectations.
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INTRODUCTION TO EQUITY
What is Equity?
In accounting and finance, equity is the residual claim or interest of the most junior
class of investors in assets, after all liabilities are paid. If valuations placed on assets
do not exceed liabilities, negative equity exists. In an accounting context,
Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders'
capital or similar terms) represents the remaining interest in assets of a company,
spread among individual shareholders of common or preferred stock.
At the start of a business, owners put some funding into the business to finance assets.
This creates liability on the business in the shape of capital as the business is a
separate entity from its owners. Businesses can be considered to be, for accounting
purposes, sums of liabilities and assets; this is the accounting equation. After
liabilities have been accounted for, the positive remainder is deemed the owner's
interest in the business.
This definition is helpful to understand the liquidation process in case of bankruptcy.
At first, all the secured creditors are paid against proceeds from assets. Afterward, a
series of creditors, ranked in priority sequence, have the next claim/right on the
residual proceeds. Ownership equity is the last or residual claim against assets, paid
only after all other creditors are paid. In such cases where even creditors could not get
enough money to pay their bills, nothing is left over to reimburse owners' equity.
Thus owners' equity is reduced to zero. Ownership equity is also known as risk
capital, liable capital and equity.
What is Equity Shares?
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Total equity capital of a company is divided into equal units of small denominations,
each called a share. For example, in a company the total equity capital of Rs
2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is
called a Share. Thus, the company then is said to have 20, 00,000 equity shares of Rs
10 each. The holders of such shares are members of the company and have voting
rights.
EQUITY INVESTMENT
Equity investments generally refers to the buying and holding of shares of stock on a
stock market by individuals and firms in anticipation of income from dividends and
capital gain as the value of the stock rises. It also sometimes refers to the acquisition
of equity (ownership) participation in a private (unlisted) company or a startup (a
company being created or newly created). When the investment is in infant
companies, it is referred to as venture capital investing and is generally understood to
be higher risk than investment in listed going-concern situations.
How to invest in Equity Shares?
Investors can buy equity shares of a company from Security market that is from
Primary market or Secondary market. The primary market provides the channel for
sale of new securities. Primary market provides opportunity to issuers of securities;
Government as well as corporate, to raise resources to meet their requirements of
investment and/or discharge some obligation. Investors can buy shares of a company
through IPO (Initial Public Offering) when it is first time issued to the public. Once
shares are issued to the public it is traded in the secondary market. Stock exchange
only acts as facilitator for trading of equity shares. Anyone who wishes to buy shares
of a company can buy it from an existing shareholder of a company.
Why should one invest in Equity in particular?
When you buy a share of a company you become a shareholder in that Company.
Equities have the potential to increase in value over time. It also provides your
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portfolio with the growth necessary to reach your long term investment goals.
Research studies have proved that the equities have outperformed most other forms of
investments in the long term.
Equities are considered the most challenging and the rewarding, when compared to
other investment options. Research studies have proved that investments in some
shares with a longer tenure of investment have yielded far superior returns than any
other investment. However, this does not mean all equity investments would
guarantee similar high returns. Equities are high risk investments. One needs to study
them carefully before investing.
It is important for investors to note that while equity shares give highest return as
compared to other investment avenues it also carries highest risk therefore it is
important to find ‘ real value’ or ‘ intrinsic value’ of the security before investing in
it. The intrinsic value of a security being higher than the security’s market value
represents a time to buy. If the value of the security is lower than its market price,
investors should sell it.
To be able to value equity, we need to first understand how equity is to be analyzed.
Equity Share of any company can be analyzed through
1. Fundamental Analysis
2. Technical Analysis
6. 6
FUNDAMENTAL ANALYSIS
Introduction
Fundamental analysis is a technique that attempts to determine a security’s value by
focusing on underlying factors that affect a Company’s actual business and its future
prospects. Fundamental analysts attempt to study everything that can affect
the security's value, including macroeconomic factors (like the overall economy and
industry conditions) and company-specific factors (like financial condition and
management).
Fundamental analysis of a business involves analyzing its financial statements and
health, its management and competitive advantages, and its competitors and markets.
Fundamental analysis is performed on historical and present data, but with the goal of
making financial forecasts. A fundamental analyst believes that analyzing strategy,
management, product, financial stats and many other readily and not-so-readily
quantifiable numbers will help choose stocks that will outperform the market.
There are several possible objectives:
To conduct a company stock valuation and predict its probable price
evolution,
To make a projection on its business performance,
To evaluate its management and make internal business decisions,
To calculate its credit risk.
Fundamental analysis serves to answer questions, such as:
Is the company’s revenue growing?
Is it actually making a profit?
Is it in a strong-enough position to beat out its competitors in the future?
Is it able to repay its debts?
Is management trying to "cook the books"?
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Fundamentals: Quantitative and Qualitative
As mentioned in the introduction, fundamentals can include anything related to the
economic well-being of a company. Obvious items include things like revenue and
profit, but fundamentals also include everything from a company’s market share to
the quality of its management.
The various fundamental factors can be grouped into two categories: quantitative and
qualitative.
Qualitative – related to or based on the quality or character of something, often
as opposed to its size or quantity.
Quantitative – capable of being measured or expressed in numerical terms.
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QUALITATIVE FACTOR – THE INDUSTRY
Each industry has differences in terms of its customer base, market share among
firms, industry-wide growth, competition, regulation and business cycles. Learning
about how the industry works will give an investor a deeper understanding of a
company's financial health.
Customer
Some companies serve only a handful of customers, while others serve
millions. In general, it's negative if a business relies on a small number of
customers for a large portion of its sales because the loss of each customer
could dramatically affect revenues. For example, think of a military supplier
who has 100% of its sales with the Indian government. One change in
government policy could potentially wipe out all of
its sales. For this reason, companies will always disclose in their annual report
if any one customer accounts for a majority of revenues.
Market Share
Understanding a company's present market share can tell volumes about the
company's business. The fact that a company possesses an 85% market share
tells you that it is the largest player in its market by far.
