economic analysis (sa)

8/8/2019 Economic Analysis (SA)

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Economic Analysis

Economic factor s play a major role in the performance of bank. Various factors like inflation,

interest rate ,GDP effect the working of a bank .

The bank made provision of Rs.540.9 crore for the loss occurred in the trading portfolio which is

in a downward trend due to rising inflation rates and bond yields. Net interest income soared

up by 14% to Rs.1019 crore from Rs.894 earned in the quarter ended June 30, 2007. Fee

income for this quarter rose by 25.7% to Rs.3840 Million from Rs.2770 Million for the same

quarter a year ago. Net interest margin surged to 2.57% from 2.42% on YoY basis. Net NPA

ratio slipped to 0.85 % in the last quarter from 0.89% in the Q1 FY 08. The bank launched Debt

Waiver and debt relief Scheme and waived nearly Rs.1550 crore covering nearly 6 lakh farmers.

Reacting to Q1 monetary policy of RBI already all major bankers initiated plans to hike their

interest rates and Canara bank is also planning to hike its lending rates. As the banks major

customers are from retail and SME segment the hike will adversely affect the growth of thecompany.

Due to introduction of base rate from April 4, according to the RBI guidelines, the special

interest rates announced by Canara Bank for fresh housing/vehicle loan stands withdrawn with

immediate effect.Special housing loan rates shall be made available to housing and vehicle

loans sanctioned up to February 20. All housing loans sanctioned up to February 20 with special

interest rates should be availed of before March 3. The un-availed sanctions as on March 31,

shall be available at normal rate of interest from April 1.

PEST ANALYSIS OF CANARA BANK

POLITICAL/LEGAL ENVIRONMENTo

y Government and RBI policies

y Declaration of measures like waiver of short-term agricultural loans, to attract thefarmers votes.

y Exploitation of various banks in the cooperative sector, open and run by the politicians.

y Chairmen of the various banks appointed by the govt.Various policies are framed by the RBI for better control over the banks

ECONOMIC ENVIRONMENT

y Existence of banking in one form or the other from time to time.

y Commencement of the present era in banking with establishment of Bengal bank in1809 under the government charter and with government participation in share capital.


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y Every year RBI declares its 6 monthly policy and accordingly the various measures andrates are implemented which has an impact on the banking sector.

y Union budget affects the banking sector to boost the economy by givingcertainconcessions or facilities. For e.g. encouragement of the savings in the Budget,relaxation

of the FDI limit

SOCIAL ENVIRONMENT

y Nationalization of the banks in 1969 Only big business houses and the effluent sections

of the society getting benefits of banking.

y To adopt the social development in the banking sector and speedy economic progress,

consistent with social justice

y Help economical weaker section of the society and provide need based finance to all the

needy sector

Technological Enviroment

y Change of the concept of branch banking to any where banking

y An era of cashless soceity with electronic purse

y Use of sms and internet as a major tool for promotions and utility to consumers.

y Simplified operations and customer handling.

Industry Analysis

There are various public and private competitor of Canara bank.Key factors supporting the

ratings of several Indian banks include strong liquidity, limited vulnerability to external capital

flows, and the high likelihood of systemic support in the event of difficulty. Canara Bank,

additionally benefit from the high likelihood of support arising from their ownership by the

Government of India. GoI's support to public sector banks has also been adequately

demonstrated by repeated instances of large re-capitalisation of these banks, amounting to

about Rs 22,500 crore in the last 13 years.

Outlook

It is expected that the GoI will continue to support all public sector banks. Canara Bank will

maintain its strong market position and that the Bank's financial and business risk profile wouldbe maintained at levels that will sustain the current rating.

Market position

Canara Bank's strong market position is underpinned by its pan-Indian presence and its large

and diversified balance sheet. Canara Bank is the fourth-largest bank in India in terms of asset

size, and in terms of deposit size, it is the third-largest bank. Canara Bank is also one of the


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few national players in the banking sector to have a network of over 2500 branches spread

across the country

Company Analysis

Canara Bank is an India-based bank. It operates in four segments: treasury operations, retail

banking operations, wholesale banking operations and other banking operations. The Bank

provides a range of products and services to the customers. The Bank provides a range of

alternative delivery channels, which includes over 2000 automated teller machines (ATMs)

covering 728 centers, 1959 branch providing Internet and Mobile Banking (IMB) services and

2091 branches offering anywhere banking services. The subsidiaries of the Bank include

Canbank Financial Services Ltd., Canbank Venture Capital Fund Ltd., Canbank Factors Ltd.,

Canara Robecco Asset Management Company Ltd., Canbank Computer Services Ltd., Canara

Bank Securities Ltd. and Canara HSBC Oriental Bank of Commerce Life Insurance Company

Ltd. As at March 31, 2010, the Bank operated 3043 branches across all geographical segments.

