ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9
PERFORMANCE EVALUATION OF SELECTED BANKS USING ECONOMIC VALUE ADDED

Dr. Shivappa,
Associate Professor, Kousali Institute of
Management Studies, Karnatak University
Dharwad.

Mrs. Jyoti N Talreja,

Assistant ProfessorDept. of MBA, Gogte
Institute of Technology,
Belgaum

ABSTRACT
Every business requires to win stakeholders confidence by presenting their reports in the most
sophisticated manner. The measurement tools like cash flow statements analysis, fund flow statements
analysis, ratio analysis, common size statements Return on Investment (ROI), Return on Net worth
(RONW), Return on Capital employed (ROCE), Earning per share (EPS) are the most popular
traditional used techniques to measure the performance. In the recent years many modern techniques
have also gained popularity like Balanced score card, value added statements, Economic value Added
(EVA) Cash value Added, Shareholders Value Added etc. Out of the modern techniques available
Economic value added has gained popularity to measure performance from shareholders point of view.
Through this paper an attempt is made to calculate EVA for two banks selected each one from public
and private sector The main objectives of this paper are To determine the value added by the banks to
shareholders wealth using Economic Value added and To calculate Beta and analyse the Risk of SBI
and ICICI
Keywords: EconimicValue Added, Banking, Shareholders Wealth, Beta, Cost of capital

Introduction:
Banking Sector in India has seen a
tremendous growth since its inception,
introduction
of
Liberalization,
globalization and Privatization LPG in
1990s has significantly changed the
structure of banking sector. This sector
plays a crucial role in the economic
development of the country and is an
important part of Indian Financial system.
EVA concept was developed by Stern
Stewart and Co. in the 1990s in U.S. Since
then many companies have used this
technique to measure their financial
performance. Economic value Added uses
the residual income approach to measure
performance. EVA is calculated by
deducting total cost of capital (Debt +
Equity) known as capital charge from the
Net operating profit after tax. Traditional
techniques dependent on the net profit
which considers only cost of debt or
borrowings. Therefore EVA is considered

superior to Traditional techniques EVA

enables the stakeholders to get a true picture
about the organizations performance.
Review of Literature: The literature
relating to EVA begins with the publication
of the book The Quest for Value by
Stewart (1991), in this book the author
highlights the significance of EVA as the
basis of performance measurement of a
company and its management. In his
empirical research Stewart examined the
informational content of EVA, by testing
613 American companies comparing two
periods, namely 198485 and 198788. He
found a strong correlation between EVA
and MVA. His ideas were further supported
by OByrne (1996), Grant (1996), Dodd
and Chen (1996), Peterson and Peterson
(1996), Biddle et al. (1997) and many more
R.SATISH AND Dr.S.S.RAO (2010): have
studied
on
PERFORMANCE

ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9

MEASUREMENT OF BANKS: AN
APPLICATION OF ECONOMIC VALUE
ADDED & BALANCED SCORECARD
this paper focuses on awareness of EVA as
a performance measurement technique in
Indian banks. In this comparison the
researcher emphasizes on BSC as a better
technique as CAMEL entirely ignores
qualitative measures of performance, in
section D the researcher concentrates on
EVA as a performance measurement tool
and in this section the researcher used
primary data to analyze the awareness
about EVA among the Indian banks, he
used 39 banks listed on BSE as sample. The
respondents selected were General
Managers and assistant managers and
almost 23% of the respondents assigned
highest rank to EVA as a performance
indicator in banking system.
G Soral and Shurveer S Bhanawat (2009)
have worked on Shareholder Value
Creation in the Indian Banking Industry:
An EVA Analysis sample of 14 public
sector banks and 12 private sector banks
was selected by the authors to measure bank
performance on the basis of EVA. The
analysis was done for 4 years and equity
approach was been followed to calculate
EVA. After finding the EVA the authors
found out the correlation between EVA and
other financial figures. The authors
conclude that in Public sector SBI has
contributed highest EVA they also
conclude that EVA has significant
correlation with Operating profit
Roji George(2005): has conducted research
on Computation of EVA in Indian Banks
the research concluded that banks add value
to the shareholders wealth and do not
destroy them and a positive relationship
was found between EVA, NPA and
employee productivity. The study reveals
that public sector banks perform better than
private sector banks for the selected period
in spite of high cost of capital. The

