sample report 1

38
1 AUTHORIZATION The report is submitted as partial fulfillment of the requirement of MBA program of IBS. The report is submitted to Prof. A Srikanth, faculty guide, IBS-Hyderabad. Submitted by Submitted to Name of Student Prof. A Srikanth Enroll No. Faculty Guide, IBS

Upload: stuti-doshi

Post on 17-Aug-2014

314 views

Category:

Documents


4 download

TRANSCRIPT

Page 1: SAMPLE REPORT 1

1  

AUTHORIZATION 

The report is submitted as partial fulfillment of the requirement of MBA program of IBS. The

report is submitted to Prof. A Srikanth, faculty guide, IBS-Hyderabad.

Submitted by Submitted to

Name of Student Prof. A Srikanth

Enroll No. Faculty Guide, IBS

Page 2: SAMPLE REPORT 1

2  

ACKNOWLEDGEMENTS 

I would like to recognize the contribution, guidance and encouragement of the City Manager of

Standard Chartered Wealth Managers, Mr. P Srinivas Reddy, and also my guide Mr.M.D.Javeed,

Sales Manager, for the constant encouragement and guidance.

I would also like to express my gratitude towards my faculty guide Prof. A Srikanth for his

continuous guidance and support.

Page 3: SAMPLE REPORT 1

3  

ABSTRACT 

The project undertaken for the Summer Internship Project (SIP) is Equity Research in Banking

Sector. The sound and well regulated banking sector in India has gone through a significant

change in past two decades with liberalization and regulatory changes happening in Indian

economy. Since liberalization of Indian economy, the number of banks nationalized has

increased. Constant changes in regulation and interest rates by the Reserve Bank of India have

created many trends in the banking sector. There are many international banks now entering the

Indian Market due to the immense scope for growth and lucrative business opportunities. As the

sub-prime mortgage crisis in US continues to threaten banks world-wide, Indian banks have been

observed to be less affected by this financial slowdown showing their robustness and firm

foundations.

The attempt in this project is to do equity analysis and valuation of three major private sector

banks in Indian Banking industry – HDFC Bank, ICICI Bank and Standard Chartered Bank with

the use of various equity valuation models like dividend discount models and CAMEL ratios

approach. Only secondary data is being used in the study. The basic approach to the project is to

do fundamental equity analysis. The analysis reveals the actual value of the equity stocks of

these banks and whether they are over or under valued. The price per share of each bank has

been estimated and the suggestion given to investors according to the results is that the share

prices of HDFC and ICICI banks are overvalued and hence must be sold as these stocks will

move towards equilibrium, i.e. they will decrease in future. Also, the CAMEL ratios suggest that

HDFC and Standard Chartered bank are overall better performers than ICICI and hence the

valuation of their equity is higher than ICICI bank.

Page 4: SAMPLE REPORT 1

4  

Table of Contents AUTHORIZATION ........................................................................................................................ 1

ACKNOWLEDGEMENTS ............................................................................................................ 2

ABSTRACT .................................................................................................................................... 3

Introduction ..................................................................................................................................... 5

Objective and Limitations ........................................................................................................... 5

Banking in India .......................................................................................................................... 6

Banking Structure in India .......................................................................................................... 6

Growth in Banking Sector in India ........................................................................................... 10

Current Trends in Banking Sector in India ............................................................................... 11

Industry Analysis .......................................................................................................................... 14

Economic Analysis of Current Scenario ................................................................................... 14

Reserve Bank of India ............................................................................................................... 17

HDFC Bank ............................................................................................................................... 18

ICICI Bank ................................................................................................................................ 20

Standard Chartered Bank .......................................................................................................... 21

CAMEL Ratios ............................................................................................................................. 24

Capital Adequacy Ratio (CAR) ................................................................................................. 24

Assessing Asset Quality ............................................................................................................ 25

Assessing Management Quality ................................................................................................ 27

Assessing Earning Performance ................................................................................................ 28

Assesing Liquidity..................................................................................................................... 30

Dividend Discount Model ............................................................................................................. 32

For HDFC Bank ........................................................................................................................ 34

For ICICI Bank.......................................................................................................................... 35

For Standard Chartered Bank .................................................................................................... 36

Conclusion .................................................................................................................................... 37

References ..................................................................................................................................... 37

Page 5: SAMPLE REPORT 1

5  

Introduction:

Objective and Limitations:

The objective of this project is to valuate equity of three private sector banks, i.e.

1) ICICI Bank

2) HDFC Bank

3) Standard Chartered Bank

The purpose is to estimate the equity share price of these banks and compare the current share

price of these banks as listed in NSE and also relate it to the fundamental business and growth of

these banks. For this, two equity valuation models have been used, i.e. Dividend Discount model

and CAMEL ratios. The attempt of this project is to analyze whether the share prices of these

banks are over-valued or under-valued, and suggest the investors whether the shares should be

purchased, held or sold.

This project has given the opportunity to understand the method to analyze and valuate banks

and financial institutions, which is unique and different from other sector firms like

manufacturing.

The limitations of the project are:

1. Only secondary data is considered for the project and not any primary data.

2. Only two models have been used, i.e. Dividend Discount model and CAMEL ratios. The

equity valuation can be done using other models which can help in validating the findings

of this project.

3. The various economic parameters like inflation have not been considered which influence

the value of equity in market.

4. The stock markets are influenced by investor confidence and sentiments which make a

significant impact on the share prices leading to a gap between the calculated values and

the actual values. This factor of investor confidence has not been considered in the

valuation.

Page 6: SAMPLE REPORT 1

6  

Banking in India:

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. The most striking is its extensive reach. 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 reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalisation 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 have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the

journey of Indian Banking System can be segregated into three distinct phases. They are as

mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

• New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

Banking Structure in India:

Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled

banks constitute of commercial banks and co-operative banks. There are about 67,000 branches

of Scheduled banks spread across India. During the first phase of financial reforms, there was a

nationalization of 14 major banks in 1969. This crucial step led to a shift from Class banking to

Page 7: SAMPLE REPORT 1

7  

Mass banking. Since then the growth of the banking industry in India has been a continuous

process.

As far as the present scenario is concerned the banking industry is in a transition phase. The

Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for

more than 78 per cent of total banking industry assets. Unfortunately they are burdened with

excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.

On the other hand the Private Sector Banks in India are witnessing immense progress. They are

leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public

Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20

percent in the employee strength of the private sector in the wake of the Voluntary Retirement

Schemes (VRS). As far as foreign banks are concerned they are likely to succeed in India.