Furthermore, this could also suggest that the company possesses some sort of
"economic moat," in other words, a competitive barrier serving to protect its
current and future earnings, along with its market share. Market share is
important because of economies of scale. When the firm is bigger than the rest
of its rivals, it is in a better position to absorb the high fixed costs of a capital-
intensive industry.
Industry Growth
One way of examining a company's growth potential is to first examine
whether the amount of customers in the overall market will grow. This is
crucial because without new customers, a company has to steal market share
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in order to grow. In some markets, there is zero or negative growth, a factor
demanding careful consideration. For example, a manufacturing company
dedicated solely to creating audio compact cassettes might have been very
successful in the '70s, '80s and early '90s. However, that same company would
probably have a rough time now due to the advent of newer technologies, such
as CDs and MP3s. The current market for audio compact cassettes is only a
fraction of what it was during the peak of its popularity.
Competition
Simply looking at the number of competitors goes a long way in
understanding the competitive landscape for a company. Industries that have
limited barriers to entry and a large number of competing firms create a
difficult operating environment for firms. One of the biggest risks within a
highly competitive industry is pricing power. This refers to the ability of a
supplier to increase prices and pass those costs on to customers. Companies
operating in industries with few alternatives have the ability to pass on costs to
their customers. A great example of this is Wal-Mart. They are so dominant in
the retailing business, that Wal-Mart practically sets the price for any of the
suppliers wanting to do business with them. If you want to sell to Wal-Mart,
you have little, if any, pricing power.
Regulation
Certain industries are heavily regulated due to the importance or severity of
the industry's products and/or services. As important as some of these
regulations are to the public, they can drastically affect the attractiveness of a
company for investment purposes. In industries where one or two companies
represent the entire industry for a region (such as utility companies),
governments usually specify how much profit each company can make. In
these instances, while there is the potential for sizable profits, they are limited
due to regulation. In other industries, regulation can play a less direct role in
affecting industry pricing. For example, the drug industry is one of most
regulated industries. And for good reason - no one wants an ineffective drug
that causes deaths to reach the market.
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As a result, the Food and Drug Administration (FDA) requires that new drugs
must pass a series of clinical trials before they can be sold and distributed to
the general public. However, the consequence of all this testing is that it
usually takes several years and millions of dollars before a drug is approved.
Keep in mind that all these costs are above and beyond the millions that the
drug company has spent on research and development.
All in all, investors should always be on the lookout for regulations that could
potentially have a material impact upon a business' bottom line. Investors
should keep these regulatory costs in mind as they assess the potential risks
and rewards of investing.
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QUALITATIVE FACTOR – THE COMPANY
Before diving into a company's financial statements, let’s take a look at some of the
qualitative aspects of a company.
Following are the qualitative factors of the company that investor should be aware of
–
Business Model
One of the most important questions that should be asked is what exactly does the
company do? This is referred to as a company's business model. Its how a company
makes money? You can get a good overview of a company's business model by
checking out its website or annual report.
Competitive Advantage
Another business consideration for investors is competitive advantage. A company's
long-term success is driven largely by its ability to maintain a competitive advantage -
and keep it. Powerful competitive advantages, such as Reliance’s brand name and
Microsoft's domination of the personal computer operating system, create a moat
around a business allowing it to keep competitors at bay and enjoy growth and profits.
When a company can achieve competitive advantage, its shareholders can be well
rewarded for decades.
Management
A company relies upon management to steer it towards financial success. Some
believe that management is the most important aspect for investing in a company. It
makes sense - even the best business model is doomed if the leaders of the company
fail to properly execute the plan.
Every public company has a corporate information section on its website.
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Usually there will be a quick biography on each executive with their employment
history, educational background and any applicable achievements.
Don't expect to find anything useful here. Let's be honest: We're looking for dirt, and
no company is going to put negative information on its corporate website.
Instead, here are a few ways for you to get a feel for management:
1. Management Discussion and Analysis (MD&A):
The Management Discussion and Analysis is found at the beginning of the annual
report. In theory, the MD&A is supposed to be frank commentary on the
management's outlook. Sometimes the content is worthwhile, other times it's
boilerplate. One tip is to compare what management said in past years with what they
are saying now. Is it the same material rehashed? Have strategies actually been
implemented? If possible, sit down and read the last five years of MD&As
2. Ownership and Insider Sales:
Just about any large company will compensate executives with a combination of cash,
restricted stock and options. It is a positive sign that members of management are also
shareholders. The ideal situation is when the founder of the company is still in charge.
Examples include Mukesh Ambani & Ajim Premji When you know that a majority of
management's wealth is in the stock, you can have confidence that they will do the
right thing. As well, it's worth checking out if management has been selling its stock.
This has to be filed with the Securities and Exchange Board of India (SEBI), so it's
publicly available information. Talk is cheap - think twice if you see management
unloading all of its shares while saying something else in the media.
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3. Past Performance:
Another good way to get a feel for management capability is to check and see how
executives have done at other companies in the past. You can normally find
biographies of top executives on company websites. Identify the companies they
worked at in the past and do a search on those companies and their performance.
4. Conference Calls:
Some of the big market capitalisation companies have conference calls do that
management can address critical issues such as performance review, critical
developments etc. The excerpts of these are later displayed on the company’s
websites so as to enable investors to access these.
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QUANTITATIVE FACTOR
Now as we know the qualitative factor of fundamental analysis, let’s proceed to the
quantitative factor of fundamental analysis. Quantitative factor include analysis of
financial statement of the company.
RATIO ANALYSIS
Financial ratios are tools for interpreting financial statements to provide a basis for
valuing securities and appraising financial and management performance.
In general, there are 4 kinds of financial ratios that a financial analyst will use most
frequently, these are:
Performance ratios
Working capital ratios
Liquidity ratios
Solvency ratios
These 4 financial ratios allow a good financial analyst to quickly and efficiently
address the following questions or concerns:
Performance ratios
What return is the company making on its capital investment?
What are its profit margins?
Working capital ratios
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How quickly are debts paid?
How many times is inventory turned?
