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Fundamental Analysis of Selected Public and Private Sector Banks in India Amanjot Kaur Sodhi Simran Waraich Abstract help them to take informed investment decisions. Fundamental analysis studies the various financial, With the help of fundamental analysis, investors can economic and industrial param...

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Fundamental Analysis of Selected Public and Private Sector Banks in India Amanjot Kaur Sodhi Simran Waraich Abstract

help them to take informed investment decisions.

Fundamental analysis studies the various financial,

With the help of fundamental analysis, investors can

economic and industrial parameters that influence the

track the past performance, recent changes and future

risk-return of securities and helps in investment

prospects of the banking sector. This research paper

decision making. Banking companies have a strong

analyses the fundamentals of selected banking

shareholding foothold in the Indian economy and the

companies using independent financial parameters.

stock markets. Fundamental analysis can help the

32

shareholders by providing relevant information in

Keywords: Profit Margins, Return on Equity, Price

terms of profitability and growth which can, in turn,

Earnings Ratio, Dividend per Share

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

Introduction

challenged to raise the required capital to comply with

The development of any economy depends on the

the Basel III requirements. For long, banks were

development of the financial sector of that economy.

comfortable that competition would only come from

The Banking industry is the key component of the

similar entities and that the Reserve Bank of India was

financial system which provides financial assistance

ensuring the least number of banks entered the

not only to the industrial sector but also to the

market to compete with them. But as it happens in any

agriculture and household sectors. Banks are the

business, technological innovation and the regulator's

credit creators. The Indian Banking industry has

delay in waking up to developments have allowed a

contributed to the economic growth of the country.

new set of companies to play the role of financial

This sector has undergone significant developments

intermediaries with a different name (The Economic

and investments in the recent past. Reserve Bank of

Times).

India is the central bank of the country; it regulates the banking industry in India and ensures monetary

Banks can issue long term bonds, without maintaining

stability in the economy. Banks are segregated into

statutory reserves as per RBI's decision, to raise funds

different groups such as scheduled and unscheduled

for infrastructure and for affordable housing which will

commercial banks, public sector banks, private banks,

enhance their ability to lend money, thereby enabling

foreign banks and cooperative banks. The Banking

them to mitigate the asset-liability mismatch. (Dun &

industry is a valuable contributor to the GDP, works

Bradstreet)

under a regulated environment and has government support. Technological advancements have changed

This paper deals with public sector and private sector

the way banking is done. A wide network of financial

banks in India. Because of increasing competition in

services increases the welfare and productivity in the

the banking sector, private sector and foreign banks

economy. It provides the opportunity to the public to

are trying their best to improve their performance. So

build savings, make investments, avail credit and

there is a need to study the fundamentals and

provides safety against income shocks and

efficiency of public sector banks.

emergencies. Fundamental analysis will examine the key financial However, the Indian Banking industry is facing

ratios of banks and help in identifying the value of

formidable challenges. Increasing competition,

stocks of these banks to identify investment

increasing level of Non-performing Assets (NPAs) and

opportunities.

deteriorating asset quality have become major areas of concern for the entire banking industry, and by

Review of Literature

extension, the Indian economy. The vicious cycle of

Dr. Virender Koundal (2012) concludes that

economic slowdown, corporate earnings slowdown,

commercial banks in India get favourable effects

increase in NPAs, increase in the proportion of

because of the various reforms. Even though the

restructured assets and depressed profitability of the

overall profitability has also improved, the major

Banking sector, has led to a situation where banks,

benefit is taken by the private sector banks and foreign

particularly Public Sector Banks (PSBs), will be severely

banks whereas public sector banks are still lagging

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

33

behind on various financial parameters.

various types of advances. He also examined the differences in various aspects of working results of

Seema Malik (2014) has analyzed the effect of

public sector and private sector banks in comparison

technology on transformation of banking in India and

to foreign banks.

also studied the benefits and challenges of changing banking trends. Technology and financial innovations

Nishit V. Davda (2012) has studied and examined the

have led to tremendous improvement in banking

economic performance and sustainability of six major

services and operations over the past decade. Survival,

banks in the private banking sector - ICICI, HDFC,

growth and profitability of banks depend upon the

AXIS, INDUSIND, ING VYSYA and KOTAK. The study

organizational effectiveness and operational efficiency

attempts to analyze the profitability position of the

in today's competitive scenario where customers'

sample banking companies for a period of 10 years

needs are changing everyday and technology is

from 2002 to 2011. The study reveals that HDFC has

touching new highs.

