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Bottom Up Beta Analysis of Bankex and its listed companies.

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59 просмотров23 страницыBottom Up Beta Analysis of Bankex and its listed companies.

© All Rights Reserved

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Of

Bankex and

its listed institutions

Date: March 22,2015

Business Communication

Group 3

Abhishek Ghosh

Akshat Garg

Chitra Sharma

Sreejith A.S

Udhayarajan

INTRODUCTION

Banks are a major part of any economic system. They provide a strong base to

Indian economy too. Even in share markets, the performance of bank shares is

of great importance. This is justified by the proof that in both BSE and NSE we

have separate index for Banking Sector Shares. But for our study we have taken

only BSE BANKEX. Thus, the performance of share market, the rise and the

fall of market is greatly affected by the performance of Banking Sector Shares

and this paper revolves around some of those factors, their understanding and a

theoretical and technical analysis of the same. By declaring that, we have made

a thorough understanding of the factors through the Beta estimation.

Risk measurement and analysis has been a critical issue for any investment

decision because risk can be transferred but cannot be eliminated from the

system. The nature and degree of risk varies from industry to industry. The risk

can be categorized into two parts:

a> Risk-Free Rate

b> Market Risk Premium

Beta is used by all categories of investors for measurement of market risk of

individual companies, portfolios and sectors.

In finance, the beta () of an investment is a measure of the risk arising from

exposure to general market movements as opposed to idiosyncratic factors. The

market portfolio of all investable assets has a beta of exactly 1. A beta below 1

can indicate either an investment with lower volatility than the market, or a

volatile investment whose price movements are not highly correlated with the

market. An example of the first is a treasury bill: the price does not go up or

down a lot, so it has a low beta. An example of the second is gold. The price of

gold does go up and down a lot, but not in the same direction or at the same

time as the market.

A beta above one generally means that the asset both is volatile and tends to

move up and down with the market. An example is a stock in a big technology

company. Negative betas are possible for investments that tend to go down

when the market goes up, and vice versa. There are few fundamental

investments with consistent and significant negative betas, but some derivatives

like equity put options can have large negative betas.

Beta is important because it measures the risk of an investment that cannot be

diversified away. It does not measure the risk of an investment held on a standalone basis, but the amount of risk the investment adds to an already-diversified

portfolio. In the capital asset pricing model, beta risk is the only kind of risk for

which investors should receive an expected return higher than the risk-free rate

of interest.

Internal or External conditions both are involved in measuring the sensitivity of

returns of stocks. Industrial Production, money Supply ,Foreign Exchange Rate,

Interest rate, Gold prices, GDP and oil prices in the world economy are involved

in external conditions whereas dividend policy, earning per share, etc. are the

contributors of internal factors. The paper studies the impact of Macro

(External) factors on BSE BANKEX. Macroeconomic indicators are already

exhibiting signs of deterioration as Rupee is depreciating against dollar,

inflation is mounting, interest rates and gold prices are increasing and industrial

production has started to decline. The study which measures the impact of

macroeconomic forces on various sectors of stock exchange index is rare in the

literature so this study provides a new way in the extending line of literature.

BANKEX

BANKEX Index Bombay Stock Exchange Limited launched "BSE BANKEX

Index" on 23 June 2003. This index consists of major Public and Private Sector

Banks listed on BSE. The BSE BANKEX Index is displayed online on the

BOLT trading terminals nationwide.

Objective:

a. An Index to track the performance of listed equity of Banks.

b. A suitable benchmark for the Central Government to monitor its wealth

on the bourses.

Features:

BANKEX tracks the performance of the leading banking sector stocks listed

on the BSE

BANKEX is based on the free float methodology of index construction

The base date for BANKEX is 1st January 2002

The base value for BANKEX is 1000 points

BSE has calculated the historical index values of BANKEX since 1st January

2002.

banking sector stocks listed on BSE are included in the Index

The Index is disseminated on a real time basis through BSE Online Trading

(BOLT) terminals.

Stocks forming part of the BANKEX along with the particulars of their freefloat adjusted market capitalization are listed below.

Script Selection Criteria for BSE BANKEX: Eligible Universe Scripts classified

under the banking sector which are present constituents of BSE-500 index form

the eligible universe.

Trading Frequency Scripts should have a minimum trading frequency of 90% in

preceding three months. Market capitalization Scripts with minimum market

capitalization coverage of 90% in banking sector based on free-float final rank

form the index. Buffers Buffer of 2% both for inclusion and exclusion in the

index is considered so that movements in and out of the index are minimized.

For example, a company can be included in the index only if it falls within 88%

coverage and an existing index constituent cannot be excluded unless it falls

above 92% coverage. However, the above buffer criterion is applied only after

the minimum 90% market coverage is satisfied.

Listed below are the today's Top Scrips traded in ``S&P BSE BANKEX`` with

respect to Total Turnover. (20th March, 2015).