Liquidity ratios
Can the company continue to pay its liabilities and debts?
Solvency ratios (Longer term)
What is the level of debt in relation to other assets and to equity?
Is the level of interest payable out of profits?
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TECHNICAL ANALYSIS
INTRODUCTION
Should I buy today? What will prices be tomorrow, next week, or next year? Wouldn't
investing be easy if we knew the answers to these seemingly simple questions?
technical analysis has the answers to these questions.
Technical analysis is the process of analyzing a security's historical prices in an effort
to determine probable future prices. This is done by comparing current price action
(i.e., current expectations) with comparable historical price action to predict a
reasonable outcome.
Simply put, technical analysis is the study of prices, with charts being the primary
tool.
Technical analysts are sometimes referred to as chartists because they rely almost
exclusively on charts for their analysis.
Technical analysis is applicable to stocks, indices, commodities, futures or any
tradable instrument where the price is influenced by the forces of supply and demand.
Price refers to any combination of the open, high, low or close for a given security
over a specific timeframe. The time frame can be based on intraday (tick, 5-minute,
15-minute or hourly), daily, weekly or monthly price data and last a few hours or
many years.
Technicians, as technical analysts are called, are only concerned with two things:
1. What is the current price?
2. What is the history of the price movement?
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The price is the end result of the battle between the forces of supply and demand for
the company's stock. The objective of analysis is to forecast the direction of the future
price. By focusing on price and only price, technical analysis represents a direct
approach.
Technicians believe it is best to concentrate on what and never mind why. Why did
the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the
value of any asset is only what someone is willing to pay for it.
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What is Chart?
A price chart is a sequence of prices plotted over a specific timeframe. In statistical
terms, charts are referred to as time series plots.
What are the different Charts used in Technical Analysis?
1. Line Chart
The line chart is one of the simplest charts. It is formed by plotting one price point,
usually the close, of a security over a period of time. Connecting the dots, or price
points, over a period of time, creates the line. Some investors and traders consider the
closing level to be more important than the open, high or low. By paying attention to
only the close, intraday swings can be ignored. Line charts are also used when open,
high and low data points are not available. Sometimes only closing data are available
for certain indices, thinly traded stocks and intraday prices
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2. Bar Chart
Perhaps the most popular charting method is the bar chart. The high, low and close
are
required to form the price plot for each period of a bar chart. The high and low are
represented by the top and bottom of the vertical bar and the close is the short
horizontal line crossing the vertical bar. On a daily chart, each bar represents the high,
low and close for a particular day. Weekly charts would have a bar for each week
based on Friday's close and the high and low for that week.
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3. Candlestick Chart
Originating in Japan over 300 years ago, candlestick charts have become quite
popular in recent years. For a candlestick chart, the open, high, low and close are all
required. A daily candlestick is based on the open price, the intraday high and low,
and the close. A weekly candlestick is based on Monday's open, the weekly high-low
range and Friday's close. Many traders and investors believe that candlestick charts
are easy to read, especially the relationship between the open and the close. White
(clear) candlesticks form when the close is higher than the open and black (solid)
candlesticks form when the close is lower than the open. The white and black portion
formed from the open and close is called the body (white body or black body). The
lines above and below are called shadows and represent the high and low.
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STATE OF THE INDIAN ECONOMY – BARRIERS, OPPORTUNITIES AND
EXPECTATIONS
Over the years, the Indian economy has gone through phases of remarkable
transformation. After witnessing the Hindu rate of growth for the first three decades
post-independence, the Indian economy got its first “big push” with the first phase of
economic reforms in 1980s while the second major push came post 1991, following
liberalisation of the economy, which helped it to move on to a sustainable higher
growth trajectory. India made a radical break in 1991 from its past policies of inward
orientation and started a process of opening up to trade and foreign investment. The
growth response emerged a decade later as the cumulative impact of the gradual
reforms began to be felt on the investment environment.
India’s GDP growth was of the order of eight-plus per cent per annum during 2001-
11. In the five years prior to the global financial crisis of 2008, the Indian economy
had averaged 9 per cent annual GDP growth. In the aftermath of the crisis, there has
been a slowdown and a question on the minds of most observers is whether this
slowdown is temporary or is the economy moving to a lower growth rate in the
medium term. While RBI estimates that the trend/potential growth rate of the Indian
economy, which averaged around 8.5 per cent during 2005-06 to 2007-08, dipped
gradually thereafter and presently stands at about 7.0 per cent, the draft Twelfth Five
Year Plan (2012-2017) document prepared by GoI indicates that India’s full growth
potential remains around 9 per cent. Like the other emerging market economies, the
Indian economy is also facing certain challenges: inflation is high, growth is down,
investment is slowing down, current account deficit is above the sustainable levels,
fiscal deficit is high, and the exchange rate is under pressure. While, global slowdown
is an important factor, the domestic factors are no less important.
At the macro level, there are concerns. But we need to separate noise from signal. The
fundamentals of the economy remain strong. An important point to note is that in the
more recent period, growth has become more broad-based across the many states of
India, poverty has declined but financial inclusion has emerged as a major concern.
There has been much more spending on inclusion and social protection.
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Going forward, there are challenges – some old, some new. The ongoing challenges
are: (i) providing world-class infrastructure for a rapidly-growing economy,
particularly in telecom and power sectors, and (ii) macroeconomic management
involving fiscal reform and monetary policy in an open economy context.
The new challenge are: how to bridge the gap between a growing demand for
different skills as the economy resumes its journey on a high-growth path, and their
supply. The demographic opportunity needs to be turned into a dividend: Today, 50
per cent of India’s population is under 25 years of age. Aspirations are rising. The
demographic opportunity is increasing for India because the percentage of population
of working age will continue to increase for another 40 years. This needs to be
harnessed with greater focus on skill building, higher education, innovation,
knowledge creation, and knowledge sharing. The Government of India’s National
Skill Development Initiative uses public-private partnership to address this challenge.
India is uniquely placed for attracting investments in education because there is a
hunger for education in emerging economies and a strong commitment to education at
the family level. Global educational institutions will have to look at building a
presence in India as they will have to gravitate where human resources are available.