Indusland Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank, SBI

Commercial and International Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd, Bank

of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include

Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank

etc.

ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank etc are some

foreign banks operating in India.

Banks in India

• Allahabad Bank • American Express Bank Ltd • Andhra Bank • ABN AMRO Bank • Bank Muscat (S A O G) • Bank Of America • Bank Of India • Barclays Bank PLC

Page 8: SAMPLE REPORT 1

8  

• Centurion Bank Ltd • Citibank • Corporation Bank • Dhanlakshmi Bank Ltd • Deutsche Bank India • Export-Import Bank Of India • Global Trust Bank Ltd • Hongkong Shanghai Banking Corporation Ltd • ICICI Bank Ltd • IDBI Bank Ltd • IndusInd Bank Ltd • Syndicate Bank India • Industrial Development Bank Of India • ING Vysya Bank Ltd • JP Morgan Chase Bank • Punjab National Bank • Standard Chartered Bank • State Bank Of India • State Bank Of Indore • Canara Bank India • Reserve Bank Of India • SBI Commercial and International Bank • Bank Of Baroda India • Federal Bank India • HDFC Bank India • Union Bank Of India • YES BANK India • State Bank Of Bikaner And Jaipur • Ceylon Bank • Catholic Syrian Bank • Dena Bank • Mizuho Corporate Bank • Indian Overseas Bank • Karnataka Bank • Punjab and Sind Bank • Kotak Mahindra Bank • State Bank of Hyderabad • Karur vysya Bank Limited • State Bank of Patiala • Oriental Bank of Commerce

Page 9: SAMPLE REPORT 1

9  

• State Bank of Travancore • United Bank of India • State Bank of Mysore • Axis Bank • Vijaya Bank • Tamilnad Mercantile Bank • Ratnakar Bank • Jammu and Kashmir Bank • UCO Bank • DBS Bank Ltd. • Lakshmi Vilas Bank • The Nainital Bank Ltd.

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors

developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SCBs). As at end-March

2002, there were 296 Commercial banks operating in India. This included 27 Public Sector

Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67

scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16

scheduled state co-operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%

registered in the previous year. And on advances, the growth was 14.5% against 17.3 % of the

earlier year.

State Bank of India is still the largest bank in India with the market share of 20%. ICICI and its

two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with

a balance sheet size of Rs1040 bn.

Higher provisioning norms, tighter asset classification norms, dispensing with the concept of

‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and

group exposure etc., are among the important measures in order to improve the banking Sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of

banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed

to hike the CAR to 12% by 2004 based on the Basel Committee recommendations.

Page 10: SAMPLE REPORT 1

10  

Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly

two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is

expected to grow at 30-40% in the coming years.

Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words

that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information on borrowers/

potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India)

Ltd. (Cibil) was set up in August 2000. The Bureau provides a framework for collecting,

processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are

the promoters of the Cibil.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National Bank for

Agricultural and Rural Development to the private players. Also, the Government has sought to

lower its holding in PSBs to a minimum of 33 per cent of total capital by allowing them to raise

capital from the market.

Banks are free to acquire shares, convertible debentures of corporates and units of equity-

oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including

Commercial Paper) as on March 31 of the previous year.

The finance ministry spelt out structure of the government-sponsored ARC called the Asset

Reconstruction Company (India) Limited (Arcil), this pilot project of the ministry would pave

way for smoother functioning of the credit market in the country. The Government will hold

49% stake and private players will hold the rest 51% - the majority being held by Icici Bank

(24.5%).

Growth in Banking Sector in India:

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is

expected to remain the same in the coming years. Based on the projections made in the "India

Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts

that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets

of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That

Page 11: SAMPLE REPORT 1

11  

will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in

2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during

the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95

and 2002-03. It is expected that there will be large additions to the capital base and reserves on

the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks.

Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000

branches of Scheduled banks spread across India. As far as the present scenario is concerned the

Banking Industry in India is going through a transitional phase.

The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for

more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with

excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.

On the other hand the Private Sector Banks are making tremendous progress. They are leaders in

Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned

they are likely to succeed in the Indian Banking Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING

Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks

from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank,

Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express

Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.

Current Trends in Banking Sector in India:

The Indian banking industry is currently termed as strong, having weathered the global economic

slowdown and showing good numbers with strong support flowing in from the Reserve Bank of

India (RBI) measures.

Furthermore, a report "Opportunities in Indian Banking Sector", by market research company,

RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth

rate (CAGR) of around 23.3 per cent till 2011.

Page 12: SAMPLE REPORT 1

12  

Banking, financial services and insurance (BFSI), together account for 38 per cent of India's

outsourcing industry (worth US$ 47.8 billion in 2007). According to a report by McKinsey and

NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US

by the year 2010. Outsourcing by the BFSI to India is expected to grow at an annual rate of 30–

35 per cent.

According to a study by Dun & Bradstreet (an international research body)—"India's Top Banks

2008"—there has been a significant growth in the banking infrastructure. 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 ATMs.

According to the RBI, Indian financial markets have generally remained orderly during 2008-09.

In view of the tight liquidity conditions in the domestic money markets in September 2008, the

Reserve Bank announced a series of measures beginning September 16, 2008. Thus, the average

call rate which was at 10.52 per cent declined to 7.57 per cent in November 2008 under the

impact of these measures.

Measures aimed at expanding the rupee liquidity, included significant reduction in the cash

reserve ratio (CRR), reduction of the statutory liquidity ratio (SLR), opening a special repo

window under the liquidity adjustment facility (LAF) for banks for on-lending to the non-

banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds

(MFs), and extending a special refinance facility, which banks could access without any

collateral.

Banking capital (net) amounted to US$ 4.8 billion in April-September 2008 as compared with

US$ 5.7 billion in April-September 2007. Among the components of banking capital, non-

resident Indian (NRI) deposits witnessed a net inflow of US$ 1.1 billion in April-September

2008, a turnaround from net outflow of US$ 78 million in April-September 2007.

The reserve money lying with the RBI as on November 21, 2008 as per the January 2009

bulletin, is a total amount of US$ 179.28 billion and RBI’s credit to the commercial sector stood

at US$ 3.65 billion. Further, banks in India put up strong growth and profit numbers in the

Page 13: SAMPLE REPORT 1

13  

October-end-December 2008 period owing to high credit growth and easing of yield on

government bonds. Top Indian banks have increased their earnings by almost 40 per cent year-

on-year for the same period. According to latest Reserve Bank of India (RBI) data, bank credit

grew by 24.6 per cent year-on-year as of December 19, 2008. The resulting credit growth was

even better at 41 per cent during the April-end-December 2008 period. Deposits grew by 20.6

per cent as of December 19, 2008.