Technical Analysis

RESULT :The company has a SMA of 511.25 on 26 Aug 2010,while EMA of the stock is

502.3 on 26 Aug 2010.


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CALCULATIONS:

Year EPS ExpectedGrowthRate

PayoutRatio

DPS Cost ofEquity

CumulatedCost ofEquity

PresentValue ofDPS

Current 50.53

1 58.64 16.06 15.83 9.28 12.57 1.1257 8.243

2 68.06 16.06 15.83 10.77 12.57 1.2672 8.499

3 78.99 16.06 15.83 12.50 12.57 1.4261 8.762

4 91.68 16.06 15.83 14.51 12.57 1.6057 9.036

5 106.40 16.06 15.83 16.86 12.57 1.8076 9.327

Present value of dividends in high growth phase =43.80

6 120.9 13.64 25.472 30.79 12.276 2.0295 12.55

7 134.47 11.22 35.094 47.19 11.982 2.4318 14.36

8 146.32 8.816 44.716 65.42 11.688 2.7160 16.31

9 155.69 6.404 54.338 84.59 11.394 3.0255 19.11

10 161.9 4.00 63.96 103.5 11.10 3.3613 20.34

Present value of dividends in transition phase = 82.67

Canara Bank reported a return on equity of 19.08 and paid out dividends per share of Rs 8 that

year (on reported earnings per share of Rs 50.53). We will assume that its protected position

will allow the bank to maintain its current return on equity and retention ratio for the next 5

years, leading to an estimated expected growth rate in earnings per share of 16.06%:

Payout Ratio = Dividend per share/ Earning per share = 8/50.53= 15.83

Expected Growth rate = Retention ratio * ROE = (1-.1583)*19.08

The cost of equity for the high growth period is estimated using a beta of .93 for Canara Bank

(based upon the betas of other Indian banks), the Indian rupee risk free rate of 5.6% and a

market risk premium of 7.5% (reflecting a mature market premium of 4.5% and an additionalcountry risk premium for India of 3%).

Cost of equity in high growth = 5.6 + .93 (7.5%) = 12.57%


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After year 5, we will assume that the beta will decline towards 1 in stable growth (which will

occur after the 10th year) and that the risk premium for India will also drop to 5.50% (reflecting

our assumptions that India will become a more stable economy).

Cost of equity in stable growth =5. 6% + 1.00 (5.50%) = 11.10%

We will assume that competition will pick up after year 5, pushing the return on equity down tothe stable period cost of equity of 11.10% by the 10th year. The payout ratio in stable growth

can then be estimated using the stable growth rate of 4%

:

Stable period payout ratio = 1- Expected Growth rate/ ROE = 1- 4%/11.10% = 63.96%

During the transition phase, all of the inputs change in equal annual installments from the high

growth period values to stable growth period values. Since the costs of equity change over time,

the cumulated cost of equity is used to calculate the present value of dividends. To compute the

cumulated cost of equity in year 8, for instance, we do the following:

The terminal price at the end of year 10 can be calculated based upon the earnings per share in

year 11, the stable growth rate of 4%, a cost of equity of 11.10% and the payout ratio of 63.96

% -

Terminal price = 161.9(1.04)(.6396)

0.110- 0.04

= 1538.47To get the present value, we divide by the cumulated cost of equity in year 10 (from table)

Present value of terminal price = Rs 1538.47/ 3.3616 = Rs. 457.66

The components of value are as follows:Present Value of dividends in high growth phase: Rs 43.80Present Value of dividends in transition phase: Rs 82.67Present Value of terminal price at end of transition: Rs. 457.66

Value of Canara Bank Stock: Rs. 584.13

economic analysis (sa)

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