In the coming years, millions of people in India are expected to move out of the
agricultural sector and that jobs will have to be provided for them. India, therefore,
needs to increase its manufacturing capability. Though in the recent past, the growth
of the manufacturing sector has generally outpaced the overall growth rate of the
economy, at just over 16 percent of GDP, the contribution of the manufacturing sector
in India is much below its potential. Every job created in manufacturing has a
multiplier effect of creating two to three additional jobs in related activities.
Therefore, a thrust on manufacturing is integral to the inclusive growth agenda of the
Government. The National Manufacturing Policy announced by the Government of
India proposes to increase the sectoral share of Manufacturing in GDP to 25% over
the next decade.
As we capitalize on these strengths, I see India delivering on the aspirations of a
young and growing middle class. And we will do so while increasing our integration
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with the world. India is now closely integrated with the rest of the world both by way
of financial integration and trade integration. It is the intent and objective of the
Government of India to attract and promote foreign direct investment in order to
supplement domestic capital, technology and skills, for accelerated economic growth.
While India can look at an 8% growth based on domestic opportunities, for a 9-10%
growth to occur the external environment has also to be hospitable
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ANALYSIS OF BANKING SECTOR
Introduction
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and
internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. It is no longer confined to only metropolitans or
cosmopolitans in India; in fact, Indian banking system has reached even to the remote
corners of the country. This is one of the main reasons of India's growth process. The
government's regular policy for Indian bank since 1969 has paid rich dividends with
the nationalization of 14 major private banks of India. Not long ago, an account
holder had to wait for hours at the bank counters for getting a draft or for withdrawing
his own money. Today, he has a choice. Gone are days when the most efficient bank
transferred money from one branch to other in two days. Now it is simple as instant
messaging or dial a pizza. Money has become the order of the day.
As per the McKinsey report India Banking 2010, the banking sector index has grown
at a compounded annual rate of over 51 per cent since the year 2001, as compared to a
27 per cent growth in the market index during the same period. It is projected that the
sector has the potential to account for over 7.7 per cent of GDP with over Rs.7,500
billion in market cap, and to provide over 1.5 million jobs.
Today, banks have diversified their activities and are getting into new products and
services that include opportunities in credit cards, consumer finance, wealth
management, life and general insurance, investment banking, mutual funds, pension
fund regulation, stock broking services, custodian services, private equity, etc.
Further, most of the leading Indian banks are going global, setting up offices in
foreign countries, by themselves or through their subsidiaries.
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India is one of the top 10 economies globally, with vast potential for the banking
sector to grow. The last decade witnessed a tremendous upsurge in transactions
through ATMs, and Internet and mobile banking. In 2014, the country’s Rs 81 trillion
(US$ 1.34 trillion) banking industry is set for a greater change. Two new banks have
already received licences from the government. Furthermore, the Reserve Bank of
India’s (RBI) new norms will provide incentives to banks to spot potential bad loans
and take corrective steps that will curb the practices of rogue borrowers.
The Indian government’s role in expanding the banking industry has been significant.
Through the Financial Inclusion Plan (FY 10–13), banking connectivity in the country
increased more than three-fold to 211,234 villages in 2013 from 67,694 at the
beginning of the plan.
Banks are also looking at new ways to attract customers. In September, 2013, ICICI
bank leveraged the popularity of the social platform, and launched its Facebook
banking service, Pockets. The service enables customers to transfer funds and pay
bills from within the website.
Post Independence
In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of India.
In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India.
The Banking Regulation Act also provided that no new bank or branch of an
existing bank may be opened without a license from the RBI, and no two banks
could have common directors.
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Liberalization
The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. In the early 1990s the then Narsimha Rao government embarked on a
policy of liberalization and gave licenses to a small number of private banks, which
came to be known as New Generation tech-savvy banks, which included banks such
as Global Trust Bank (the first of such new generation banks to be set up) which later
amalgamated with Oriental Bank of Commerce, UTI Bank (now re-named as Axis
Bank), ICICI Bank and HDFC Bank.
Market Size
The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9
billion during the period 2001–2010. In the same period, the profit after tax increased
from US$ 1.4 billion to US$ 12 billion.
In 2012–13, Indian banks had 170 overseas branches (163 in 2011–12) while foreign
banks had 316 branches in India (309 in 2011–12).
Credit to housing sector grew at a compound annual growth rate (CAGR) of 11.1 per
cent during the period FY 2008–13. Total banking sector credit is expected to grow at
a CAGR of 18.1 per cent (in terms of INR) to touch US$ 2.4 trillion by 2017.
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Recent Developments
Infrastructure Development Finance Company (IDFC) and Bandhan Financial
Services Pvt Ltd have been chosen among a field of 25 banks by the RBI to set up
banks. ‘In-principle’ approval has been given to the banks, which are both non-
banking finance companies. While Mumbai-based IDFC is categorised as an
infrastructure finance company, Kolkata-based Bandhan is a microfinance
establishment.
Bandhan covers 5.5 million customers, nearly all of them women whose loans
average Rs 10,000. The bank seeks to continue catering to a rural and unbanked
customer base from its current branch network. "Why go after the same person and
ask him to get another account? Why not just go after those who do not have any bank
accounts," said Mr Chandra Shekhar Ghosh, the bank’s Managing Director.
Banks and housing finance companies (HFCs) together enjoyed a 20 per cent growth
in home loans in FY 2013–14, according to Mr RV Verma, Chairman and Managing
Director, National Housing Bank. Home loans disbursed by banks and HFCs
collectively grew by Rs 1.60 trillion (US$ 26.59 billion) in FY 2013–14 to reach Rs
9.60 trillion (US$ 159.58 billion) at the end of the fiscal. “We expect the growth (in
home loans) to continue. There is every reason to believe that,” said Mr Verma.
Jammu and Kashmir (J&K) Bank is looking at opportunities to increase its presence
outside the country. The bank is likely to establish branches in London and Dubai to
strengthen its relationships with current customers who have business interests in
Europe and West Asia. “We have a number of business relationships in these
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countries and it makes sense for us to have a presence there,” said Mr Mushtaq
Ahmad, Chairman and Chief Executive Officer,
J&K Bank.
