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Equity research on Banking sector

PROJECT REPORT ON EQUITY RESEARCH ON BANKING SECTOR IN BIRLA SUNLIFE INSURANCE LIMITED

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT OF MASTER OF MANAGEMENT STUDIES

BY SAINI SIMRANJEET MALKEET SINGH ROLL NO: 2010127 MMS-II (SEM III) YEAR 2010-2012

LALA LAJPATRAI INSTITUTE OF MANAGEMENT MAHALAXMI, MUMBAI - 400034

Equity research on Banking sector

PROJECT REPORT ON EQUITY RESEARCH ON BANKING SECTOR IN BIRLA SUNLIFE INSURANCE LIMITED

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT OF MASTER OF MANAGEMENT STUDIES

BY SAINI SIMRANJEET MALKEET SINGH ROLL NO: 2010127 MMS-II (SEM III) YEAR 2010-2012

Equity research on Banking sector

SUMMER INTERNSHIP PROJECT

SUBMITTED BY SAINI SIMRANJEET MALKEET SINGH ROLL NO 2010127 MMS II (SEM III) Year 2010-2012

Equity research on Banking sector

Equity research on Banking sector

Certificate This is to certify that the project work titled Equity research of Banking sector is a summer internship work carried out by Ms. Saini Simranjeet Malkeet Singh. The project was completed for name of the company , under the guidance of Nikesh Ruparel. I further certify that the said work has not been submitted in the part or in full, to any other University.

Date: 29th August 2011

____________________ Prof. Arati Kale Project Guide Management

____________________ Dr V.B. Angadi Director, Lala Lajpatrai Institute of

Equity research on Banking sector

DECLARATION

I, Ms. Saini Simranjeet Malkeet Singh, student of Lala Lajpatrai Institute of Management of MMS II (Semester III) hereby declare that I have completed the summer internship project on Equity research of banking sector with Birla Sunlife Insurance Limited in the Academic year 20102012. The information submitted is true & original to the best of my knowledge.

Equity research on Banking sector

ACKNOWLEDGEMENT At the outset of this project, I would like to express my profound thanks to a few people without whose help, completion of this project would not have been possible. First and foremost, I would like to express sincere thanks to Birla Sunlife Insurance for giving me this opportunity to work with them. The list is endless but to name a few special people, I would like to thank Nikesh Ruparel for being extremely supportive and guiding me throughout my internship and giving me constant motivation and expert advice. I would also like to thank the entire Finance department for providing me their precious time and making this internship a successful learning experience. I am very grateful to Dr. Angadi, Director of Lala Lajpat Rai Institute of Management, for giving me the opportunity to do this project in (name of the company). My sincere thanks to Prof. Arati Kale for her valuable guidance and advice in completing this project. I would also like to thank my prof. Mr. Narendran for being an excellent mentor and helping me whenever I approached him. Last but not the least; I take pride in thanking my family, siblings and friends for their much valued support.

Equity research on Banking sector

SR.NO 1 2 3 4 4.1 4.2 4.3 5 5.1 5.2 5.3 5.4 6 6.1 6.2 6.3 6.4 7 8 9 10 11 12

INDEX Introduction Company Profile Introduction to Equity Fundamental Analysis Qualitative Factor- Industry Qualitative Factor- Company Quantitative Factor-Ratios Technical Analysis Introduction to Trendline Introduction to Support & Resistance Introduction to Indicators Moving Averages Analysis of Banking Sector Recent development in Banking sector SWOT Analysis of Banking sector Banking Structure in India Income & Expenses profile of Banks Analysis of Punjab National Bank Analysis of State Bank of India Technical Analysis of Banks Findings Conclusion Recommendation

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Equity research on Banking sector

EXECUTIVE SUMMARY Indian Economy being one of the fastest developing economies in the world, Companies in India are growing at farter rate as compared to their growth rate a decade back. Many Indian companies are expanding their business globally with mergers and acquisitions. Thus Indian equity markets today are attracting investors from around the world to take advantage of Indias growth story. As companies grow their shareholders are benefitted with good dividend and capital appreciation on investment in equity shares of such companies. Number of companies listed in stock exchange (BSE & NSE) has been increasing every year with new IPOs coming in the market. In India people are realizing that equity has potential to give highest return as compared to other investment avenues however people do not have proper knowledge in which stock to invest their hard earned money to get good returns. They just invest on the basis of tips given by brokers or friends which is not correct. The penetration of retail investors in the Indian Markets is just around 5%, which means that the Indian investor is not able to take the maximum advantage of Indias growth. This report is meant to narrow down this gap between retail investors and equity markets by simplifying the basic investment strategies and give a basic understanding of how stocks are analysed for investment using the the theories of fundamental and technical analysis Equity Research helps the investor to know about the value, risk & volatility of the covered security, and thus assist investors to decide whether to buy, hold, sell, sell short, or simply avoid the security in question. Fundamental analysis is very helpful to the investor, which is reflected in the investment purpose. Fundamental analysis consist of three parts, they are economic, industry and company. Any investors who go to systematic investment, he/she would like to know, the complete scenario of the industry. If the industry looks positive then analyze various companies in the sector. A Company is analyzed fundamentally to check its performance and financial strength. With the help of this analysis investors comes to know whether to make an investment in a particular stock. In this report I have explained How to do fundamental analysis & technical analysis with analysis of banking sector and few companies in the sector.

Equity research on Banking sector

INTRODUCTION ABOUT THE PROJECT


OBJECTIVE OF THE STUDY: The primary objective of equity research is to analyze the earnings persistence. Some key aspects that affect the earnings persistence can be summarized as follows: - The stability of the equity under consideration - The predictability of the value of the given equity under the given circumstances - The variability of the given equity, given the various variance factors To acquire a deep knowledge of the Banking Sector through fundamental and technical analysis. To assess the financial health & management effectiveness of the Company. To evaluate the share of major banks like State bank of India and Punjab National Bank on the basis of fundamental and technical analysis. To find out how effectively resources are used within the enterprise SCOPE: The scope of project is limited to Understanding the basics of Fundamental analysis and apply it to take a decision of investing in banking Stocks. RESEARCH METHODOLOGY: Formation of the Problem Which significant ratios determine investment decision in share market? What trend the banks are following (uptrend or downtrend)? Collection of Data Secondary Data: The sources of secondary data are: Company Annual Report Internet-Websites Research Limitation Information available on the websites was not updated. There was a limited time period to complete the project.

Equity research on Banking sector

2. COMPANY PROFILE
Established in 2000, Birla Sun Life Insurance Company Limited (BSLI) is a joint venture between the Aditya Birla Group, a well known and trusted name globally amongst Indian conglomerates and Sun Life Financial Inc, leading international financial services organization from Canada. The local knowledge of the Aditya Birla Group combined with the domain expertise of Sun Life Financial Inc., offers a formidable protection for its customers future. With an experience of over 9 years, BSLI has contributed significantly to the growth and development of the life insurance industry in India and currently ranks amongst the top 5 private life insurance companies in the country. Known for its innovation and creating industry benchmarks, BSLI has several firsts to its credit. It was the first Indian Insurance Company to introduce Free Look Period and the same was made mandatory by IRDA for all other life insurance companies. Additionally, BSLI pioneered the launch of Unit Linked Life Insurance plans amongst the private players in India. To establish credibility and further transparency, BSLI also enjoys the prestige to be the originator of practice to disclose portfolio on monthly basis.