researcher suggests that public sector banks

can use EVA as their USP while reaching
the capital market.
Samuel C. Weaver (2001): the author has
worked on Measuring Economic Value
Added: A survey of the practices of EVA
proponents A survey was conducted by the
author by selecting 29 respondents who
were clients of Stern Stewart and Company
The survey demonstrates that the
calculation of EVA varies widely from
company to company. The author
concludes that EVA is primarily
implemented
to
enhance
financial
performance metrics and EVA proponents
perceive a link between EVA and
shareholders returns.
Research Methodology:
Objectives of the study
To study Economic Value Added
and its applications in Indian Banks
To determine the value added by the
banks to shareholders wealth using
Economic Value added
To calculate Beta and analyse the
Risk of selected banks
To calculate the Return on capital
employed by the selected banks
To compare the value added by
public sector banks and private
sector banks using the selected
banks
Sample size: The study is conducted by
selecting two leading banks in India one
each from Public Sector and Private Sector
namely State Bank of India and ICICI Bank
Collection of Data: Secondary data is used
for the study. The data is collected from the
annual reports of the banks, Publications by
RBI and stock prices of the banks are
collected from stock market websites like
yahoo finance, money control and NSE

ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9

Tools for Analysis:

Various financial tools are used for
different analysis like Capital Asset pricing
Model is used to calculate the cost of
Equity, regression technique using excel is
used to calculate the Beta values for the
selected banks, ratios and Graphical
representation is used to analyse and
interpret the data

Results and Discussions:

Net Operating Profit is considered instead
of Net profit to find the Economic value
added
Net Operating Profit = Income- Operating
Expenses
Net Operating Profit after Tax is used
instead of Net Profit to get a true Picture of
the value created
NOPAT= Operating Profit Tax

Duration of Study:
The study is conducted for a period of two
years i.e., 2012-13 and 2013-14
NOPAT (Net operating profit after Tax)
Banks

SBI

ICICI

Year
2012-13 (Rs. In Cr) 2013-14 (Rs. In Cr)
Total Income
Operating expenses
Operating Profit
Taxes
NOPAT

2012-13 (Rs.
In Cr)

2013-14 (Rs.
In Cr)

135,691.94

154,903.72

22212

26903

29,284.42

35,725.85

9013

10309

106,407.52

119,177.87

13,199.00

16,594.00

5846

5283

3072

4158

100,561.52

113,894.87

10,127.00

12,436.00

Invested Capital is calculated by adding

Equity Capital, Reserves and Surplus and
Borrowings
Invested Capital
2012-13
2013-14
Bank/
(Rs. In
(Rs. In
Years
Cores)
Cores)
SBI
328756.22
371130.25
ICICI
Bank
212042.96
227965.80
Return on Invested Capital: is calculated by
dividing Net Operating Profit after Tax
with the total capital Invested

Return on Invested Capital

Bank/Year
2012-13
s
(%)
SBI
35%
ICICI
Bank
4.78%

2013-14
(%)
27%
5.46%

BETA ()
Beta can be defined as the risk co-efficient
higher the Beta higher is the RisK. It is used
to calculate Cost of Equity. Beta is the
systematic risk which is calculated using
the following formula. Calculations of Beta
are done using Excel the calculation is
shown in the annexure
nxy - (x) (y) nx2 - (x)2

ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9

Beta ()
Bank/Years 2012-13 2013-14
SBI
0.98
2.37
ICICI
1.54
2.78

Market Return (Rm)

Bank/Year 2012-13
2013-14
s
(%)
(%)
SBI
8.15%
17.72%
ICICI
8.15%
17.72%

Market Return (Rm)

Market return is calculated using 2 years
Market Monthly return of NIFTY,
calculations are done using excel,
calculations are shown in the annexure

Cost of Equity (Ke):

It determines the expected rate of return for
the investors it is calculated by using
Capital Asset Pricing Model CAPM by
taking inputs such as Beta risk factor, Rm
Market Return, Rf Risk Free Rate (364 days
treasury bill rate is taken for each year)

Cost of Equity (Ke):

SBI
Years
Risk free rate of
return Rf
Market Return Rm
Beta
Ke

ICICI Bank
2012-13
(%)

2013-14
(%)

7.79%
8.15%
0.98
8.14%

8.96%
17.72%
2.37
29.72%

Years
Risk free rate of
return Rf
Market Return Rm
Beta
Ke

2012-13
(%)
7.79%
8.15%
1.54
8.34%

2013-14
(%)
8.96%
17.72%
2.78
33.31%

Cost of Debt (Kd)

Cost of debt is calculated by: Interest/ Borrowings*100
Cost of Debt (Kd)
SBI

Years
Interest
expenses
Borrowings
Cost of Debt
(Kd)

ICICI Bank
2012-13 (Rs. In
Cr)
7861.25
203723.20
3.86%

WACC (Weighted Average Cost of

Capital)

2013-14 (Rs. In
Cr)