Indian banks operating abroad enjoyed a higher credit growth in comparison to
foreign banks operating in India, as per an RBI survey on international trade in
banking services for 2012–13. According to the survey, growth of credit extended by
Indian banks’ branches operating overseas grew by 31.7 per cent to Rs 585,570 crore
(US$ 97.36 billion); credit extended by foreign banks based in India increased 27.5
per cent to touch Rs 307,700 crore ($51.15 billion).
Strong growth in agriculture and services sectors as well as the personal loans
segment has helped push bank credit growth during the period April–November, 2013
to 7.2 per cent, compared to 6.6 per cent during the same period of 2012, according to
a report by credit rating agency CARE Ratings. During the period, loans to the
agricultural sector grew by 5.2 per cent compared to 2.3 per cent in 2012. "Higher
growth in credit to agriculture may be attributed to the expected better kharif crop
which has been announced by the Ministry of Agriculture," according to the report.
ICICI Bank is looking at different ways to maximise the digital opportunity for
growth. The bank is doubling the number of cities it covers with 'tablet banking' and
offering its customers services such as video conferencing, so they can talk to the
money managers from the comfort of their homes. "The idea is thinking ahead of your
customer. Not just what they may want today but what could they want tomorrow,"
said Mr Rajiv Sabharwal, Executive Director, ICICI.
29. 29
Bank of India (BoI) launched its card-less cash withdrawal facility in March 2014.
Under this service, a BOI customer can transfer money to anyone, using the bank’s
ATMs or through Internet banking. The sender has to provide the beneficiary’s
mobile number, a sender code, and the amount through internet banking or text
message. The beneficiary, after receiving a code from the bank can visit any BOI
ATM with instant money transfer facility and withdraw the money within a fortnight
of the transfer.
Simple steps such as memorising one's PIN, lowering credit limits on cards, using
virtual cards and deactivating transactional services connected to a mobile number
could bring down bank frauds, says experts. Regular changing of the password can
also save an account from attacks. “If there is a change in the email or phone number,
it should be immediately updated with the bank," said a cyber-crime investigation
specialist.
Government Initiatives
The RBI has issued extra guidelines for banks giving gold metal loans (GMLs). To
safeguard against fraud, the central bank has asked lenders to check the credit
worthiness of borrowers; collateral securities against the loan; and trade cycle of the
manufacturing activity, before sanctioning the loans. "Lack of proper monitoring
mechanism and not ensuring end use of GML has resulted in certain instances of
frauds/misuse related to GML by certain unscrupulous jewellers," stated the RBI in a
notification.
The Cabinet Committee on Economic Affairs (CCEA) has given the green signal to a
proposal to increase foreign holding in Axis Bank from 49 per cent to 62 per cent.
The move could bring in overseas investment of nearly Rs 7,250 crore (US$ 1.20
billion) into the country. The CCEA nod is dependent on FIIs’ holding capped at 49
per cent.
Road Ahead
30. 30
India’s banking sector has the potential to become the fifth largest banking sector
globally by 2020 and the third largest by 2025. The industry has witnessed
discernable development, with deposits growing at a CAGR of 21.2 per cent (in terms
of INR) in the period FY 06–13; in FY 13 total deposits stood at US$ 1,274.3 billion.
Today, banks are turning their focus to servicing clients. Banks in the country,
including those in the public sector, are emphasising on enhancing their technology
infrastructure, in order to improve customer experience and gain a competitive edge.
The popularity of internet and mobile banking is higher than ever before, with
Customer Relationship Management (CRM) and data warehousing expected to drive
the next wave of technology in banks. Indian banks are also progressively adopting an
integrated approach to risk management. Most banks already have in place the
framework for asset–liability match, credit and derivatives risk management.
Exchange Rate Used: INR 1 = US$ 0.01661 as on April 7, 2014
The global slowdown has taken its toll on the Indian economy. Besides, the domestic
economy too is having its own set of problems. High inflation, subdued growth,
slowing investments, undesirable current account deficit levels, high fiscal deficit and
battered currency have together made the growth visibility rather muted. The banking
sector, being the barometer of the economy, has succumbed to these challenges.
Amidst this challenging scenario, the Indian banking system is continues to deal with
improvement in operational efficiency and execution of prudent risk management
practices.
RBI's hawkish monetary policy stance in order to combat inflation has led to sharp
increase in interest rates during FY13. The elevated costs of deposits and limited
pricing power ensured margin pressures for most of the banks for major part of FY13.
Indian banking industry, valued at Rs 77 trillion (Source: IBEF), is growing at a
slower pace and plagued by bad loans. In what could be termed as a challenging year,
FY13 witnessed steep increase in bad loans of Indian banks and turning them
skeptical to extend loans to companies. As a share of sector loan book, the bad loans
have gone up from 1.3% in March 2009 to 3.4% in March 2013. Public sector banks
31. 31
that account for 60% of the total banking assets have been the worst hit vis-a-vis its
private and foreign counterparts.
Growth of ATMs
ATMs in India have increased to 126,950 in 2013.
Market share of bank groups by deposits
Share of private sector banks in India in total deposits have increased to 18.8 per cent
in FY13 from 17.1 per cent in FY05.
Growth in credit off-take
32. 32
During FY06-13, credit off-take expanded at a CAGR of 22.8 per cent to US$ 991
billion.
Growth in deposits
Deposits have grown at a CAGR of 21.2 per cent during FY06-13; in FY13 total
deposits stood at US$ 1,274.3 billion.
34. 34
SWOT ANALYSIS OF INDIAN BANKING INDUSTRY
The accelerating shift in economic power from the developed to emerging economies
is dramatically changing the banking industry across the world. The international
banking scene has in recent years witnessed strong trends towards globalization and
consolidation of the financial system. Stability of the financial system has become the
central challenge to bank regulators and supervisors throughout the world. The multi-
lateral initiatives leading to evolution of international standards and codes and
evaluation of adherence thereto represent resolute attempts to address this challenge.