Equity research on Banking sector

These category development initiatives have helped BSLI be closer to its policy holders expectations, which gets further accentuated by the complete bouquet of insurance products (viz. pure term plan, life stage products, health plan and retirement plan) that the company offers. Add to this, the extensive reach through its network of 600 branches and 175,000 empanelled advisors. This impressive combination of domain expertise, product range, reach and ears on ground, helped BSLI cover more than 2 million lives since it commenced operations and establish a customer base spread across more than 1500 towns and cities in India. To ensure that our customers have an impeccable experience, BSLI has ensured that it has lowest outstanding claims ratio of 0.00% for FY 2008-09. Additionally, BSLI has the best Turn Around Time according to LOMA on all claims Parameters. Such services are well supported by sound financials that the Company has. The AUM of BSLI stood at Rs. 8165 crs as on February 28, 2009, while as on March 31, 2009, the company has a robust capital base of Rs. 2000 crore. VISION To be a leader and role model in a broad based and integrated financial services business. MISSION To help people mitigate risks of life, accident, health, and money at all stages and under all circumstances. Enhance the financial future of our customers including enterprises. VALUES Integrity Commitment Passion Seamlessness Speed A US $28 billion corporation, the Aditya Birla Group is in the league of Fortune 500 worldwide. It is anchored by an extraordinary force of 100,000 employees, belonging to 25 different nationalities. The group operates in 25 countries across six continents truly India's first multinational corporation. Aditya Birla Group through Aditya Birla Financial Services Group (ABFSG), has a strong presence across various financial services verticals that include life insurance, fund management, distribution & wealth management, security based lending, insurance broking, private equity and retail broking. The seven companies representing ABFSG are Birla Sun Life Insurance Company, Birla Sun Life Asset Management Company, Aditya Birla Money, Aditya Birla Finance, Birla Insurance Advisory & Broking Services, Aditya Birla Capital Advisors and Apollo Sindhoori Capital Investment. In FY 2008-09, the consolidated revenues of ABFSG from these businesses crossed Rs. 4763 crore, registering a growth rate of 36%.

Equity research on Banking sector

Sun Life Financial is a leading international financial services organisation providing a diverse range of protection and wealth accumulation products and services to individuals and corporate customers. Chartered in 1865, Sun Life Financial and its partners today have operations in key markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China and Bermuda. As of December 31, 2008, the Sun Life Financial group of companies had total assets under management of $381 billion. AWARDS At Birla Sun Life Insurance, winning is a way of life. Our innovative solutions and customer-friendly services have been admired, appreciated and rewarded by customers and the industry at large. Recruiting and Staffing Best in Class Awards.

Outlook Money Awards 2004 BSLI - Best Life Insurer (Runner Up) 2004 TROPHY

The 8th Asia Insurance Industry Awards 2004 - Birla Sun Life Insurance was among the top five nominees in the category.

The Indo-Canadian Business Chamber- BSLI awarded for its 'Successful Performance' for 4 years April 2005.

Birla Sun Life Insurance was presented 'The Hewitt Best Employers In India Awards 2004' Trophy.

Birla Sun Life Insurance was awarded 'The Great Place to Work Seminar Series 2007 Presented by Anil Sachdev (Chairman & MD of Grow Talent Company Ltd) Robert Levering (Co-founder Great Place to Work Institute) and Jehangir Pocha (Business World Magazine).

The Bhartiya Shiromani Puraskar awarded to BSLI at the seminar on "Economic Development New Delhi, on February 13, 2006. This is a Certificate of Excellence for Enhancing the image of India presented by Dr. Bhishma Narain Singh (Former

Equity research on Banking sector

Governor of Tamil Nadu & Assam) in association with the "Institute of Economic Studies (IES)".

Hewitt Best Employers in India 2004.

Sponsorship Acknowledgement for - The Asia Insurance Review.

FUTURE BUSINESS CONTINUITY PLAN Birla Sun Life Insurance is one of the few Indian companies to have a fully operational Business Continuity Plan (BCP) to ensure minimal impact to the organisation, its people, and most importantly, its customers. Our Business Continuity Planning (BCP) Program is a response plan which would ensure that in the event of a disaster we would be able to restore and recover operations for critical processes within a predetermined time after the disaster. BSLIS BUSINESS CONTINUITY MANAGEMENT POLICY To have a planned response in the event of any contingency ensuring recovery of critical activities at agreed levels within agreed timeframe thereby complying with various regulatory requirements and minimizing the potential business impact to BSLI. Additionally to create a system that fosters continuous improvement of business continuity management. BUSINESS CONTINUITY MANAGEMENT SYSTEM OBJECTIVES (BCMS) The objectives of BSLI's BCMS are as follows Ensuring a Proactive response to any contingency Ensuring recovery of identified critical activities within agreed timeframe. Ensuring that we adhere to our clients, contractual, legal & regulatory requirements.

Equity research on Banking sector

3. 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?

Equity research on Banking sector

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 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.

Equity research on Banking sector

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 securitys market value represents a time to buy. If the value of the security is lower than its market price, investors should sell it. Literature Review To be able to value equity, we need to first understand how equity is to be analyzed. Equity research is, researching and analyzing equities, or stocks. These stocks trade on various stock markets such as the NSE (National Stock exchange), BSE (Bombay Stock exchange), New York Stock Exchange, NASDAQ, AMEX (which are the main U.S. stock markets) or foreign stock markets.

Equity research analysts are usually employed by financial firms that have equity research departments made up of numerous analysts, each of which focuses on being an "expert" on a particular industry. There are numerous industries within the 10 sectors. Those 10 sectors are the consumer discretionary, consumer staples, energy, industrials, financials, healthcare, materials, information technology, and telcommunications and utilities sectors. On a daily basis, equity research analysis closely follows, or monitors a number of stocks. For example, a PC hardware equity research analyst would probably spend a great deal of time monitoring the business of Dell Computer and any news that may affect dell. For example, if Microsoft decided to begin to sell computers that would likely be a problem for Dell since that would mean that Dell has more competition. The analyst would try to quantify what that means for Dell's sales and profits. In addition to just monitoring current events with companies, equity research analysts typically write equity research reports, which explain and analyze what a company's business is. As part of that analysis, the analyst will "model" the company's financial statements. In other words, the analyst will try to predict how many computers, etc. a particular company can sell and how much profit the company could make. To create the model, the analyst will use Microsoft Excel, which is a spreadsheet program that allows for easy calculation of numerous equations, some of which could be very complex. The process of investment starts with analyzing a sector, understanding its growth prospects, then analyzing companies in the chosen sector using fundamental and technical analysis.