The growth in advances reflects that the net interest income (NIM) too would indicate higher

growth rate. RBI has taken a number of steps to lower the cost of credit in this quarter like

cutting cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, repo

and reverse repo rate. The CRR rate, which had been reduced in December 2008, to 5.50 per

cent, repo rate to 6.50 and reverse repo rate to 5.00, were further reduced – CRR to 5 per cent,

(its lending rate) repo rate to 5.5 per cent and reverse repo, at which it absorbs cash from the

banking system, to 4 per cent in January 2009.

Responding to these measures, banks have cut the prime lending rates (PLR). Further, according

to several brokerage research teams, NIM may remain stable in the last quarter. For instance, a

Motilal Oswal report on earnings preview reveals, "We expect margins to remain stable despite

the PLR cut of 125-150 basis points (75 bps w.e.f January 1, 2009), as the banks have reaped the

benefit of CRR cut (350 bps in December quarter) and have demonstrated their pricing power to

corporate."

According to brokerage Prabhudas Lilladher’s preview report, "among the banks, SBI, Bank of

Baroda and Union Bank stand to gain the most on account of mark-to-market (MTM) reversals.”

Banks however, have to face the challenge of rising non-performing assets (NPAs) owing to the

slowdown in exports and industrial production. Also, RBI has taken steps like one-time

restructuring of real estate loans and second-time restructuring of loans given to other sectors to

counter the NPA scenario.

Page 14: SAMPLE REPORT 1

14  

Industry Analysis:

Economic Analysis of Current Scenario:

Government is committed to the objective of achieving faster and inclusive growth by increasing

allocation to social sectors at the same time increasing allocation to infrastructure to boost

employment investment and consumption levels. The Fiscal deficit in 2008/09 is seen at 2.5

percent of GDP compared to 3.1 percent during the previous year. Revenue deficit is seen at 1

percent of GDP compared to 3.1 percent in the previous year. Plan spending in 2008/09 seen at

2.4 trillion rupees ($60.3 billion) and Non-plan spending seen at 5.07 trillion rupees.

Government has decided to waive debts of small farmers and the total cost of debt waiver

scheme will be 600 billion rupees.

Prime Lending Rates: 12.75% to 13.25%

Savings Bank Rate: 3.5%

Deposit Rate: 7.50% to 9.60%

CRR: 5.%

SLR: 24%

Money Market Call Rates: 2.35% to 4.30%

Rate of inflation was 7.74% for the corresponding year. It has been around 12.10 % in the last

few months but the government has taken stringent steps to curb such a high inflation rate.

As for the matter of the investor’s confidence in investing in India, we can see from the AT

Kearney FDI confidence Index that China and India continue to rank first and second in the

December 2007 Foreign Direct Investment Confidence Index, a regular survey of global

executives conducted by management consulting firm AT Kearney.

China leads the Index rankings for the fifth consecutive year and ranks first among Asian

investors, 34% of whom plan to invest there over the next three years. Whereas India retains

second place in the Index, a position it has held since displacing the United States in 2005.

Page 15: SAMPLE REPORT 1

15  

India has seen a CAGR of 42% in the last 9 years in the Foreign Investments and it is expected to

reach 60 billion USD in 2007-08 from USD 2 billion in 1998-99. Unemployment is present at

7.2% of the total population of more than 1.14 billion. (Source: CIA Fact book, estimates as of

2007)

The last year has witnessed significant developments in the global economy. Following the

deterioration in the US sub-prime housing loan market, the US economy is expected to

experience a sharp slowdown in growth. The Federal Reserve has reduced its forecast for US

GDP growth in calendar year 2008 from the 1.3%–2.0% range to between 0.3%–1.2%. Growth

in the Euro zone remained above expectations at 0.8% in the first quarter of calendar year 2008.

However, downside risks to growth remain on account of adverse financial market conditions

and increases in energy and food prices. Growth in China moderated slightly during the first

quarter of calendar year 2008 to 10.6% as compared to 11.7% during the same period last year.

During fiscal 2008, the Indian economy continued on its high growth path, despite some

moderation due to difficult conditions in global markets and increasing inflationary pressures and

monetary tightening. The Central Statistical Organization (CSO) put GDP growth at 9.0% during

fiscal 2008 following the 9.6% GDP growth in fiscal 2007, reflecting a slight moderation in

growth of the economy. Growth in fiscal 2008 was driven mainly by double-digit growth in the

services sector and growth in the industrial sector. The Index of Industrial Production (IIP)

recorded an annual average growth rate of 8.1% in fiscal 2008, moderating from 11.5% in fiscal

2007. This was mainly due to moderation of growth in the manufacturing sector from 12.5% in

fiscal 2007 to 8.6% in fiscal 2008. The momentum of growth in the services sector (including

construction) continued with 10.7% growth during fiscal 2008 following the 11.2% growth in

fiscal 2007. Growth in agriculture and allied activities increased to 4.5% during fiscal 2008 as

compared to 3.8% in fiscal 2007.

Inflation remained under control for most of fiscal 2008 with the annual average rate of inflation

as measured by the Wholesale Price Index easing from 5.3% in fiscal 2007 to 4.4% in fiscal

2008. However, inflationary pressures picked up sharply from March 2008 with the year-on-year

rate of inflation increasing from 5.1% for the week ending March 1, 2008 to 8.8% for the week

ending May 31, 2008. The sharp increase in inflation was mainly due to the higher prices of

Page 16: SAMPLE REPORT 1

16  

primary articles, fuel group items and some manufactured products. The increase in inflation was

in line with global price movements. Global oil prices increased sharply during fiscal 2008,

increasing inflationary pressures experienced on this account. International crude oil prices

increased from US$ 65.87 per barrel at March 30, 2007 to US$ 101.58 per barrel at March 31,

2008 and further increased to US$ 135.90 per barrel at June 13, 2008. In view of rising inflation,

Reserve Bank of India (RBI) increased the Cash Reserve Ratio (CRR) from 6.00% to 7.50%

during fiscal 2008 and further to 8.25% effective May 2008.