The Indian banking scene has witnessed progressive deregulation, institution
of prudential norm and an emulation of international supervisory best practices. The
supervisory processes have also concomitantly evolved and have acquired a certain
level of robustness and sophistication in the banking industry.
Strengths of Indian Banks
In the short-term, most developed economies experienced a significant economic
slowdown or recession in 2008-9, reducing significantly the growth of domestic
banking assets.
Emerging economies such as India by contrast tended to maintain relatively
high growth rates, although some temporary economic slowdown was
experienced in certain cases. In 2010, however, emerging economies grew
strongly in general, while the recovery in Europe in particular remained
relatively weak.
High standard regulatory environment. The policy makers, which comprise
the Reserve Bank of India (RBI), Ministry of Finance and related government
and financial sector regulatory entities, have made several notable efforts to
improve regulation in the sector.
35. 35
Bank lending has been a significant driver of GDP growth and employment.
Presence of more number of smaller banks that would likely to be impacted
adversely.
Approximately 53000 networks of branches spread all over the
country provides easy access to entire spectrum of customers.
Diversification in their operations Banks offer an entire gamut of services
including insurance, investment banking, asset management, private equity,
foreign exchange, payment of utility bills to customers, mobile and
internet banking.
Large manpower with relevant banking skills to manage the operations.
Technological up gradation changing the way the banking is done.
Anywhere banking and anytime banking has become a reality and thus
making service faster, error free and competitive.
Banks have gained financial strengths in terms of Productivity and
Profitability.
36. 36
Weakness of Indian Banks
Indian commercial banks, particularly PSBs have been witnessing the following
challenges which have become bottlenecks in achieving competitive edge over their
rivals.
Low operating size
High operating costs
Inadequate deposit mobilization efforts
High level of nonperforming assets
Financial exclusion
Complex and non-responsive organizational structures
Credit to non-productive sectors like commercial estate
Poor customer service
Underutilized capacity particularly in rural areas
Unsatisfactory work culture
Feudalistic attitude of the staff
37. 37
Ethnocentric and action flippant management
Absence of organizational focus on the employees leading to their
demotivation
Inadequate access to global financial system
The cost of banking intermediation in India is higher and bank penetration is
far lower than in other markets
Inadequate risk management skills particularly to cope with market risks
and per Basel II norms
Structural weaknesses such as a fragmented industry structure, restrictions on
capital availability and deployment, lack of institutional support infrastructure,
restrictive labour laws, weak corporate governance and ineffective regulations
beyond Scheduled Commercial Banks (SCBs)
The inability of bank managements (with some notable exceptions) to improve
capital allocation, increase the productivity of their service platforms and
improve the performance ethic in their organisations could seriously affect
future performance
38. 38
Opportunities for Indian banks
Increase the profitability by accessing international financial market
for procuring funds cheaply and deploy funds prudently.
The emerging economies’ banking sectors are expected to outgrow those in
the developed economies.
As per the PWC projection in Banking 2050 By 2050 the leading E7(China, India,
Brazil, Russia, Mexico, Indonesia, Turkey)emerging economies could have domestic
banking assets and profits that exceed those in the G7(US, Japan, Germany, UK,
France, Italy, Canada) by around 50%.
39. 39
Figure 1: Projections of domestic banking assets in the E7 and G7
India has particularly strong long-term growth potential and PWC projections
suggest it could become the third largest domestic banking sector by 2050
after China and the US, but ahead of Japan, the UK and Germany. Brazil
could also rise strongly up the global banking league table over this period.
To acquire any company, non-bank finance company, housing finance or other
businesses to increase their balance sheet size and go into areas where there is
lot of potentials.
Projected changes in population having an important effect on some countries’
relative growth rates. For instance, Russia, Japan and Republic of Korea are
expected to experience population falls, depressing overall GDP growth.
Nigeria, Saudi Arabia and India are all expected to experience strong
population increases, thereby boosting overall GDP growth. Some advanced
economies (e.g.US, Australia) are projected to have stronger population
growth than some emerging economies (notably China due to its one child
policy).
40. 40
The emerging economies’ market exchange rates are expected to appreciate
over time in real terms due to relative stronger productivity growth (the so-
called Balassa- Samuelson effect). This provides a boost to growth in all of the
emerging economies when measured in real US$ terms. Note that this real
exchange rate appreciation could arise due to nominal appreciation and/or
higher inflation rates in the countries are concerned.
Freedom to pursue new lines of business as part of overall business stratergy.
Freedom in pricing and Structuring their products
Opportunities to access foreign market.
Robust economic health of the country and development in different
sectors promises the growth opportunities.
Growing SME sector leading to greater demand of credit facilities.
Boom in Indian’s consumer spending
Huge opportunities in rural area where people still depend of money lenders
and relatives.
Projection of Share of total global banking assets. Source: IMF data for 2009,
PwC model projections for 2050
41. 41
Threats
Competition among banks for highly rated corporates needing lower amount
of capital may exert pressure on already thinning interest spread. Further, huge
implementation cost may also impact profitability for smaller banks.
The biggest challenge is the re-structuring of the assets of some of the banks
as it would be a tedious process, since most of the banks have poor asset
quality leading to significant
Proportion of NPA. This also may lead to Mergers & Acquisitions, which
itself would be loss of capital to entire system
Huge surplus manpower, absence of good work culture, antiquated
labour laws, inflexible and inefficient labour and existence of strong labour
union.
High level of Non Performing assets (NPA). 6 percent of the advances are still
blocked up which is about 58000 crore. Therefore problem of nonrecognition
of interest income and loan loss provisioning exists.
The house hold savings comprising financial assets are moving away
from bank deposits to more sophisticated form of financial assets such as
mutual funds, stocks and derivatives.
Asset liability mismatch
42. 42
Demanding customers are ready to jump from one bank to another when they
are not satisfied with the service provided. This causes major
threat particularly to PSUs.
Competition from new players.