Equity research on Banking sector

Sector analysis is done using the model of the Five Competitive Forces developed by Michael E. Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors The Five Competitive Forces are typically described as follows: 1. 2. 3. 4. 5. Bargaining Power of Suppliers Bargaining Power of Customers Threat of New Entrants Threat of Substitutes Competitive Rivalry between Existing Players

Therefore Equity Share of any company can be analyzed through 1. Fundamental Analysis

2. Technical Analysis

4. FUNDAMENTAL ANALYSIS
Introduction Fundamental analysis is a technique that attempts to determine a securitys value by focusing on underlying factors that affect a Companys 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,

Equity research on Banking sector

To calculate its credit risk.

Fundamental analysis serves to answer questions, such as: Is the companys 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"?

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 companys 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.

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.

Customers

Equity research on Banking sector

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 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.

Equity research on Banking sector

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. 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.

Equity research on Banking sector

QUALITATIVE FACTOR THE COMPANY


Before diving into a company's financial statements, lets 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 Reliances 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. Usually there will be a quick biography on each executive with

Equity research on Banking sector

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. 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 web sites. 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 companys web sites so as to enable investors to access these.

Equity research on Banking sector

QUANTITATIVE FACTOR
Now as we know the qualitative factor of fundamental analysis, lets 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


How quickly are debts paid? How many times is inventory turned?

Equity research on Banking sector

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?

Following are some ratios which are used to analyze companies performance
1. Current Ratio: Current ratio is calculated in order to work out firms ability to pay

off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains the relationship between current assets and current liabilities of a business. Where current assets are those assets which are either in the form of cash or easily convertible into cash within a year. Similarly, liabilities, which are to be paid within an accounting year, are called current liabilities. Current Ratio = Current Assets/Current Liabilities Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued Incomes etc. Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc. Objective and Significance: Current ratio shows the short-term financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is supposed to be 2:1 i.e. current assets must be twice the current liabilities. In case, this ratio is less than 2:1, the short-term financial position is not supposed to be very sound and in case, it is more than 2:1, it indicates idleness of working capital.
2. Liquid Ratio: Liquid ratio shows short-term solvency of a business in a true manner.

It is also called acid-test ratio and quick ratio. It is calculated in order to know how quickly current liabilities can be paid with the help of quick assets. Quick assets mean those assets, which are quickly convertible into cash. Liquid Ratio = Liquid Assets/Current Liabilities

Equity research on Banking sector

Where liquid assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Short-term Investments etc. In other words, all current assets are liquid assets except stock and prepaid expenses. Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc
3. Debt-Equity Ratio: Debt equity ratio shows the relationship between long-term

debts and shareholders funds. It is also known as External-Internal equity ratio. Debt Equity Ratio = Debt/Equity Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc.

Equity (Shareholders Funds) = Share Capital (Equity + Preference) + Reserves and Surplus Fictitious Assets Objective and Significance: This ratio is a measure of owners stock in the business. Proprietors are always keen to have more funds from borrowings because: (i) Their stake in the business is reduced and subsequently their risk too (ii) Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities. The normally acceptable debt-equity ratio is 2:1.
4. Fixed Assets Ratio: Fixed Assets Ratio establishes the relationship of Fixed Assets to

Long-term Funds. Fixed Assets Ratio = Long-term Funds/Net Fixed Assets Where Long-term Funds = Share Capital (Equity + Preference) + Reserves and Surplus + Long- term Loans Fictitious Assets Net Fixed Assets means Fixed Assets at cost less depreciation. It will also include trade investments. Objective and Significance: This ratio indicates as to what extent fixed assets are financed out of long-term funds. It is well established that fixed assets should be financed only out of long-term funds. This ratio workout the proportion of investment of funds from the point of view of long-term financial soundness. This ratio should be equal to 1. If the ratio is less than 1, it means the firm has adopted the impudent policy of using short-term funds for acquiring fixed assets. On the other hand, a very

Equity research on Banking sector

high ratio would indicate that long-term funds are being used for short-term purposes, i.e. for financing working capital.
5. Working Capital Turnover Ratio: Working capital turnover ratio establishes a

relationship between net sales and working capital. This ratio measures the efficiency of utilization of working capital. Working Capital Turnover Ratio = Net Sales or Cost of Goods Sold/Net Working Capital Where Net Working Capital = Current Assets Current Liabilities Objective and Significance: This ratio indicates the number of times the utilisation of working capital in the process of doing business. The higher is the ratio, the lower is the investment in working capital and the greater are the profits. However, a very

high turnover indicates a sign of over-trading and puts the firm in financial difficulties. A low working capital turnover ratio indicates that the working capital has not been used efficiently.
6. Stock Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold and

average stock. This ratio is also known as stock velocity or inventory turnover ratio. Stock Turnover Ratio = Cost of Goods Sold/Average Stock Where Average Stock = [Opening Stock + Closing Stock]/2 Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses Closing Stock Objective and Significance: Stock is a most important component of working capital. This ratio provides guidelines to the management while framing stock policy. It measures how fast the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit.
7. Debtors Turnover Ratio: Debtors turnover ratio indicates the relation between net

credit sales and average accounts receivables of the year. This ratio is also known as Debtors Velocity. Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2 Credit Sales = Total Sales Cash Sales

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Objective and Significance: This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly.
8. Capital Turnover Ratio: Capital turnover ratio establishes a relationship between net

sales and capital employed. The ratio indicates the times by which the capital employed is used to generate sales. It is calculated as follows: Capital Turnover Ratio = Net Sales/Capital Employed Where Net Sales = Sales Sales Return Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans Fictitious Assets.

Objective and Significance: The objective of capital turnover ratio is to calculate how efficiently the capital invested in the business is being used and how many times the capital is turned into sales. Higher the ratio, better the efficiency of utilisation of capital and it would lead to higher profitability.
9. Net Profit Ratio: Net Profit Ratio shows the relationship between Net Profit of the

concern and Its Net Sales. Net Profit Ratio can be calculated in the following manner: Net Profit Ratio = Net Profit/Net Sales x 100 Where Net Profit = Gross Profit Selling and Distribution Expenses Office and Administration Expenses Financial Expenses Non Operating Expenses + Non Operating Incomes. And Net Sales = Total Sales Sales Return Objective and Significance: In order to work out overall efficiency of the concern Net Profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years ratios, the increment shows the efficiency of the concern. 10. Return on Investment or Return on Capital Employed: This ratio shows the relationship between the profit earned before interest and tax and the capital employed to earn such profit. Return on Capital Employed = Net Profit before Interest, Tax and Dividend/Capital Employed x 100

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Where Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans Fictitious Assets Or Capital Employed = Fixed Assets + Current Assets Current Liabilities Objective and Significance: Return on capital employed measures the profit, which a firm earns on investing a unit of capital. The profit being the net result of all operations, the return on capital expresses all efficiencies and inefficiencies of a business. This ratio has a great importance to the shareholders and investors and also to management. To shareholders it indicates how much their capital is earning and to the management as to how efficiently it has been working. This ratio influences the market price of the shares. The higher the ratio, the better it is.