Scrip Name

Scrip

Group

Open

High

Low

LTP

No. of

Shares

Traded

Total

Turnover

(Lac)

No. of

Trades

532215.0

0

532174.0

0

AXISBANK

562.70

565.00

553.20

556.75

881262.00

4921.23

28760.00

ICICIBANK

329.00

329.50

318.00

319.10

4032.49

28423.00

500112.00

SBIN

281.55

282.30

277.00

278.35

3921.66

27980.00

532648.0

0

500180.0

0

532461.0

0

532149.0

0

500247.0

0

532187.0

YESBANK

827.90

841.25

816.90

832.25

398049.00

3303.82

19513.00

HDFCBANK

1052.00

1059.05

1045.25

1055.55

309916.00

3262.76

10223.00

PNB

162.00

163.75

159.40

162.95

1078868.0

0

1750.67

10717.00

BANKINDIA

214.80

217.90

210.65

212.80

598411.00

1280.46

11560.00

KOTAKBANK

1334.90

1343.85

1308.50

1339.25

85431.00

1130.84

7523.00

INDUSINDBK

871.50

895.05

871.50

887.45

106642.00

945.74

8029.00

Scrip

Code

1248169.0

0

1401237.0

0

0

532134.0

0

BANKBAROD

A

177.30

177.30

172.00

172.90

504686.00

879.26

9952.00

532483.0

0

CANBK

390.00

390.00

380.30

382.05

167195.00

641.97

6851.00

500469.0

0

FEDERALBN

K

138.65

140.30

137.00

137.65

100876.00

139.25

2623.00

Macro factors

This paper studies the impact of Macro (External) factors on BSE BANKEX

and some of the factors that are considered are explained below:

Inflation

The control of inflation has become one of the dominant objectives of

government economic policy in many countries. Monetary policy can control

the growth of demand to tame inflation through an increase in interest rates and

a contraction in the real money supply. This higher interest rates reduce

aggregate demand by discouraging borrowing by both households and

companies and by increasing the rate of saving (the opportunity cost of

spending has increased) Inflation is usually measured based on certain indices.

Broadly, there are two categories of indices for measuring inflation i.e.

Wholesale Prices and Consumer Prices.

Exchange rate

Exchange Rate is the price of one country's currency expressed in another

country's currency. If there is depreciation in the exchange rate, this

depreciation will cause cost-push inflation and demand pull inflation.

Controlling inflation will lead to increase in interest rates by RBI thereby

affecting the profitability of banks.

GDP

GDP represents the total Rupee value of all goods and services produced over a

specific time period. If the GDP growth rate is speeding up too fast, RBI may

raise interest rates to stem inflation or the rising of prices for goods and

services. As GDP growth slows down, and, in particular, during recessions,

credit quality deteriorates, and defaults increase, thus resulting into reduced

bank returns. Unlike nominal GDP, real GDP can account for changes in the

price level, and provide a more accurate figure.

Gold prices

Of all the precious metals, gold is the most popular as an investment. Investors

generally buy gold as a hedge or harbour against economic, political, or social

fiat currency crises (including investment market declines, burgeoning national

debt, currency failure, inflation, war and social unrest). The gold market is

subject to speculation as are other markets.

LITERATURE REVIEW

Aswath Damodrans textbook on valuation with security analysis for investment

and corporate finance, helped the report with in-depth coverage of different

distinct valuation approaches and key models within reach, the beta estimation

with the support of regression model paved a way for better understanding and

furthermore to analyse the firm as levered or unlevered.

Manisha Luthra and Shikha Mahajans journal (2014), The Impact of Macro

Factors on BSE BANKEX, cemented the report with elaboration of MacroEconomic factors like Inflation, GDP rates, Gold Prices and Exchange Rates,

helped us to understand the effect on overall Beta in the BANKEX.

Reddy and Prasad (2011) analyses the effect of announcements made by RBI

and S&P ratings on public and private bank stocks and BANKEX respectively.

After the announcement of RBIs credit policy, the stock price of BANKEX is

affected more, when compared to public or private sector banks individually.

There is no impact of S&P ratings on public sector banks.

Ghosh et al. estimates the relationship between BSE Sensex and some important

Economic factors like Oil prices, Gold price, Cash Reserve Ratio, Food price

inflation, Call money rate, Dollar price, FDI, Foreign Portfolio Investment and

Foreign Exchange Reserve (Forex) using multiple regression model and Factor

Analysis.

Neha Sainis Measuring The Profitability And Productivity Of

Banking Industry: A Case Study Of Selected Commercial Banks

In India is used as a reference to understand the profitability

and productivity of banking industry.

RESEARCH PROBLEM

1. Responsiveness of the stock to its Sectorial Index rather than BSE/NSE?

2. Classification of those stock into aggressive or defensive stock as per

their responsiveness as per their responsiveness to Sectorial Index?

3. Calculation of Alpha (Abnormal Return) whether it prevails in any of the

stocks?

4. Whether the market (S&P BSE BANKEX) performed in accordance to

the expected return of the investors (Expected return as per the CAPM)?

5. Bottom-Up Beta i.e., convert the Raw Beta into Adjusted Beta to take

both systematic and the unsystematic risk?

VARIABLE IDENTIFICATION

Estimating Beta

The standard procedure for estimating betas is to regress stock returns (Rj)

against market returns (Rm) Rj = a + b Rm

where a is the intercept and b is the slope of the regression.