Competition at global level in terms of product innovation and product mix.
Keep pace with the fast growing technology
The current business environment demands
BANKING STRUCTURE IN INDIA
43. 43
At present, In India, the banks can be bifurcated into following categories.
44. 44
Public Sector Banks or Nationalized Banks, which are commercial and
scheduled. Examples: State Bank of India, Bank of India etc.
Public Sector Banks, which are co-operative and non-scheduled: These are
state owned banks like the Maharashtra State Co-operative Bank, Junnar Co-
operative Society etc.
Private Sector Banks, which are commercial and scheduled- These could
be foreign banks, as well as Indian Banks. Examples: Foreign Banks- CITI
Bank, Standard Chartered Bank etc. Indian Banks- Bank of Rajasthan Limited,
VYSYA Bank Limited etc.
Private Sector Banks, which are co-operative and scheduled- These are
large co-operative sector banks but which are scheduled banks. Examples:
Saraswat Co-operative Bank Limited, Cosmos Co-operative Bank Limited etc.
Private Sector Banks, which are co-operative and non-scheduled-These
are small co-operative banks but which are non-scheduled. Examples: Local
co-operative banks which operate within a town or a city. Example: Mahesh
Sahakari Bank Limited.
Regional Rural Banks. These are state owned. These banks have been
established with a view to developing the rural economy by providing, for
the purpose of development of agriculture, trade, commerce, industry and
other productive activities in the rural areas, credit and other facilities,
particularly to the small and marginal farmers, agricultural labourers and
artisans and small entrepreneurs
45. 45
Gramin Banks, that are also state owned. They operate at still smaller level
than RRBs and serve at village level.
Foreign banks, These banks have Head Office outside India and branch in
India, Besides, the Reserve Bank of India (hereinafter referred to as RBI) acts
as the central bank of the country. RBI is responsible for development and
supervision of the constituents of the Indian financial system (which
comprises banks and non-banking financial institutions) as well as for
determining, in conjunction with the central Government, the monetary and
credit policies. They are also controlled by RBI.
47. 47
What are the sources of funds for banks in India?
The banks in India generate their funds from two types of sources:
Long-Term Sources:
1. Tier one and Tier two Capital in the form of equity/subordinate
debts/debentures/preference shares.
2. Internal accrual generated out of profits.
3. Long-term fixed deposits generated from public and corporate clients,
financial institutions, and mutual funds, etc.
4. Long-term borrowings from financial institutions like NABARD/SIDBI.
Short-Term Sources:
1. Call money market, i.e., funds generated among inter banking transactions
where there is online trading of money between bankers.
2. Fixed deposits generated from public and corporate clients, FIs, and MFs, etc.
3. Market-linked borrowings from RBI.
4. Sale of liquid certificate deposits in the open market.
5. Borrowing from RBI under Repo (Repurchase option).
6. Short and medium-term fixed deposits generated from public and corporate
clients, mutual funds, and financial institutions, etc.
7. Floating in current and saving accounts.
8. Short-term borrowings from FIs by way of rated papers placed, etc.
48. 48
Key RATIOS in the banking sector
CASA
The CASA (current and savings account) ratio is the ratio of deposits in the current
and savings accounts of a bank to its total deposits. A high CASA ratio indicates that
a higher portion of the banks deposits come from current and savings accounts. This
means that the bank is getting money at low cost, since no interest is paid on the
current accounts and the interest paid on savings account is usually low. Current and
Saving Accounts are demand deposits and therefore pay lower interest rates compared
to term deposits where the rates are higher. Thus higher CASA ratio means that more
of the money deposited in the bank is in the demand deposits i.e. the CASA, thus
bank is getting the money at lower cost
'Capital Adequacy Ratio - CAR'
A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted
credit exposures. Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."
TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) -
(equity investments in subsidiary + intangible assets + current & b/f losses)
TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C)
hybrid debt capital instruments and subordinated debts
49. 49
where Risk can either be weighted assets ( ) or the respective national regulator's
minimum total capital requirement. If using risk weighted assets
Capital adequacy ratio is the ratio which determines the bank's capacity to meet the
time liabilities and other risks such as credit risk, operational risk etc. In the simplest
formulation, a bank's capital is the "cushion" for potential losses, and protects the
bank's depositors and other lenders.
'Net Interest Margin'
A performance metric that examines how successful a firm's investment decisions are
compared to its debt situations. A negative value denotes that the firm did not make
an optimal decision, because interest expenses were greater than the amount of returns
generated by investments.
Calculated as:
'Net Interest Income'
The difference between the revenue that is generated from a bank's assets and the
expenses associated with paying out its liabilities. A typical bank's assets consist of all
forms of personal and commercial loans, mortgages and securities. The liabilities are,
of course, the customer deposits. The excess revenue that is generated from the spread
between interest paid out on deposits and interest earned on assets is the net interest
income.
50. 50
'Non-Performing Asset - NPA '
Non-performing assets, also called non-performing loans, are loans,made by a bank or
finance company, on which repayments or interest payments are not being made on
time.
A loan is an asset for a bank as the interest payments and the repayment of the
principal create a stream of cash flows. It is from the interest payments than a bank
makes its profits.
Banks usually treat assets as non-performing if they are not serviced for some time. If
payments are late for a short time a loan is classified as past due. Once a payment
becomes really late (usually 90 days) the loan classified as non-performing.
A high level of non-performing assets compared to similar lenders may be a sign of
problems, as may a sudden increase. However this needs to be looked at in the context
of the type of lending being done. Some banks lend to higher risk customers than
others and therefore tend to have a higher proportion of non-performing debt, but will
make up for this by charging borrowers higher interest rates, increasing spreads. A
mortgage lender will almost certainly have lower non-performing assets than a credit
card specialist, but the latter will have higher spreads and may well make a bigger
profit on the same assets, even if it eventually has to write off the non-performing
loans.
51. 51
YES BANK
Profile of Yes Bank
Yes Bank India, founded under the initiative of Rana Kapoor and Ashok Kapur, is
known for comprehensive banking and providing financial solutions to its customers.