11. Return on Equity: Return on equity is also known as return on shareholders

investment. The ratio establishes relationship between profit available to equity shareholders with equity shareholders funds. Return on Equity = Net Profit after Interest, Tax and Preference Dividend/Equity Shareholders Funds x 100 Where Equity Shareholders Funds = Equity Share Capital + Reserves and Surplus Fictitious Assets Objective and Significance: Return on Equity judges the profitability from the point of view of equity shareholders. This ratio has great interest to equity shareholders. The return on equity measures the profitability of equity funds invested in the firm. The investors favour the company with higher ROE.
12. Earning Per Share: Earning per share is calculated by dividing the net profit (after

interest, tax and preference dividend) by the number of equity shares. Earning Per Share = Net Profit after Interest, Tax and Preference Dividend/No. Of Equity Shares Objective and Significance: Earning per share helps in determining the market price of the equity share of the company. It also helps to know whether the company is able to use its equity share capital effectively with compare to other companies. It also tells about the capacity of the company to pay dividends to its equity shareholders.

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13. Price/Earning Ratio: This ratio shows the relationship between market price per share and earning per share. In other words, if a company is reporting a profit of Rs.200 per share, and the stock is selling for Rs.2000 per share, the P/E ratio is 10 because you are paying ten-times earnings (Rs.2000 per share divided by Rs.200 per share earnings = 10 P/E.) This ratio is calculated to find out the possibility of capital appreciation in future. Price Earning Ratio = Market Price per Equity Share/ Earning per Share.

5. 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?

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2. What is the history of the price movement? 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. 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.

(Chart for Minnesota Mining & Manufacturing) On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right. The price plot for MMM extends from

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January 1, 1999 to March 13, 2000. 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.

(Chart for Sun Microsystems) 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

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

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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.

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.

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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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INTRODUCTION TO TRENDLINE
Trendlines are an important tool in technical analysis for both trend identification and confirmation. A trendline is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. Trends in charts are found to take decision regarding buying, selling or holding the stock. When a stock is in uptrend it is good stock to buy and when a stock is in down trend it is advisable to sell that particular stock or wait for trend in the stock to change before taking buying decision. Following charts show Uptrend and Downtrend movement in stocks

The above chart of GoodYear Tire shows uptrend movement in stock. The trendline is formed by joining previous lowest closing prices of the stock.

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The above chart of MERK&CO shows downtrend movement in stock. The trendline is formed by joining previous highest closing prices of the stock. Note: Trendline as it shows the uptrend or downtrend movement in stock, breakout in the trendline indicates the trend reversal in the stock. Breakout in downtrend line give bullish signal and it is the time to buy that particular stock whereas breakout in uptrend line give bearish signal, it is advisable to sell the stock as the trend in the stock has changed and the stock may further fall in price.

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INTRODUCTION TO SUPPORT AND RESISTANCE


Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control. What is Support? Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. What is Resistance? Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

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The above chart of PHILLIP MORRIS shows that the stock has Resistance at 51.5 with double top confirmation and it has Support at 45.5 with double bottom confirmation. Breakout in the resistance level gives bullish signal, it is the right time to buy the stock as the stock is expected to rise further whereas breakout in the support level is bearish sign for the stock and investors are advised to sell the stock when its price goes below support level as it is expected that the stock may further fall in price. Note: When a resistance level is successfully penetrated, that level becomes a support level. Similarly when a support level is successfully penetrated, that level becomes a resistance level.

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INTRODUCTION TO INDICATORS
An indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced. An indicator offers a different perspective from which to analyze the price action. Regardless of the complexity of the formula, indicators can provide unique perspective on the strength and direction of the underlying price action. Why use indicators? Indicators serve three broad functions: to alert, to confirm and to predict. An indicator can act as an alert to study price action a little more closely. If momentum is waning, it may be a signal to watch for a break of support. Or, if there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout. Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. Or, if a stock breaks support, a corresponding low in the On-BalanceVolume (OBV) could serve to confirm the weakness. Some investors and traders use indicators to predict the direction of future prices.

Following are various indicators used in Technical Analysis Average Directional Index (ADX) Average True Range (ATR) Bollinger Bands Commodity Channel Index (CCI) Moving Average Moving Average Convergence Divergence (MACD) Relative Strength Index(RSI) Stochastic Oscillator

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MOVING AVERAGES
Moving averages are one of the most popular and easy to use tools available to the technical analyst. By using an average of prices, moving averages smooth a data series and make it easier to spot trends. This can be especially helpful in volatile markets. Moving Averages like other indicators are mainly used to confirm the trend reversal and take decision regarding Buying, Selling or Holding the stock. If current stock price is above Moving Average Line then it is good stock to buy or hold. Breakout in the Moving Average Line gives indication of buying or selling the stock.

The above chart of Sun Microsystems, Inc. shows 50 day SMA (Simple Moving Average) and 200 day SMA line. The chart shows breakout in 200 day SMA line at 50 which gives bearish signal. Investors are advised to sell the stock at 50 as it is entering the bearish zone. Note: For long term investment horizon use 200 day SMA and for short or medium term investment horizon use 50 day SMA.

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6. THE INDIAN BANKING SECTOR


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. 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. 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.

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RECENT DEVELOPMENT IN BANKING SECTOR


A retrospect of the events clearly indicates that the Indian banking sector has come far away from the days of nationalization. The Narasimhan Committee laid the foundation for the reformation of the Indian banking sector. Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector. As the international standards became prevalent, banks had to unlearn their traditional operational methods of directed credit, directed investments and fixed interest rates, all of which led to deterioration in the quality of loan portfolios, inadequacy of capital and the erosion of profitability. The recent international consensus on preserving the soundness of the banking system has veered around certain core themes. These are: effective risk management systems, adequate capital provision, sound practices of supervision and regulation, transparency of operation, conducive public policy intervention and maintenance of macroeconomic stability in the economy. Until recently, the lack of competitiveness vis--vis global standards, low technological level in operations, over staffing, high NPAs and low levels of motivation had shackled the performance of the banking industry. However, the banking sector reforms have provided the necessary platform for the Indian banks to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, i.e. reduction in CRR and SLR reserves, capital adequacy norms, restructuring and recapitulating banks and enhancing the competitive element in the market through the entry of new banks. The reforms also include increase in the number of banks due to the entry of new private and foreign banks, increase in the transparency of the banks balance sheets through the introduction of prudential norms and increase in the role of the market forces due to the deregulated interest rates. These have significantly affected the operational environment of the Indian banking sector. To encourage speedy recovery of Non-performing assets, the Narasimhan committee laid directions to introduce Special Tribunals and also lead to the creation of an Asset Reconstruction Fund. For revival of weak banks, the Verma Committee recommendations have laid the foundation. Lastly, to maintain macroeconomic stability, RBI has introduced the Asset Liability Management System. The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology to maintain their market share. Thus, the declaration of the Voluntary Retirement Scheme accounts for a positive development reducing the administrative costs of Public Sector banks. The developments, in general, have an emphasis on service and technology; for the first time that Indian public sector banks are being challenged by the foreign banks and private sector banks.