Years
Interest
9182.93 expenses

223759.71 Borrowings
Cost of Debt
4.10% (Kd)

2012-13 2013-14
(Rs. In
(Rs. In
Cr)
Cr)
10701.7 11291.5
7
9
145341. 154759.
49
05
7.36%

7.30%

Weight of equity and debt in the total

capital invested is calculated to find
weighted average cost of capital

ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9

WACC (Weighted Average Cost of Capital)

SBI
2012-13
2013-14
(Rs. In
(Rs. In
Years
Cores)
Cores)
Total
203723.19 223759.70
Borrowings
69
95
Total Equity
684.034
746.5731
Reserves and
surplus
124348.99 146623.96
Total capital
invested
328756.22 371130.25
Debt weight
0.62
0.60
Equity weight
0.38
0.40

Weighted Average Cost of Capital is

calculated using the following formula
WACC= (Ke* weight of equity)+(Kd*
weight of debt)
WACC (%)
Bank/Year
2012-13
s
(%)
SBI
5.49%
ICICI
7.67%

2013-14
(%)
14.28%
15.65%

Years
Total
Borrowings
Total Equity
Reserves and
surplus
Total capital
invested
Debt weight
Equity weight

ICICI Bank
2012-13
(Rs. In
Cores)
145341.49
44
1153.64

2013-14
(Rs. In
Cores)
154759.05
39
1155.04

65547.83

72051.71

212042.96
0.69
0.31

227965.80
0.68
0.32

Capital Charge
Bank/Yea
rs
SBI
ICICI
Bank

2012-13
(Rs. In
Cores)
18042.44

2013-14
(Rs. In
Cores)
52983.22

16267.61

35678.81

Economic Value Added (EVA)

EVA= Net Operating Profit after TaxCapital Charge

Capital Charge :
Capital Charge is calculated by multiplying
total Capital Invested with WACC
(Invested Capital*WACC)
Economic Value Added (EVA)
SBI
ICICI Bank
2012-13
2013-14
2012-13
(Rs. In
(Rs. In
(Rs. In
Years
Cores)
Cores)
Years
Cores)
NOPAT
100561.52
113894.87 NOPAT
10127
Capital
Capital
Charge
18042.44
52983.22 Charge
16267.61
EVA
82519.08
60911.65 EVA
-6140.61

Economic Value Added (%age)

EVA = Return on Capital Employed Weighted Average Cost of Capita

2013-14
(Rs. In
Cores)
12436
35678.81
-23242.81

ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9

Economic Value Added (%)

SBI
Years
Return on Invested Capital
SBI
WACC
EVA

201213
35%
5.49%
29%

ICICI Bank
2012Years
13
Return on Invested
27% Capital
4.78%
14.28
% WACC
7.67%
13% EVA
-3%

201314

Findings
It was observed through the analysis
that State bank of India added value to
the shareholders wealth by generating a
positive Economic Value Added and
meeting its capital charge entirely.
Whereas ICICI bank could not add
value to the shareholders wealth
Return on Capital Employed of SBI is
greater than its cost whereas in case of
ICICI Cost is higher than the Returns
Beta values are calculated to find the
risk co-efficient of the banks it is
observed that beta of both the banks is
high in the year 2013-14. This shows
the banks stocks were very volatile in
this period as compared to the market.

Conclusion:
Banking sector in India is growing in leaps
and bounds and is also approaching capital
market for infusion of funds to escalate
further growth in the banking sector. It is
now predominantly significant for bankers
to increase the shareholders wealth and
encourage them for more investment in
banks. To do this the banks have to measure
their performance from shareholders
perspective, bankers will have to follow
wealth maximization as an objective to
indicate that they are adding value to
shareholders wealth and not deteriorating it.
In order to determine this, bankers need to
apply the Economic value added measure.

201314
5.46%
15.65
%
-10%

Through this paper an attempt is made to

evaluate bank performance using Economic
Value Added as a Performance
measurement technique, it is concluded that
EVA can be used to value bank
performance from shareholders point of
view. Shareholders can use EVA values to
decide on their investment decisions in
different banks.
References
[1] R.Satish
and
Dr.S.S.Rao
Performance measurement of
banks: an application of Economic
Value Added & Balanced Scorecard

Journal
of
Management
Vol.VI.No.1.October 2010.pp. 74 101
[2] Roji George Computation of EVA
in Indian Banks The IUP Journal
of Bank Management, 32 May 2005
[3] Samuel C. Weaver Measuring
EVA A survey of the practices of
EVA proponents Journal of
applied finance 2001
[4] G Soral and Shurveer S Bhanawat
Shareholder Value Creation in the
Indian Banking Industry: An EVA
Analysis The IUP Journal of
Accounting Research & Audit
Practices, Vol. VIII, Nos. 3 & 4,
2009