India’s exports were US$ 155.5 billion during fiscal 2008, a growth of 23.0% over the previous

year. During April–December 2007, exports of agriculture and allied products recorded a growth

of 34.9% and exports of petroleum products recorded a growth of 37.3%. According to RBI, net

invisibles receipts reached US$ 50.50 billion during the first nine months of fiscal 2008, a

growth of 39.2% over the corresponding period in the previous year. Growing import demand for

capital goods due to the strong investment climate and the sharp increase in oil prices have led to

a deficit in the current account (US$ 16.05 billion during first nine months of fiscal 2008). Net

Foreign Direct Investment (FDI) into India was US$ 8.40 billion during the first nine months of

fiscal 2008 while net portfolio investment was US$ 33.00 billion. Foreign exchange reserves

continued to grow, reaching US$ 309.16 billion on March 28, 2008.

The resilience displayed by the economy in fiscal 2008, in light of the developments in the

global economy and the sharp increase in global oil and commodity prices, is evidence of the

broad-based and sustainable nature of India’s growth momentum. The investment pipeline and

demand for credit from corporate continue to be robust.

Inflation conditions, global developments and external inflows will be key factors impacting

liquidity and interest rates during the current year. Continued investment in infrastructure,

reorienting education and skill-building to the needs of the new economic drivers and holistic

development of the agricultural sector and the rural economy are the key imperatives to realize

India’s full potential in the long run.

Page 17: SAMPLE REPORT 1

17  

Reserve Bank of India:

Reserve Bank of India was established on 1 April 1935 and nationalized on 1 January 1949, the

Reserve Bank of India (RBI) has since then been the Central Bank of India governing all the

major financial matters of the state. The RBI is responsible for the adequate liquid flow of

currency in the country as well as maintaining requisite reserve in the state treasury.

Functions of RBI:

Monetary Authority:

The RBI is responsible for implementing, formulating and monitoring the monetary policy of

India.

Objective: Keeping this authority in mind the RBI is required to maintain price stability and

ensure adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

The Supreme financial body sets down broad parameters of banking operations within which the

country's banking and financial system operates.

Objective: This reasonably helps in maintaining public confidence in the system. It in turn

protects depositors' interest and provides lucrative banking services to the public.

Manager of Exchange Control:

The RBI is responsible for managing the Foreign Exchange Management Act, 1999.

Objective: It is the nodal agency which facilitates external trade and payment and promotes

orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

Page 18: SAMPLE REPORT 1

18  

It is the only supreme body which issues and exchanges or destroys currency and coins not fit for

circulation.

Objective: This facilitates in giving the public adequate quantity of currency notes and coins and

in good quality.

Developmental role

The RBI since its inception performs a wide range of promotional functions to support national

objectives and generate goodwill among the citizens of the country.

Related Functions:

Banker to the Government:

The RBI performs merchant banking function for the central and the state governments and also

acts as their banker. The RBI often advises the Government of the current monetary condition in

the state.

Banker to banks: maintains banking accounts of all scheduled banks. The RBI looks after the

functioning of the state banks and grants them license and even cancels the same on account of

fraud practice.

HDFC Bank:

HDFC Bank was incorporated in August 1994, and, currently has an nationwide network of 1412

Branches and 3275 ATM's in 528 Indian towns and cities.

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to

receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the

private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The

bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered

Page 19: SAMPLE REPORT 1

19  

office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank

in January 1995.

HDFC Bank offers a wide range of commercial and transactional banking services and treasury

products to wholesale and retail customers. The bank has three key business segments:

Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian

corporate to small & mid-sized corporates and agri-based businesses. For these customers, the

Bank provides a wide range of commercial and transactional banking services, including

working capital finance, trade services, transactional services, cash management, etc. The bank is

also a leading provider of structured solutions, which combine cash management services with

vendor and distributor finance for facilitating superior supply chain management for its corporate

customers. Based on its superior product delivery / service levels and strong customer

orientation, the Bank has made significant inroads into the banking consortia of a number of

leading Indian corporates including multinationals, companies from the domestic business

houses and prime public sector companies. It is recognised as a leading provider of cash

management and transactional banking solutions to corporate customers, mutual funds, stock

exchange members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of financial

products and banking services, giving the customer a one-stop window for all his/her banking

requirements. The products are backed by world-class service and delivered to customers

through the growing branch network, as well as through alternative delivery channels like

ATMs, Phone Banking, NetBanking and Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the

Investment Advisory Services programs have been designed keeping in mind needs of customers

who seek distinct financial solutions, information and advice on various investment avenues. The

Bank also has a wide array of retail loan products including Auto Loans, Loans against

Page 20: SAMPLE REPORT 1

20  

marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider

of Depository Participant (DP) services for retail customers, providing customers the facility to

hold their investments in electronic form.

HDFC Bank was the first bank in India to launch an International Debit Card in association with

VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched

its credit card business in late 2001. By March 2008, the bank had a total card base (debit and

credit cards) of 9.1 million. The Bank is also one of the leading players in the “merchant

acquiring” business with over 61,000 Point-of-sale (POS) terminals for debit / credit cards

acceptance at merchant establishments. The Bank is well positioned as a leader in various net

based B2C opportunities including a wide range of internet banking services for Fixed Deposits,

Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and Derivatives,

Local Currency Money Market & Debt Securities, and Equities. With the liberalization of the

financial markets in India, corporate need more sophisticated risk management information,

advice and product structures. These and fine pricing on various treasury products are provided

through the bank's Treasury team. To comply with statutory reserve requirements, the bank is

required to hold 25% of its deposits in government securities. The Treasury business is

responsible for managing the returns and market risk on this investment portfolio.

ICICI Bank:

Industrial Credit and Investment Corporation of India (ICICI) Bank was originally promoted in

1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,744.10 billion. The Bank has

a network of 1,420 branches and about 4,644 ATMs in India and presence in 18 countries. ICICI

Bank offers a wide range of banking products and financial services to corporate and retail

customers through a variety of delivery channels and through its specialized subsidiaries and

affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset

management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada,

Page 21: SAMPLE REPORT 1

21  

branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai

International Finance Centre and representative offices in United Arab Emirates, China, South

Africa, Bangladesh, Thailand, Malaysia and Indonesia.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock

Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New

York Stock Exchange (NYSE).