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Branch size has been reduced considerably by using technology thus saving manpower. The deregulation process has resulted in delivery of innovative financial products at competitive rates; this has been proved by the increasing divergence of banks in retail banking for their development and survival. In order to survive and maintain strong presence, mergers and acquisitions has been the most common development all around the world. In order to ensure healthy competition, giving customer the best of the services, the banking sector reforms have lead to the development of a diversifying portfolio in retail banking, and insurance, trend of mergers for better stability and also the concept of virtual banking.

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SWOT ANALYSIS OF BANKING SECTOR


STRENGTH Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. WEAKNESS Public Sector Banks need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. 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), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital. Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term. OPPORTUNITY The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. With increased interest in India, competition from foreign banks will only intensify.

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Given the demographic shifts resulting from changes in age profile and household

income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. Reach in rural India for the private sector and foreign banks. Liberalization of ECB norms: The government also liberalised the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets. Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity.

THREATS Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. Rise in inflation figures which lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the Public Sector Bank as well as the private players.

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BANKING STRUCTURE IN INDIA

According to the RBI in March 2009, number of all Scheduled Commercial Banks (SCBs) was 171 of which, 86 were Regional Rural Banks and the number of NonScheduled Commercial Banks including Local Area Banks stood at 5. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all automated teller machines (ATMs).

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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.

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7. PUNJAB NATIONAL BANK


Profile With over 60 million satisfied customers and more than 5100 offices including 5 overseas branches, PNB has continued to retain its leadership position amongst the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card, debit card; bullion business; life and non-life insurance; Gold coins & asset management business, etc. PNB has earned many awards and accolades during the year in appreciation of excellence in services, Corporate Social Responsibility (CSR) practices, transparent governance structure, best use of technology and good human resource management. Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, PNB has achieved significant growth in business which at the end of March 2011 amounted to Rs 5,55,005 crore. PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network, business and many other parameters. During the FY 2010-11, with 39.16% share of CASA to domestic deposits, the Bank achieved a net profit of Rs 4433 crore. Bank has a strong capital base with capital adequacy ratio of 12.42% as on Mar11 as per Basel II with Tier I and Tier II capital ratio at 8.44% and 3.98% respectively. As on March11, the Bank has the Gross and Net NPA ratio of 1.79% and 0.85% respectively. During the FY 2010-11, its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.67% & Agriculture Credit to Adjusted Net Bank Credit at 19.30% was also higher than the stipulated requirement of 40% & 18% respectively. The Bank has been able to maintain its stakeholders interest by posting an improved NIM of 3.96% in Mar11 (3.57% Mar10). The Earning per Share improved to Rs 140.60 (Rs 123.86 Mar10) while the Book value per share improved to Rs 661.20 (Rs 514.77 Mar10). Punjab National Bank continues to maintain its frontline position in the Indian banking industry. In particular, the bank has retained its NUMBER ONE position among the nationalized banks in terms of number of branches, Deposit, Advances, total Business, Assets, Operating and Net profit in the year 2010-11. Bank always looked at technology as a key facilitator to provide better customer service and ensured that its IT strategy follows the Business strategy so as to arrive at Best Fit. The Bank has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution (CBS) since Dec08, thus covering 100% of its business and providing Anytime Anywhere banking facility to all customers including customers of more than 3200 rural & semi urban branches. The Bank has also been offering Internet

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banking services to its customers which also enables on line booking of rail tickets, payment of utilities bills, purchase of airline tickets, etc. Towards developing a cost

effective alternative channels of delivery, the Bank with 5050 ATMs has the largest ATM network amongst Nationalized Banks. With the help of advanced technology, the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. With its policy of inclusive growth, the Banks mission is Banking for Unbanked. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. Bank has launched a welfare scheme of adoption of village viz., PNB VIKAS. Under the scheme, Bank has selected 117 villages (60 in lead districts and 57 in non lead district) in different circles for all-round improvement in the living standards of the villagers. Besides, Bank has formed PNB PRERNA, an association of the wives of the Banks senior management. The association through its voluntary initiatives has undertaken activities like distribution of food to the poor and needy, provision of computers, books, stationary items to poor girl students at various orphanages and schools etc. Backed by strong domestic performance, the Bank is planning to realize its global aspirations. Bank has opened one branch each at Kabul and Dubai, two branches at Hong Kong and an Off Shore Banking Unit at Mumbai. In addition to the above, Bank has Representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK with 7 branches and a subsidiary each in Kazakhstan & Bhutan, and joint venture with Everest Bank Ltd. Nepal. During the year, Bank acquired majority equity stake of 63.64% in Dana Bank of Kazakhstan. SHARE HOLDING PATTERN

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% Share Holding

OtherCompanies, 1.30% ForeignNRI, 0.02% GeneralPublic, 3.96% NBanksMutualFunds, 4.65% FinancialInstitutions, 12.76% ,0 Others, 0.02%

ForeignInstitutions, 19.29%

Promoters, 58.00%

BALANCESHEET
Rs (Crores) Mar '11 Mar '10 Mar '09

CAPITAL AND LIABILITIES: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities ASSETS Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments

316.81 316.81 0.00 0.00 19,720.99 1,470.76 21,508.56 312,898.73 31,589.69 344,488.42 12,328.27 378,325.25

315.30 315.30 0.00 0.00 15,915.63 1,491.99 17,722.92 249,329.80 19,262.37 268,592.17 10,317.69 296,632.78

315.30 315.30 0.00 0.00 12,824.59 1,513.74 14,653.63 209,760.50 4,374.36 214,134.86 18,130.13 246,918.62

23,776.90 5,914.32 242,106.67 95,162.35

18,327.58 5,145.99 186,601.21 77,724.47

17,058.25 4,354.89 154,702.99 63,385.18

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Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

4,981.60 1,876.01 3,105.59 0.00 8,259.42 378,325.25 101,465.73 37,449.53 632.48

4,215.21 1,701.74 2,513.47 0.00 6,320.07 296,632.79 68,124.47 33,215.78 514.77

3,930.36 1,533.25 2,397.11 0.00 5,020.20 246,918.62 79,270.65 31,941.43 416.74

PROFIT AND LOSS STATEMENT


Mar '11 INCOME Interest Earned Other Income Total Income EXPENDITURE Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp Capitalised Operating Expenses Provisions & Contingencies TOTAL EXPENSES Net Profit for the Year Extraordionary Items Profit brought forward TOTAL Preference Dividend Equity Dividend Corporate Dividend Tax 26,986.48 3,612.58 30,599.06 15,179.14 4,461.10 2,813.45 255.85 3,456.02 0.00 8,367.96 2,618.46 26,165.56 4,433.50 0.00 0.00 4,433.50 0.00 696.99 113.07 Mar '10 21,466.91 3,565.31 25,032.22 12,944.02 3,121.14 1,701.46 222.83 3,137.42 0.00 5,761.36 2,421.49 21,126.87 3,905.36 0.00 7.64 3,913.00 0.00 693.67 116.43 Mar '09 19,326.16 2,919.69 22,245.85 12,295.30 2,924.38 1,406.42 191.06 2,337.80 0.00 5,026.81 1,832.85 19,154.96 3,090.88 0.00 0.00 3,090.88 0.00 630.61 107.17

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Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

139.94 220.00 632.48 1,258.39 2,365.05 810.06 0.00 4,433.50

123.86 220.00 514.77 1,532.46 1,570.44 810.10 0.00 3,913.00

98.03 200.00 416.74 1,155.46 1,190.00 737.78 7.64 3,090.88

COMMENTS
1. Financial year 2010-11 was an eventful year with the Bank crossing number of milestones. While total business crossed Rs.5.55 lakh crore at the end of March 2011 compared to Rs. 4.36 lac crore last year, registering Year- on-Year (YoY) growth of 27.3%, global deposits reached Rs. 3.12 lac crore (25.5%) and global gross advances touched Rs. 2.42 lac crore (29.7%).
2.