performed better in terms of Earning per Share than ICICI, AXIS, KOTAK, INDUSIND BANK and ING VYSYA

Sana Samreen (2014) has analyzed the overall banking

during the last ten years i.e. 2002 to 2011. The study

industry with the help of Porter's five forces model.

also reveals that after KOTAK Bank, HDFC Bank has

The study also concentrated on the various

performed better in terms of Net Profit margin than

developments, challenges and opportunities in the

the remaining banks. On the other hand, among all the

banking industry. The author emphasized upon the

six banks, ICICI has achieved the highest yield in terms

need to act both decisively and quickly to build an

of Return on Assets as compared to the remaining

enabling, rather than a limiting, banking sector in

selected banks.

India. Indian Brand Equity Foundation (2015) has studied Malaya Ranjan Mohapatra, Avizeet Lenka, Subrat

that Indian banks are focusing on adopting an

Kumar Pradhan (2015) have analyzed the operational

integrated approach to risk management. Banks have

efficiency of commercial banks in India and challenges

already embraced the international banking

faced by public sector banks. The parameters

supervision accord of Basel II. According to RBI,

considered for study are labour productivity, branch

majority of the banks already meet with the capital

expansion and profitability ratios. The study concluded

requirements of Basel III, which has a deadline of

that internal management and employee efficiency of

March 31, 2019. Most of the banks have put in place

foreign banks are far better than other sectors of

the framework for asset-liability match, credit and

commercial banks. Public sector banks are lagging

derivatives risk management. As per their report,

behind in various financial parameters.

rising incomes are expected to increase the need for banking services in rural areas which will positively

34

Karan Walia (2012) has examined the impact of

affect the growth of the banking sector. The RBI has

reforms on credit deposit ratio, credit to GDP ratio,

relaxed its branch licensing policy which emphasized

investment in government securities, share of

the need to focus on spreading the reach of banking

business of public sector banks and proportion of

services to the un-banked population of India.

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

Amit Kumar Dwivedi, D. Kumara Charyulu (2011)

Das and Ghose (2006) used non-parametric DEA to

determine the impact of various market and

estimate the efficiency of Indian commercial banks in

regulatory initiatives on efficiency improvements of

the post-reform period, 1992-2002.

Indian banks. They concluded that reform process has shifted the focus, of public sector dominated banking

Omprakash K. Gupta1, Yogesh Doshit and Aneesh

system, from social banking to a more efficient and

Chinubhai (2007) analyzed the performance of the

profit oriented industry. The infusion of private equity

Indian banking sector in two stages. Non-parametric

capital has led to shareholders' challenges and

frontier methodology DEA and TOBIT model have

bureaucratic decision making. The emphasis in

been used to construct productive inputs. The outputs

banking has shifted from traditional banking to

are measured in monetary value and efficiency scores

technology based banking.

have been determined for the period 1999-2003. The study shows that private banks and other nationalized

M. Vassiloglou and D. Giokas (1990) present a

banks follow State Bank of India in terms of efficiency

systematic application of Data Environment Analysis

which is measured in terms of capital adequacy.

(DEA) carried out at the Commercial Bank of Greece in assessing the relative efficiency of bank branches.

R. K. Uppal (2011) examined the efficiency of all the

After a description of the model and the data, the

bank groups in the post- banking sector reforms era for

results of the analysis are discussed, and a note is

the time period between 1999 and 2006. The main

made of certain aspects of the follow-up analysis.

implication of this study is that although public sector banks have improved their financial position, they still

S. S. Rajan, K. L. N. Reddy and V. Pandit (2011) attempt

need to make many changes. On the basis of some

to examine technical efficiency and productivity

important parameters of efficiency, the paper

performance of Indian scheduled commercial banks,

concludes that among the Indian banks, efficiency of

for the period 1979-2008. They model a multiple

new private sector banks is quite high, but foreign

output/multiple input technology production frontier

banks have an edge over new private sector banks.

using semi-parametric estimation methods. Mariappan (2005-06) analyzed that the IT revolution Bhattacharya et. al (1997), in their study, examined

has brought a stunning change in the business

the productivity efficiency of 70 Indian commercial

environment, with the maximum impact on the

banks during 1986 to 1991. Using Data Evolvement

banking and finance sector; as a result, the banking

Analysis (DEA), their study concludes that public

sector sports a new look today.

sector banks have been the most efficient followed by the foreign and the private banks.