ICICI Venture is one of the largest and most successful private equity firms in India with funds

under management in excess of USD 2 billion. ICICI Venture, over the years has built an

enviable portfolio of companies across sectors including pharmaceuticals, Information

Technology, media, manufacturing, logistics, textiles, real estate etc thereby building sustainable

value. ICICI is among the few ones to offer credit in the Indian Private Equity industry. ICICI

Venture is a subsidiary of ICICI Bank, the largest private sector financial services group in India.

ICICI emerges as the major source of foreign currency loans to Indian industry. Besides funding

from the World Bank and other multi-lateral agencies, ICICI was also among the first Indian

companies to raise funds from international markets.

Standard Chartered Bank:

Standard Chartered is a London based international bank with significant operations in Asia,

Africa, the Middle East and Latin America. The Standard Chartered Group was formed in 1969

through a merger of two banks: The Standard Bank of British South Africa founded in 1863, and

the Chartered Bank of India, Australia and China, founded in 1853.

Chartered Bank opened its first overseas branch in India, at Kolkata, on 12 April 1858. During

that time Kolkata was the most important commercial city and was the hub of jute and indigo

trades. With the opening of the Suez Canal in 1869 and the growth of cotton trade, Bombay

replaced Kolkata as the main commercial center. Hence Standard Chartered shifted its main

operations to Bombay. Today the Bank's branches and sub-branches in India are directed and

administered from Bombay with Kolkata remaining an important trading and banking centre.

Page 22: SAMPLE REPORT 1

22  

To cater to diverse financial needs, Standard Chartered offers a wide range of state-of-the-art

banking products and services through its network of 80 branches in 31 cities across the country.

Recent alliances and developments

In 2000, Standard Chartered acquired Grindlays Bank from ANZ Bank, increasing its presence

in private banking and further expanding its operations in Bangladesh, India and Pakistan.[5]

Standard Chartered retained Grindlays' private banking operations in London and Luxembourg

and the subsidiary in Jersey, all of which it integrated into its own private bank. This now serves

high net worth customers in Hong Kong, Dubai, and Johannesburg under the name Standard

Chartered Grindlays Offshore Financial Services. In India, Standard Chartered integrated most of

Grindlays' operations, making Standard Chartered the largest foreign bank in the country, despite

Standard Chartered having cut some branches and having reduced the staff from 5500 to 3500

people.

On 15 April 2005, the bank acquired Korea First Bank, beating HSBC in the bid. Since then the

bank has rebranded the branches as SC First Bank.

Standard Chartered completed the integration of its Bangkok branch and Standard Chartered

Nakornthon Bank in October, renaming the new entity Standard Chartered Bank (Thailand).

Standard Chartered also formed strategic alliances with Fleming Family & Partners to expand

private wealth management in Asia and the Middle East, and acquired stakes in ACB Vietnam,

Travelex, American Express Bank in Bangladesh and Bohai Bank in China.

On 9 August 2006 Standard Chartered announced that it had acquired an 81% shareholding in

the Union Bank of Pakistan in a deal ultimately worth $511 million. This deal represented the

first acquisition by a foreign firm of a Pakistani bank and the merged bank, Standard Chartered

Bank (Pakistan), is now Pakistan's sixth largest bank.

On 22 October, 2006 Standard Chartered announced that it has received tenders for more than 51

per cent of the issued share capital of Hsinchu International Bank (“Hsinchu”), established in

1948 in Hsinchu province in Taiwan. Standard Chartered, which had first entered Taiwan in

1985, acquired majority ownership of the bank, Taiwan’s seventh largest private sector bank by

Page 23: SAMPLE REPORT 1

23  

loans and deposits as at 30 June, 2006. Standard Chartered merged its existing three branches

with Hsinchu's 83, and then delisted Hsinchu International Bank, changing the bank's name to

Standard Chartered Bank (Taiwan) Limited). Prior to the merger, Hsinchu had suffered extensive

losses on defaulted credit card debt.

In 2007, Standard Chartered opened its Private Banking global headquarters in Singapore.

On 23 August, 2007 Standard Chartered entered into an agreement to buy a 49 percent of an

Indian brokerage firm (UTI Securities) for $36 million in cash from Securities Trading

Corporation of India Ltd., with the option to raise its stake to 75 percent in 2008 and, if both

partners agree, to 100 percent by 2010. UTI Securities offers broking, wealth management and

investment banking services across 60 Indian cities.

On 29 February 2008, Standard Chartered PLC announced it has received all the required

approvals leading to the completion of its acquisition of American Express Bank Ltd (AEB)

from the American Express Company (AXP). The total cash consideration for the acquisition is

US$ 823 million.

In Sri Lanka, in Nov 2008, Standard Chartered Bank became embroiled in a major $500m oil

hedge scandal with allegations of mis-selling complex financial derivatives to the national

petroleum company, amidst claims of various unethical practices employed to woo decision

makers at the company. The Supreme Court of Sri Lanka has temporarily frozen payments under

the oil hedge, which could result in massive losses for Ceylon Petroleum Corporation after the

dramatic drop in global oil prices.

On 15 Nov 2008, Sri Lanka's Supreme Court asked the Central Bank to impound documents

relating to the foreign travel of public officials paid for by the Standard Chartered Bank which a

petitioner said was kept at the bank, but was in danger of being lost.

In March 2009 the Central Bank of Sri Lanka sent a ‘Show Cause’ letter to Standard Chartered

Bank’s Chief Executive Officer in Sri Lanka on the oil hedging issue and allegations relating to

corruption. The letter to CEO Clive Haswell was sent by Central Bank Governor Ajith Nivard

Cabraal. The letter was believed to be related to allegations that the SCB had funded Ceylon

Page 24: SAMPLE REPORT 1

24  

Petroleum Corporation (CPC) and other bank officials on foreign trips and other matters in

connection with the hedging deals.

CAMEL Ratios:

The first method used for valuation is CAMEL Ratios in which we calculate certain ratios

like

1) Capital Adequacy Ratio,

2) Assessing Asset Quality,

3) Assessing Earning Performance,

4) Earning Spread Ratio, and

5) Assessing Liquidity.

Capital Adequacy Ratio (CAR): 

Capital Adequacy is a measure of an bank's financial strength, in particular its ability to cushion

operational and abnormal losses. An bank should have adequate capital to support its risk assets

in accordance with the risk-weighted capital ratio framework. It has become recognized that

capital adequacy more appropriately relates to asset structure than to the volume of liabilities.