Growth in the credit was mainly driven by Retail and MSME. Under retail credit segment, Education Loans, Auto Loans and Housing Loans with growth of 24% were the major contributors. Loans to MSME sector, which is thrust area of the Bank, registered a growth of 29.3%.

3. Banks productivity indicators have shown improvement. While Business per employee grew to Rs. 10.17 crore in March2011 from Rs. 8.08 crore at the end of March 2010, Business Per Branch showed improvement to Rs. 104.8 crore from Rs. 87.1 crore at end March2010.
4.

Operating profit stood at Rs. 9056 crore for the FY ended 2010-11, growing by 23.6% from Rs. 7326 crore last year. Net Profit at Rs. 4433 crore registered a growth of 13.5%.

5. Banks Capital to Risk Asset Ratio (CRAR) complying with Basel II requirements stood at 12.42 % at the end of March 2011.
6. Net interest income of the bank grew 2 2 . 2 4 % to Rs. 30,599.06

for the ear

ended March 31, 2011 as against

25,032.22cr as on March 31, 2010.

7. Deposits of the bank increased by 25.49% amount to Rs. 312898.73 cr for the

Equity research on Banking sector

yearer ended M a r c h 2010 as compared to Rs. 249329.80 cr in December


8. Advances of the bank registered a growth of 29.74% to Rs. 242106.67cr for

this year as against Rs. 186601.21cr as on 31 s t March 2010

FINANCIAL RATIOS
Mar '11 PROFITABILITY RATIOS Net Profit Margin Return on Long Term Fund(%) Return on Net Worth(%) Net Operating Profit Per Share (Rs) MANAGEMENT EFFICIENCY RATIOS Interest Income / Total Funds Interest Expended / Total Funds Operating Expense / Total Funds Total Income / Capital Employed(%) Interest Expended / Capital Employed(%) Asset Turnover Ratio PROFIT AND LOSS ACCOUNT RATIOS Interest Expended / Interest Earned Other Income / Total Income Operating Expense / Total Income BALANCE SHEET RATIOS Capital Adequacy Ratio Advances / Loans Funds(%) Total Debt to Owners Fund Debt Equity Ratio LEVERAGE RATIOS Current Ratio 14.56 108.49 22.12 940.76 8.87 4.52 2.41 9.06 4.52 6.04 56.25 2.12 26.64 12.42 78.98 15.62 16.01 0.03 Mar '10 15.64 116.11 24.06 777.82 9.07 4.79 2.05 9.24 4.79 5.89 60.3 1.75 22.19 14.16 77.31 15.36 15.15 0.02 Mar '09 13.76 129.83 23.52 694.81 9.89 5.55 2.18 10.14 5.55 5.64 63.62 2.46 21.53 14.03 80.15 15.96 14.61 0.02

Equity research on Banking sector

Quick Ratio

22.24

20.47

9.75

COMMENTS
1. Punjab National Bank is a highly levered company, with more dependency on debt as compared to equity. 2. Acid test ratio is quite good, which indicates that it has high liquidity. 3. Income earned by the bank is double the expenses incurred by the firm when compared to total funds.
4.

For the FY ended 2010-11, Net Interest Margin (NIM) stood at 3.96% compared to 3.57% in FY 2009-10. With better profit performance, Return on Assets (RoA) and Return on Equity (RoE) stood at 1.34% and 22.13%, respectively. Bank will continue its focus on sustaining the high earnings performance by keeping strict control on costs and revenue maximization.

5. Gross NPA ratio stood at 1.79% at the end of March2011. Similarly, Net NPA to Net Advances ratio stood atO.85%.
6. Advances and deposits have increased. Capital adequacy ratio has also improved

when compared to last year. 7. Net profit of the bank has decreased due to inflation and RBIs policies of increasing rates.

Attribute PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last dividend (%) Return on average equity

Value 6.98 139.94 8,315.24 10 14.56 220 22.12

Equity research on Banking sector

ACHIEVEMENTS AND FUTURE PROSPECTS


1. Bank has earned awards and accolades during the year in appreciation of excellence in services, Corporate Social Responsibility (CSR) practices, transparent governance structure, best use of technology and good human resource management practices. 2. Bank has been conferred with the Gold trophy of SCOPE Meritorious Award for Best Managed Bank, Financial Institution or Insurance Company for 2009-10 by Her Excellency the President of India. PNB has found place in the league tables in various categories.
3.

PNB figures as one of the top 5 banks in India according to The Banker magazine, London. The Bank ranks at 257th position amongst worlds Top 1000 Banks. As per Forbes magazine, PNB tops the list of nationalized banks with a global ranking of 653. The Bank is ranked 24th Best Company amongst top 500 Indian Companies as per Economic Times. Business World recognized PNB as the 3rd best large bank and 5th Fastest Growing Bank for 2010, while Business Today ranked it as 14th Most Valuable Public Sector Companyfor 2010. PNB will continue to make investments in technology, new products, risk management and towards expanding franchise value. Such investment will facilitate the Bank to retain competitive advantage.

4.

5. Indias demography is undergoing significant changes. With rapid economic growth, rising incomes and changes in customer expectations, banking services have to be refashioned. They have to offer consistent banking experience to the customers irrespective of the channel he or she may prefer to use.

Equity research on Banking sector


6.

Their products and services will have to be user-friendly, innovative, competitive and seamlessly integrated across channels. As business opportunities expand, the bank will have to remain alert, nimble-footed and execute its strategy effectively.

8. STATE BANK OF INDIA


PROFILE The State Bank of India, the countrys oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. The bank is entering into many new businesses with strategic tie ups Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc each one of these initiatives having a huge potential for growth. The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years. It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list.

Equity research on Banking sector

The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 21000 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc. With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programes are attended by bankers from banks in other countries. The bank is also looking at opportunities to grow in size inIndia as well as Internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings.

Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication programme termed Parivartan the Bank rolled out over 3300 two day workshops across the country and covered over 130,000 employees in a period of 100 days using about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme. SHARE HOLDING PATTERN

Equity research on Banking sector

% Share Holding
O therComp aniesForeignN RI 0.15% 3.11% N BanksM utualFunds 4.52% G eneralPublic 6.20% ForeignInstitutions 11.20%

CentralG ovt 0.02% O thers 0.23%

FinancialInstitutions 13.42%

Promoters 61.15%

BALANCESHEET
Rs (Crores) CAPITAL AND LIABILITIES: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth 12 mths 635.00 635.00 0.00 0.00 64,351.04 0.00 64,986.04 12 mths 634.88 634.88 0.00 0.00 65,314.32 0.00 65,949.20 12 mths 634.88 634.88 0.00 0.00 57,312.82 0.00 57,947.70

Equity research on Banking sector

Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities ASSETS Cash & Balances with RBI Balance with Banks, Money at Call Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs)

933,932.81 119,568.96 1,053,501.7 7 105,248.39 1,223,736.2 0

804,116.23 103,011.60 907,127.83 80,336.70 1,053,413.7 3

742,073.13 53,713.68 795,786.81 110,697.57 964,432.08

94,395.50 28,478.65 756,719.45 295,600.57 13,189.28 8,757.33 4,431.95 332.23 43,777.85 1,223,736.2 0 585,294.50 205,092.29 1,023.40

61,290.87 34,892.98 631,914.15 285,790.07 11,831.63 7,713.90 4,117.73 295.18 35,112.76 1,053,413.7 4 429,917.37 166,449.04 1,038.76

55,546.17 48,857.63 542,503.20 275,953.96 10,403.06 6,828.65 3,574.41 263.44 37,733.27 964,432.08 614,603.47 152,964.06 912.73

PROFIT AND LOSS ACCOUNT


Rs (Crores) Mar '11 12 mths Mar '10 12 mths Mar '09 12 mths

INCOME Interest Earned Other Income Total Income

81,394.36 14,935.09 96,329.45

70,993.92 14,968.15 85,962.07

63,788.43 12,691.35 76,479.78

Equity research on Banking sector

EXPENDITURE Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Operating Expenses Provisions & Contingencies TOTAL EXPENSES Net Profit for the Year Extraordionary Items Profit brought forward TOTAL Preference Dividend Equity Dividend Corporate Dividend Tax Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet Total

48,867.96 14,480.17 12,141.19 990.50 12,479.30 31,430.88 8,660.28 88,959.12 7,370.35 0.00 0.34 7,370.69 0.00 1,905.00 246.52 116.07 300.00 1,023.40 2,488.96 2,729.87 2,151.52 0.34 7,370.69

47,322.48 12,754.65 7,898.23 932.66 7,888.00 24,941.01 4,532.53 76,796.02 9,166.05 0.00 0.34 9,166.39 0.00 1,904.65 236.76 144.37 300.00 1,038.76 6,495.14 529.50 2,141.41 0.34 9,166.39

42,915.29 9,747.31 5,122.06 763.14 8,810.75 18,123.66 6,319.60 67,358.55 9,121.23 0.00 0.34 9,121.57 0.00 1,841.15 248.03 143.67 290.00 912.73 6,725.15 306.90 2,089.18 0.34 9,121.57

COMMENTS:1. Bank had to make substantially higher provisions during the year, on account of higher regulatory requirements in respect of special home loans as well as for higher provision coverage ratio on loans, in excess of prudential requirements. In regard to special home loans, which carry lower interest in the initial years, RBI required banks to provide higher provision of 2% (as against the usual rate of 0.4%), as these loans are considered riskier.Bank has adhered to very conservative underwriting policies in respect of such loans, which are all Standard. 2. As such, the additional provision would, therefore, be written back in the Banks books, when these loans revert to the usual card rates of interest. Similarly, the

Equity research on Banking sector

additional provision for enhancing the provision coverage ratio (so as to reach a coverage of 70%, as against the specific asset-wise coverage of around 59% for SBI is also in the nature of additional comfort in the balance sheet and is expected to be written back when the underlying exposures are resolved.
3.

Driven by loan growth of 20.32%, interest income on advances has increased by 18.45% yoy in FY11 against a growth of 9.11% in FY10. Growth in interest expenses was contained mainly due to CASA deposits growth of 22.14%.

4. Consequently, net interest income increased by 37.41% to Rs. 32,526 crores against 13.41% rise recorded in FY10. Fee income also recorded a handsome rise of 20% in FY11. Non interest income rose by 5.72% despite profit on sale of investments declining by Rs. 1,196 crores in a rising interest rate scenario.
5. The bank took a charge through reserves and `8.8 bn through P & L during the

current quarter for pensions on revised salary costs


6. 5 bn of standard asset provisions for teaser loans ,2.5 bn impact on revised costs

on provident fund (increase of 1% to 9.5% for FY2011) resulting in margin decline


7. Higher slippages of 3.1% (annualized), resulting in higher loan-loss provisions

and de-recognition of interest income


8. Tax rate is abnormally high as the benefit of provisions do not have the benefit

of tax deductions.
9. SB I reported sharply lower earnings for this year, but addressed most of

its pending issues.

10. Deposits of Bank rose to 16.14% yoy from Rs. 8,04,116 crores in March10 to Rs. 9,33,933 crores in March11, driven by CASA growth of 22.14%. With sustained 26.20% rise in Savings Bank deposits, CASA ratio improved from 46.67% in March10 to 48.66% in March11, an increase of 199 bps. 11. Gross Advances of Bank recorded a yoy growth of 20.32% from Rs.6,41,480 crores in March10 to Rs. 7,71, 802 crores in March11. Credit Deposit Ratio (Domestic) at 76.32% as at the end of March11 was 276 bps higher than 73.56% at the end of March10; sequentially, however, it has declined from 77.22% at the end of December10 due to higher growth in deposits in Q4FY11. 12. With lower growth in operating expenses at 13.27% in FY11 against growth of 29.84% in FY10, your Banks costincome ratio fell below the psychological threshold of 50% to 47.60% in FY11 from 52.59% in FY10.

Equity research on Banking sector

13. Average cost of deposits has come down by 54 bps to 5.26% in March11 from 5.80% in March10, though sequentially it is up from 5.20% in December10. In the same period, the yield on advances at 9.56% was 10 bps lower than 9.66% and 2 bps lower than 9.58% in December10.