The main mission of the Yes Bank in India is to establish a hi-tech driven private
Indian bank catering to the needs of the emerging India. The founders got the
financial assistance from the Rabobank Nederland, the world's only AAA rated
private bank, and three respected global institutional private equity investors, CVC
Citigroup, AIF Capital and ChrysCapital. At present, Yes Bank India has forty fully
operational branches.
Activities:
The main feature that differentiates Yes Bank India in the banking industry is their
use of knowledge bankers who are industry experts in various sectors of Indian
economy thereby helping their valued customers with in-depth knowledge of these
sectors. In general the products and services offered by the Yes Bank are:
52. 52
Corporate and Institutional Banking
Financial Markets
Investment Banking
Business and Transactional Banking
Retail Banking
Private Banking
YES BANK has been recognized amongst the Top and the Fastest Growing Bank
in various Indian Banking League Tables by prestigious media houses and Global
Advisory Firms, and has received national and international honors for our Businesses
including Corporate Finance, Investment Banking, Treasury, Transaction Banking,
and Sustainable practices through Responsible Banking. The Bank has received
several recognitions for world-class IT infrastructure, and payments solutions, as well
as excellence in Human Capital.
56. 56
Ratios of Yes Bank
Mar 2014 Mar 2013 Mar 2012
CASA 22.0% 18.9% 15%
NIM 2.65 2.36 2.33
NII 2.61 2.57 3.67
NPA 0 0 0
Capital Adequacy Ratio 0 0 0
57. 57
KOTAK MAHINDRA BANK
Profile of Kotak Mahindra Bank
The Kotak Mahindra group is a financial organization established in 1985 in India. It
was previously known as the Kotak Mahindra Finance Limited, a non-banking
financial company. In February 2003, Kotak Mahindra Finance Ltd, the group's
flagship company was given the license to carry on banking business by the Reserve
Bank of India (RBI). Kotak Mahindra Finance Ltd. is the first company in the Indian
banking history to convert to a bank.
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak
& Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in
1986, and that's when the company changed its name to Kotak Mahindra Finance
Limited.
Kotak Mahindra Bank Limited. The Group's principal activity is to provide banking
and related services. The Group operates in four business segments: Treasury and
Balance Sheet Management Unit (BMU), which includes dealing in money market,
forex market, derivatives, investments and primary dealership of government
securities; Retail Banking, which includes lending, commercial vehicle finance,
personal loans, agriculture finance, other loans and home loans, branch banking,
which includes retail borrowings covering savings, current, term deposit accounts and
branch banking network/services including distribution of financial products, and
58. 58
credit cards; Corporate Banking, which comprises wholesale borrowings and lendings
and other related services to the corporate sector; As of 31-Mar-2010, it had a
network of 249 branches.
Kotak Mahindra BANK announces Financial Results for the Quarter ended Mar
30, 2014
60. 60
Ratios of Kotak Mahindra Bank
Mar 2014 Mar 2013 Mar 2012
CASA 31.9% 29%
NIM 4.40 3.96 3.97
NII 4.34 4.29 4.31
NPA 0 0 0
Capital Adequacy Ratio 19.01 16.05 17.52
48.4
4.13
29.4
2.64 1.29
0.27
13.87
Indian Promoters
Banks,Financial Institutions &
Insurance
FII's
Private Corporate Bodies
NRI's/Foreign Others
Others
General Public
61. 61
Analysis
Yes Bank Kotak Mahindra bank
Mar 2014 Mar 2013 Mar 2012
CASA 22.0% 18.9% 15%
NIM 2.65 2.36 2.33
NII 2.61 2.57 3.67
NPA 0 0 0
Capital
Adequacy
Ratio
0 0 0
Mar 2014 Mar 201
3
Mar 2012
CASA 31.9% 29%
NIM 4.40 3.96 3.97
NII 4.34 4.29 4.31
NPA 0 0 0
Capital
Adequac
y Ratio
19.01 16.05 17.52
62. 62
DATA ANALYSIS REPORT:-
YES BANK won seven awards at Asia’s Best Employer Brand Awards and the
CMO Asia Awards for Excellence in Branding and Marketing that were held on
July 22, 2011 in Singapore. The bank received award
The share price of yes Bank increasing from past performance. Wheare the share
price of kotak Mahindra bank is lower than res bank
Casa ratio increase from March 2012 to Mar 2014 from 15% to 18.9% to 22.0%
respectively And
Increase in EPS of the yes bank
Increase in share holder number to earn maximum return
63. 63
INTERPREATATION
From the study of banking sector I found that most of the banking sector stocks are
bullish. Most of the banks have good valuation & their percentage growth is also
good. Let’s do a comparative study of banks taken in these studies
Yes Bank Kotak Mahindra Bank
EPS 44.86 19.51
P/BV 2.09 4.88
EV/EBIDTA 13.48 28.26
ROE (%) 25.02% 13.83%
Recommendations HOLD SELL
YES BANK
EPS
P/BV
EV/EBIDTA
ROE
64. 64
FINDING
Current scenario suggests, markets are on a bullish run,
especially in case of banking Industry. Analysis suggest that all the
chosen stock i.e. yes bank and kotak Mahindra bank going perform well, with
huge potential of earning for equity share
Target prize of yes bank is minimum than kotak Mahindra bank i.e 536.55 and
933.35
It seen that the price of yes bank is decreasing so need to sell the stock.
The stock of Kotak Mahindra Bank is
Stock Target prize Recommendation
Yes bank 536.55 Sell
Kotak Mahindra bank
933.35 Buy
65. 65
CONCLUSION
We all have personal biases, and every analyst has some sort of bias. There is
nothing wrong with this, and the research can still be of great value.
Corporate statements and press releases offer good information, but they
should be read with a healthy degree of skepticism to separate the facts from
the spin.
Investors should become skilled readers to weed out the important information
and ignore the hype.
Keep long term horizon for investment but book profits at the right times.
Always keep diversified investment, do not invest all your money in the same
sector or in the same company.
Check the track record of an analyst before taking any decision based on his
recommendation