Singla (2008) examined the profitability position of the selected sixteen banks from the banker index for a

Sathye (2003), using DEA to estimate efficiency, found

period of six years (2001-06). The study reveals that

that private banks are less efficient than public and

the profitability position was reasonable during the

foreign banks.

period of study when compared with the previous years. Strong capital position and balance sheet place

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

35

banks in a better position.

Research Methodology The present study attempts to evaluate the

P. Hanumantha Rao & Sudhendu Dutta (2014)

performance of selected public and private sector

attempted to study the fundamentals of the banking

banks in India. It examines and compares the various

sector in India. He considered operating profit margin,

aspects of performance of selected public and private

net profit margin, return on equity, earnings per share,

sector banks in India. Secondary data has been used

price earnings ratio, dividend per share and dividend

for the purpose of this study. To analyze the

payout ratio for a period of six years from 2006 to 2012

fundamentals of the top five banks, three in the public

for three major banks.

sector and two in the private sector have been taken as samples. State Bank of India, Bank of Baroda, Punjab

Subbaroo (2007) concluded in his paper that the

National Bank, HDFC and ICICI have been taken as

Indian banking system has undergone a

samples for the purpose of this study. The variables

t ra n s fo r m a t i o n f ro m d o m e s t i c b a n k i n g t o

which are considered for analyzing the profitability are

international banking. Major trends that change the

net profit margin, operating profit margin, return on

banking industry world over are consolidation of

equity, earnings per share, dividend per share, price

p l aye rs t h ro u g h m e rge rs a n d a c q u i s i t i o n s ,

earnings ratio and dividend payout ratio. The variables

globalization of players, development of new

are studied over a period of five years starting from

technology, universal banking and human resource in

2010-11 to 2014-15. The Porter's Five Forces Model

banking, profitability, rural banking and risk

has been used to analyze the banking industry.

management. Stringent prudential capital adequacy norms under Basel I and II, and the free trade

The data has been collected from various sources such

agreements are big challenges before the banking

as Statistical Tables relating to Banks in India, Trends

sector in India. The technological innovations in

and Progress of Banks in India, RBI Monthly Bulletin

banking pose another big challenge.

published by RBI, IBA Bulletins published by IBA, and annual reports of banks. Following were the major

Objectives of the study

sources of data for this study:

Fundamental analysis of public and private sector

1. Statistical Tables Relating to Banks in India for

banks in India has been done with the objective of

various years published by the Reserve Bank of

analyzing the profitability position of the selected

India, Mumbai and moneycontrol.com.

banks which is helpful in taking investment decisions.

2. Performance Highlights of Public Sector Banks, Indian Banks' Association, Mumbai.

Hypotheses of Study

3. Annual Reports of the selected banks.

H0 : There is no significant difference between the

4. Various journals, bulletins, periodicals and

selected variables of selected banks.

newspapers devoted to the subject of banking in

H1 : There is a significant difference between the

India.

selected variables of selected banks. Quantitative Techniques used for the Study A research design is a plan according to which 36

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

observations are made and data is assembled. The present study is analytical in nature. Various statistical

Where

= standard deviation,

= Actual Mean of Series,

techniques have been used in the present study to

X-

provide analytical results of the data. The following

N = Sample Size

methods have been used to analyze the data: A. Tabular Analysis - On the basis of the data/ information collected from the various sources, tabulation analysis is used to make the study more meaningful. The use of tables is made whenever needed and necessary for clarity of thought, and easy understanding. B. Descriptive Analysis – Statistical methods such as mean, standard deviation and one-way ANOVA were worked out to study the nature and distribution of different variables. All statistical calculations have been made by the use of Microsoft Excel and Statistical Package for Social Science (SPSS) version 20. A brief description of all the tools used and the formulae is given as under: a) Arithmetic Mean - Mean has been used to find the average of various items. The Arithmetic mean has been obta...