This is exemplified by central banks' efforts internationally to unify the capital requirements of

commercial banks and to generate worldwide classification formulae such as the one proposed

here. This indicator requires that assets be classified by reference to their demands on the equity

(or capital) structure of the bank.

Capital Adequacy Ratio most importantly tells how the assets of the bank are performing this

ratio gives importance to the assets structure rather than to the liabilities. The CAR indicator is

derived by comparing the ratio of an entity's equity capital to its assets-at-risk.

Page 25: SAMPLE REPORT 1

25  

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Capital

Adequacy Ratio %:

Total Capital funds

146,113,300,000

96,927,000,000

500,585,000,000

338,961,900,000

29,442,000,000

28,114,000,000

Risk weighted assets and

contingents

1,074,479,900,000

740,819,200,000

3,584,566,200,000

2,899,930,600,000

188,821,000,000

185,354,000,000

Capital Adequacy Ratio %

13.60% 13.08% 13.97% 11.69% 15.59% 15.17%

The regulatory requirement in India for minimum capital adequacy ratio is 9%, and we can see

that all the three banks are maintaining capital adequacy ratio well above 9%. This means that

the total capital funds are sufficient to cover the risk weighted assets and contigents.

Assessing Asset Quality: 

Asset quality has direct impact on the financial performance of abank. The quality of assets

particularly, loan assets and investments, would depend largely on the risk management system

of the institution. The value of loan assets would depend on the realizable value of the collateral

while investment assets would depend on the market value.

Loan Loss Provision Ratio:

Indicates provisioning requirements on loan portfolio for the current period.

Loan loss provision ratio = Loan Loss Provision/Average performing assets

Page 26: SAMPLE REPORT 1

26  

Loan Loss Provision Ratio %:

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Loan Loss Provision 10,263,700

,000 6,911,500,000

234,842,423,000

163,584,984,000

28,625,313

25,190,250

Average Performing Assets

1,217,224,400,000

816,739,600,000

3,716,210,031,000

3,222,527,260,000

734,452,439

588,913,544

Loan Loss Provision Ratio %

0.84% 0.85% 6.32% 5.08% 3.90% 4.28%

The loan loss provision ratio is high for ICICI Bank and also for Standard Chartered Bank, but

for HDFC Bank it is very low. This indicates that the average performing assets (including loans

disbursed) of HDFC are reasonably sound and well performing as compared to ICICI and

Standard Chartered. Thus, HDFC needs to keep a low provision for loan losses.

Reserve Ratio:

Indicates the adequacy of reserves in relation to the portfolio. The Loan loss reserve is a reserve

maintained to cover potential loan losses.

Reserve ratio = Loan Loss Reserve/Value of Loans Outstanding

Reserve Ratio (%): HDFC Bank ICICI Bank Standard Chartered

Bank 2008 2007 2008 2007 2008 2007 Loan Loss Reserve 10,263,70

0,000 6,911,500,000

234,842,423,000

163,584,984,000

2,862,531

2,519,025

Value of Loans Outstanding

617,895,200,000

461,400,200,000

2,103,846,259,000

1,841,192,599,000

29,891,615

15,458,440

Reserve Ratio (%) 1.66% 1.50% 11.16% 8.88% 9.58% 16.30% The loan loss provision ratio is high for ICICI Bank and also for Standard Chartered Bank, but

for HDFC Bank it is very low. This indicates that the loans disbursed by HDFC are reasonably

less risky as compared to ICICI and Standard Chartered. Thus, HDFC needs to keep a low

provision for loan losses.

Page 27: SAMPLE REPORT 1

27  

Assessing Management Quality: 

The performance of the other four CAMEL components will depend on the vision, capability,

agility, professionalism, integrity, and competence of the bank's management. As sound

management is crucial for the success of any institution, management quality is generally

accorded greater weighting in the assessment of the overall CAMEL composite rating.

Cost per unit of money lent:

Indicates efficiency in distributing loans (in monetary terms).

Cost per unit of money lent = Operating costs/Total amount disbursed

Cost per Unit of Money Lent:

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Operating Costs 37,456,20

0,000 24,208,00

0,000 81,541,8

19 66,905,5

64 7,611,00

0,000 6,215,00

0,000 Total Amount Disbursed

156,495,000,000

124,555,300,000

297,504,831

497,024,907

31,130,000,000

30,607,000,000

Cost per Unit of Money Lent

23.93% 19.44% 27.41% 13.46% 24.45% 20.31%

We can see that the cost per unit of money lent for ICICI has increased significantly from

13.46% in 2007 to 27.41% in 2008 while for HDFC, it has increased from 19.44% in 2007 to

23.93% in 2008 and for Standard Chartered, it has increased from 20.31% to 24.45%. Thus we

can say that operating and management efficiency of ICICI has deteriorated in 2008 and it is

better in case of HDFC.

 

 

 

Page 28: SAMPLE REPORT 1

28  

Assessing Earning Performance: 

 

The quality and trend of earnings of a bank depend largely on how well the management

manages the assets and liabilities of the bank. A bank must earn reasonable profit to support

asset growth, build up adequate reserves and enhance shareholders' value. Good earnings

performance would inspire the confidence of depositors, investors, creditors, and the public at

large.

Return on Assets (%):

Return on assets = Net income after tax/Average total assets

Return on Assets (%):

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Net Income After Tax

15,901,800,000

11,414,500,000

41,577,279

31,102,200

3,511,000,000

2,989,000,000

Average Total Assets 1,331,766,000,000

912,356,100,000

3,997,950,762

3,446,581,126

435,068,000,000

329,871,000,000

Return on Assets (%) 1.19% 1.25% 1.04% 0.90% 0.81% 0.91% The return on assets is higher for HDFC as compared to ICICI and Standard Chartered.

Return on Equity (%):

Return on equity = Net income after tax/Average total equity funds

Return on Equity (%):

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Net Income After Tax

15,901,800,000

11,414,500,000

41,577,279

31,102,200

3,511,000,000

2,989,000,000

Average Total Equity Funds

114,972,300,000

64,331,500,000

468,202,095

246,632,644

22,695,000,000

21,452,000,000

Return on Equity (%)

13.83% 17.74% 8.88% 12.61% 15.47% 13.93%

Page 29: SAMPLE REPORT 1

29  

The return on equity of ICICI has gone down in 2008 (12.61%) as compared to 2007 (8.88%),

for HDFC, it has gone down from 17.74% to 13.83%. But for Standard Chartered, the ROE has

gone up from 13.93% to 15.47%. This indicates that Standard Chartered bank has been very

profitable for its shareholders while ICICI has been least profitable. This can be seen in the

higher share prices of HDFC as compared to ICICI in recent times.