RATIO ANALYSIS
Mar '11 PROFITABILITY RATIOS Net Profit Margin Return on Long Term Fund(%) Return on Net Worth(%) MANAGEMENT EFFICIENCY RATIOS Interest Income / Total Funds Interest Expended / Total Funds Operating Expense / Total Funds Loans Turnover 8.55 96.72 12.71 8.39 4.29 2.67 0.14 Mar '10 10.54 95.02 13.89 8.52 4.69 2.38 0.15 Mar '09 12.03 100.35 15.74 8.88 5.09 2.06 0.16

Equity research on Banking sector

Total Income / Capital Employed(%) Interest Expended / Capital Employed(%) Asset Turnover Ratio PROFIT AND LOSS ACCOUNT RATIOS Interest Expended / Interest Earned Other Income / Total Income Operating Expense / Total Income BALANCE SHEET RATIOS Capital Adequacy Ratio Advances / Loans Funds(%) Debt Equity LEVERAGE RATIOS Current Ratio Quick Ratio

8.48 4.29 7.24 60.04 1.1 31.51 11.98 77.19 16.21 0.04 8.5

8.62 4.69 7.26 66.66 1.21 27.61 13.39 74.22 13.75 0.04 9.07

8.99 5.09 7.2 67.28 1.18 22.91 14.25 78.34 13.73 0.04 5.74

COMMENTS
1. State Bank of India is a highly levered company, with more dependency on debt as

compared to equity. 2. Acid test ratio is quite good, which indicates that it has high liquidity. 3. Income earned by the bank is double the expenses incurred by the firm when compared to total funds.
4. Net interest margin has improved to 3.32% as compared to 2.66% for financeial year

2010.

5. Though gross NPAs stood at 3.28% in March11 against 3.05% in March10, increased provisioning saw net NPAs move down from 1.72% to 1.63% in the same period.
6.

Advances and deposits have increased. Banks market share in total deposits at 16.40% in March11 was 11 bps higher than 16.29% in March10. In the same period, your Banks market share in low cost demand deposits at 18.23% was 90 bps higher than 17.33%.

7. Capital adequacy ratio has also decreased when compared to last year.
8.

Operating profit rose by 34.04% to Rs. 33,240 crores in FY11 from Rs. 24,799 crores in FY10, showing that core operations remain robust.

Equity research on Banking sector

Attribute PE ratio EPS (Rs) Sales (Rs crore) Face Value (Rs) Net profit margin (%) Last dividend (%) Return on average equity

Value 80.22 130.15 24,197.44 10 8.55 300 12.71

ACHIVEMENTS AND FUTURE PROSPECTS


1. Two new lines of business viz. Custodial Services and General Insurance have been successfully set up and are in the process of stabilization. 2. Seven niche areas viz. Mobile Banking, Merchant Acquisition Business, SME Current account and Supply Chain Finance, Savings Bank, Cash Management Product, NRI remittances and Government business have been identified for strategising aggressive business plans, improving processes and matching organizational structures.

Equity research on Banking sector

3. The Bank is the market leader (market share around 29.88% as on 31.03.2010) in SHG-Bank Credit Linkage programme having credit linked so far 18.90 lac SHGs (1.78 lac SHGs credit linked during FY11) and disbursed loans to the extent of Rs. 14,500 crores (cumulative) up to 31.03.2011. 4. SBI is the first Bank to sign MoU with UIDAI to become a Registrar. The enrolment data will be used for opening UID enabled accounts. After State Governments, SBI is the top enroller with more than 9.50 lac enrollments done up to 31.03.2011. 5. During the year, gross premium of SBI Life crossed the Rs. 12,000 crores mark and the company recorded a profit of Rs. 366 crores in FY11, clocking an impressive yoy growth of 33% and raising its market share to 19.22% from 18% in FY10. 6. SBI Life received the NDTV Profit Business Leadership 2010-11 award for organisational excellence. SBI Capital Markets Ltd. posted a PAT of Rs. 374.72 crores during FY11 against Rs. 137.12 crores in FY10, a yoy growth of 172%, driven by an increase of 81% in fee income, and 85% yoy growth in revenue for infrastructure Group. 7. After recording continuous losses for preceding three years, SBI Cards has scripted an impressive turnaround and posted a net profit of Rs. 7.10 crores in FY11.

COMPARISON

Equity research on Banking sector

Above graph shows the changes in stock prices of Punjab National Bank and State Bank of India. We can see that the stock of SBI is more volatile when compared to PNB. Also it has come down to larger extend, whereas PNB has also seen a fall but its is marginal when compared to SBI. Also when we talk about Non performing assets, we can find PNB having strong hold compared to SBI. When we compare net interest margin, PNB is better then SBI. PE ratio also suggests PNB better then SBI as it is only 6.98 which means we are paying for 6 yrs profit in advance which is 80.22 for SBI. EPS is also in favour of PNB.

9. TECHNICAL ANALYSIS

Equity research on Banking sector

PUNJAB NATIONAL BANK

We can observe that according to technical analysis the stock pattern shows falling wedge trend. But still nothing can be commented as to whether it will continue downtrend for some more time or not. It has already reached to its 52 weeks low, which forms support price. The stocks also indicate bearish market trend. Hence there are chances the stock will get underpriced and when we make of Bollinger band indicator it can be noticed by comparing moving averages the stock will follow an uptrend. The expected target price is Rs 1055

STATE BANK OF INDIA

Equity research on Banking sector

We can observe that according to technical analysis the stock pattern shows sidewards movement and downward trend. But still nothing can be commented as to whether it will continue downtrend for some more time or not. It has already reached to its 52 weeks low, which forms support price. The stocks also indicate bearish market trend. Hence there are chances the stock is undervalued and when we make of Bollinger band indicator it can be noticed by comparing moving averages the stock will follow an uptrend. The expected target price is Rs 2064.

Equity research on Banking sector

10. FINDINGS
According to analysis it can be noticed that according to fundamental analysis both the Banks i.e Punjab National Bank and State Bank of India are having a sound position and we can invest in both the firms. According to technical analysis though there is downtrend we can invest in both the firms as the stocks are undervalued now and can give assured returns. But after considering major factors like NIM, NPA, EPS and PE ratio it is advisable to invest in Punjab National Bank.

11. CONCLUSION

Equity research on Banking sector We had done our summer internship as trainee in Birla Sunlife Insurance Company where we were asked to achieve target and, in turn we were being provided training on equity research and wealth management.

We were given a traditional plan to sell the policy. This policy was for a long tenure of 22 years or 35 years. When we approached to people we found that people were reluctant to make an investment in this plan for such a long period of time. It was also found that people prefer LIC to make an investment than making an investment in any private company. So it was difficult task to sell this policy.

Our training program helped us to understand various aspects of training module. We got knowledge of share market, mutual funds and our mentor advised to make project on equity research or on IPO or on mergers and acquisitions or on mutual funds.

We also learnt preparing a dummy portfolio as an activity by choosing stocks and maintaining the NAV.

12. RECOMMENDATIONS
The training room should be more spacious.

Equity research on Banking sector There is a need for an improvement in companys system as it takes more time to execute the policy. At times the operational system used to be down and because of that there was delay in login of the policy. To overcome this, the company should have a smooth operational system in place.

The policy documents also took time of 15-20 days to reach to the clients which can be improved if the policy gets login on the day when company receives all client details along with money.

Interns should be given two-three insurance plans to sell so that it becomes easy for interns to achieve the targets. Smaller duration plans should be promoted as people are ready to invest in such plans. Company should even focus on ULIP plan though it is totally based on equity which is a risky investment but in a period of 10-12 years share market provides good returns to investors.

The company should start promoting by emphasizing on its recent achievement of 100% claim settlement. This will surely help them to attract new customers and improve their market position. The company should also come up with innovative products to meet the tough competition.