Interest-Spread Ratio (%):

Interest-spread ratio = (Income from loan portfolio/average loan portfolio) - (Interst Expenses

and other financial charges/ average borrowings)

Interest-Spread Ratio (%):

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Income from Loan Portfolio

118,295,000,000

79,403,100,000

307,883,429,000

219,955,876,000

16,378,000,000

16,176,000,000

Average Loan Portfolio 617,895,200,000

461,400,200,000

2,103,846,259,000

1,841,192,599,000

220,761,000,000

189,631,000,000

Interest Expenses and Other Financial Charges

48,871,200,000

31,794,500,000

234,842,423,000

163,584,984,000

8,991,000,000

9,911,000,000

Average Borrowings 1,052,474,600,000

711,133,300,000

3,100,794,840,000

2,817,662,126,000

372,617,000,000

273,297,000,000

Interest-Spread Ratio (%):

14.50% 12.74% 7.06% 6.14% 5.01% 4.90%

The interest spread ratio is highest for HDFC as compared to ICICI and Standard Chartered

indicating that HDFC has been utilizing its deposits to disburse profitable loans more efficiently

than ICICI and Standard Chartered.

Earning Spread ratio (%):

Earning spread ratio = (Total Income-Non Operating Income/Average total portfolio) - (Interest

Expenses & Other Financial charges/Average Total Resources)

Page 30: SAMPLE REPORT 1

30  

Earning Spread ratio (%):

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Total Income - Non-Operating Income

118,295,000,000

79,403,100,000

307,883,429,000

219,955,876,000

19,798,000,000

19,365,000,000

Average Total Portfolio 1,220,209,600,000

818,768,500,000

3,751,115,531,000

3,242,447,660,000

290,614,000,000

245,174,000,000

Interest Expenses and Other Financial Charges

48,871,200,000

31,794,500,000

234,842,423,000

163,584,984,000

8,991,000,000

9,911,000,000

Average Total Resources

1,167,446,900,000

775,464,800,000

3,568,996,935,000

3,064,294,770,000

395,312,000,000

294,749,000,000

Earning Spread ratio (%)

5.51% 5.60% 1.63% 1.45% 4.54% 4.54%

The earning spread ratio for ICICI is very low as compared to HDFC (highest) and Standard

Chartered. This indicates the total operating income is highest for HDFC (5.51%) and very low

for ICICI (1.63%) and for Standard Chartered, it is 4.54%.

Assesing Liquidity: 

A bank must always be liquid to meet depositors' and creditors' demand to maintain public

confidence. There needs to be an effective asset and liability management system to minimize

maturity mismatches between assets and liabilities and to optimize returns. As liquidity has

inverse relationship with profitability, a bank must strike a balance between liquidity and

profitability.

Current and quick ratios are inappropriate for measuring bank liquidity. A loan-to-deposit ratio is

more relevant. However, an bank's liquidity and solvency are directly affected by portfolio

quality. Consequently, financial analysts (investment officers) should carefully analyze the

bank's portfolio quality on the basis of collectability and loan-loss provisioning.

Loan to Deposit Ratio (%):

Loan deposit ratio = Loans/Deposits

Page 31: SAMPLE REPORT 1

31  

Loan to Deposit Ratio (%):

HDFC Bank ICICI Bank Standard Chartered Bank

2008 2007 2008 2007 2008 2007 Loans 617,895,2

00,000 461,400,200,000

2,103,846,259,000

1,841,192,599,000

220,761,000,000

189,631,000,000

Deposits 1,007,686,000,000

682,979,400,000

2,444,310,502,000

2,305,101,863,000

265,917,000,000

205,640,000,000

Loan to Deposit Ratio (%)

61.32% 67.56% 86.07% 79.87% 83.02% 92.22%

The loan to deposit ratio is lowest for HDFC (61.32%) while higher for ICICI (86.07%) and

Standard Chartered (83.02%). This means that liquidity for HDFC is much higher as compared

to ICICI and Standard Chartered. But on the other hand, the earning capability will be higher for

ICICI and Standard Chartered as compared to HDFC.

 

 

 

Page 32: SAMPLE REPORT 1

32  

Dividend Discount Model:

Dividend Discount Model is a method which helps in determing the value of the company. In

this method net income is taken into consideration and this method is apt as it tells the present

and future value of the firm. The method also tells whether the value of firm being over-valued

or under-valued. The firm value is over valued when the market price of the share is being more

than computed value and vice-versa.

Here, the value of equity per share can be calculated as follows:

Where,

DPSt = Expected dividend per share in period t

ke = Cost of equity

Value Per Share = value of a firm / No. of Shares

Where g = growth rate of the company

Inputs to this model are:

1. Cost of equity: the cost of equity for a financial service firm has to reflect the portion of

the risk in the equity that cannot be diversified away by the marginal investor in the

stock. This risk is estimated using a beta (in the capital asset pricing model). The cost of

equity can be found out by using regression betas if the regulatory restrictions have

remained unchanged over the period.

Page 33: SAMPLE REPORT 1

33  

2. Payout Ratios: The expected dividend per share in a future period can be written as the

product of the expected earnings per share in that period and the expected payout ratio.

3. Expected Growth: If dividends are based upon earnings, the expected growth rate that

will determine value is the expected growth rate in earnings.

Notes on following calculations:

1. The betas for the banks are obtained from National Stock Exchange (NSE) except

for Standard Chartered Bank, which is not listed in India. Hence, for Standard

Chartered, the assumption is that the risk it is same as that for the overall banking

sector. Thus the beta for Standard Chartered Bank is assumed to be 1.00.

2. The market risk premium is assumed to be 10% as the GDP of Indian economy is

expected to grow at around 9-10% in the coming years.

3. As the Standard Chartered Bank is not listed in India, the share price is obtained

assuming the bank will be listed in immediate future. Thus, the bank will not give

out dividends till it is in high growth period. The bank will start giving dividends

only when it approaches constant growth stage.

4. In the following calculations it is assumed that the banking sector is in high

growth phase with an expectation of further deregulation by the RBI as is the

trend from 1992. It is also assumed that the high scope of banking in rural sector

will fuel these private sector banks’ growth, who have predominantly been

targeting urban and higher end customers till date.

 

 

Page 34: SAMPLE REPORT 1

34  

For HDFC Bank:

Year 2009 2008 2007 2006 2005 2004 Dividend per share (Rs.)

10 8.5 7 5.5 4.5 3.5

Payout ratio 18.90% 18.39% 19.29% 19.70% 19.63% 19.50% Average payout ratio

19.24%

Growth in dividend per share

17.65% 21.43% 27.27% 22.22% 28.57%

Average growth 22.14% Cost of equity Risk free rate of return (T-bills rate) 4.60% Beta for HDFC Bank Ltd. 1.00 Risk premium (Market rate of return) 10% Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + Beta*10%

14.60%

Year period Expected

growth rate Dividend per share

Cost of equity

Present value

2010 1 22% 12.200 14.60% 10.65 2011 2 22% 14.884 14.60% 11.33 2012 3 22% 18.158 14.60% 12.06 2013 4 22% 22.153 14.60% 12.84 2014 5 22% 27.027 14.60% 13.67 2015 6 15% 31.081 14.60% 13.72 2016 7 15% 35.743 14.60% 13.77 2017 8 15% 41.105 14.60% 13.82 2018 9 15% 47.271 14.60% 13.87 2019 10 15% 54.361 14.60% 13.91 2020 11 8% 58.710 14.60% 13.11 For constant growth from 2020 onwards, the present value is = 889.5455165 Present value of equity (Rs.per share) = 1,032.31

Page 35: SAMPLE REPORT 1

35  

For ICICI Bank: Year 2009 2008 2007 2006 2005 2004 Dividend per share (Rs.) 11 11 10 8.5 8.5 7.5 Payout ratio 32.58% 27.93% 28.70% 26.16% 30.85% 28.13% Average payout ratio 29.06% Growth in dividend per share 0.00% 10.00% 17.65% 0.00% 13.33% Average growth 8.20% Net Profit 37,581,

300,00041,577,279,000

31,102,200,000

25,400,747,000

20,052,016,000

16,371,063,000

Growth in net profit -9.61% 33.68% 22.45% 26.67% 22.48% Average growth in net profit 19.13% Cost of equity Risk free rate of return (T-bills rate) 4.60% Beta for HDFC Bank Ltd. 1.60 Risk premium (Market rate of return) 10% Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + Beta*10%

20.60%

Year period Expected

growth rate Dividend per share

Cost of equity

Present value

2010 1 18% 11.800 20.60% 9.78 2011 2 18% 13.924 20.60% 9.57 2012 3 18% 16.430 20.60% 9.37 2013 4 18% 19.388 20.60% 9.17 2014 5 18% 22.878 20.60% 8.97 2015 6 12% 25.623 20.60% 8.33 2016 7 12% 28.698 20.60% 7.73 2017 8 12% 32.141 20.60% 7.18 2018 9 12% 35.998 20.60% 6.67 2019 10 12% 40.318 20.60% 6.19 2020 11 8% 43.544 20.60% 5.55 For constant growth from 2020 onwards, the present value is = 345.5837876 Present value of equity (Rs.per share) = 434.10

Page 36: SAMPLE REPORT 1

36  

For Standard Chartered Bank: Year 2008 2007 2006 2005 2004 Net profit 3,511,000,0

00 2,989,000,000 2,354,000,00

0 1,971,000,000

1,479,000,000

Growth in net profit 17.46% 26.98% 19.43% 33.27% Average growth in net profit

24.28%

Total Equity 22,140,000,000

20,851,000,000

17,397,000,000

12,333,000,000

8,435,000,000

Return on Equity 15.86% 14.34% 13.53% 15.98% 17.53% Average ROE 15.45% Cost of equity Risk free rate of return (T-bills rate) 4.60% Beta for Standard Chartered Bank Ltd. 1.00 Risk premium (Market rate of return) 10% Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + Beta*10%

14.60%

Year period Expected

growth rate Earnings per share

Dividend per share

Cost of equity

Present value

2009 1 25% 2.53 0 14.60% 0.00 2010 2 25% 3.16 0 14.60% 0.00 2011 3 25% 3.95 0 14.60% 0.00 2012 4 20% 4.74 0 14.60% 0.00 2013 5 20% 5.69 0 14.60% 0.00 2014 6 20% 6.83 0 14.60% 0.00 2015 7 15% 7.86 0 14.60% 0.00 2016 8 15% 9.03 0 14.60% 0.00 2017 9 10% 9.94 3.50 14.60% 1.03 2018 10 10% 10.93 3.86 14.60% 0.99 2019 11 8% 11.81 4.16 14.60% 0.93 Divident payout ratio in 2017(1-growth rate/ROE) = 35.27% Dividend per share in 2017(EPS*payout ratio) = 3.50 For constant growth from 2019 onwards, the present value is = 63.08 Present value of equity ($ per share) = 66.03

Page 37: SAMPLE REPORT 1

37  

Conclusion:

1) According to CAMEL ratios, we can see that HDFC Bank has performed the best out

of the three banks from the view of asset quality, management performance and

earning capability. Overall, Standard Chartered Bank is a better performer than ICICI

Bank and the performance of ICICI Bank is lowest of the three banks in the last two

years. Thus, we can say that the equity of HDFC Bank will be highest valued, next is

Standard Chartered Bank and the equity of ICICI is valued lowest.

2) From the dividend discount model, we can see that the value of each share of HDFC

Bank is Rs. 1032.31 which is overvalued as the recent value of share price of HDFC

Bank in NSE is Rs.1411.80. Hence, the shares of HDFC Bank should not be

purchased by investors and they should be sold.

3) Similarly, the share price of ICICI Bank is Rs.434.10 which is also overvalued as

compared to the recent share price of ICICI Bank in NSE, which is Rs.756.15. Hence,

the shares of ICICI Bank should also be sold and not purchased by investors.

References:

• www.hdfcbank.com

Page 38: SAMPLE REPORT 1

38  

• www.icicibank.com • www.standardchartered.co.in • www.nseindia.com • www.adb.org/documents/guidelines/financial/part060302 • www.standardchartered-wealthmanagers.co.in • www.moneycontrol.com • www.ibef.org • www.researchandmarkets.com • www.lankabusinessonline.com • http://www.lbo.lk • http://sundaytimes.lk • Osama K. Najjar, 2004-2006, Financial Analysis for Bank of Palestine & Jordan Ahli

Bank (CAMEL Analysis) • Damodaran, Aswath (2006). Damodaran on Valuation. New York: John Wiley & Sons.