The slope of the regression corresponds to the beta of the stock, and measures

the riskiness of the stock.

This beta has three problems:

1. It has high standard error

2. It reflects the firms business mix over the period of the regression, not

the current mix

3. It reflects the firms average financial leverage over the period rather than

the current leverage.

Modify the regression beta by:

Changing the index used to estimate the beta

Adjusting the regression beta estimate, by bringing in information

about the fundamentals of the company

The standard deviation in stock prices instead of a regression

against an index

Accounting earnings or revenues, which are less noisy than market

prices.

Estimate the beta for the firm from the bottom up without employing the

regression technique. This will require:

Understanding the business mix of the firm

Estimating the financial leverage of the firm

There are four steps:

Step 1:

Break your company down into the businesses that it operates in. A firm like GE

operates in 26 businesses but Walmart is a single business company. Do not

define your business too narrowly or you will run into trouble in step 2.

Step 2:

Estimate the risk (beta) of being in each business. This beta is called an asset

beta or an unlevered beta.

Step 3:

Take a weighted average of the unlevered betas of the businesses you are in,

weighted by how much value you get from each business.

Step 4:

Adjust the beta for your company's financial leverage (Debt to equity ratio)

Using beta as a measure of relative risk has its own limitations. Most analyses

consider only the magnitude of beta. Beta is a statistical variable and should be

considered with its statistical significance (R-Square value of the regression

line). Higher R-Square value implies higher correlation and a stronger

relationship between returns of the asset and benchmark index

Comparable firms

While the narrow version of comparable firm defines it to be another firm in the

same business that the firm is in, the broader definition of comparable firm

includes any firm whose fortunes are tied to the firm's success and failure (or

vice versa).

i.

Define comparable more broadly (all software as opposed to

entertainment software).

ii.

entertainment companies listed globally would be an example.

iii.

Look up and down the supply chain for other companies that feed

into your company and that your company feeds into. Thus, you may

start looking for software retailers that get the bulk of their revenues

from entertainment software.

Any sample size greater than one is an improvement on a regression beta.

However, the more firms that we have in the sample, the greater the potential

savings in error. With a sample of 4, the standard error will be cut by half; with

a sample of 9, by two-thirds; with a sample of 16, by 75%.

Its better to get to double digits for the sample size, if you can. If you cannot,

settle for 6-8 firms and you are still saving a substantial amount in terms of

estimation error.

There is clearly a trade-off between how tightly defining "comparable firm" and

the sample size. If the comparable narrowly (firms like just like in terms of size

and what they do), one will get a smaller sample. If one can get to double digits

with a narrow definition, stay with it.

.

unlevered (asset) betas?

Simply average their regression betas and cleaning up those betas for financial

leverage and cash holdings. In practical terms, here are some issues that one

will face:

Do the regression betas for the comparable firms all have to be over the

same time period and against the same index?

In a perfect world, YES! However, as the sample size increases, one can afford

to get sloppy with these details, hoping that the law of large numbers bails you

out. Thus, if we have 100 global firms in the sample, with betas estimated

against local indices, one can get away using an average of these 100 betas

since some are likely to be over-estimated and some under-estimated.

Once we have the regression betas for the firms, should we use simple or

weighted averages?

Use simple averages. Otherwise, one will be attaching the beta of the largest

firm or firms in the group to all of the firms in the sample.

Why do we need to correct for financial leverage?

The company can have a very different policy on how much debt to use than the

typical firm in the sample. Regression betas are levered betas but they reflect

the financial leverage of the companies in the sample (and not the company).

Its necessary to take out the financial leverage effect (un-lever the beta) to

come up with a pure play or business beta.

Unlevered beta = Levered Beta / (1 + (1-tax rate) D/E)

Should we un-lever each firm's beta and then average or average and then

un-lever?

We prefer to average first and then un-lever. Individual firm regression betas are

noisy (have large standard error) and un-levering them only compounds the

noise. Averaging first should reduce the noise, leading to better beta estimates.

What tax rate and debt to equity ratio should be used for the

sector?

To be safe, its better to go with a marginal tax rate and use either the median

D/E ratio or the aggregate D/E ratio for the sector. (There are always strange

outliers with D/E ratios that make simple averages go haywire.)

leverage?

It is possible, but only if we want to know what costs are fixed and what are

variable not only for the firm but for all of the firms in the sample. If we do

have that information, one can break the unlevered beta down into a business

component (reflecting the elasticity of demand for your company) and an

operating leverage component:

Business Risk beta = Unlevered beta/ (1 +Fixed Costs/ Variable Costs)

The problem from a practical standpoint is getting the fixed and variable cost

breakdown.

for the company?

The weights should be market value weights of the individual businesses that

the firm operates in. However, these businesses do not trade (GE Capital does

not have its own listing) and one have to estimate the market values. One can

use weight based on revenues or earnings from each business but we are

assuming that a dollar in revenues (earnings) has the same value in every

business. An alternative is to apply a multiple of revenues (earnings) to the

multiple can be estimated for the comparable firms (from which we have

estimated the betas). Since we are interested in the value of the business (and

not the value of equity), we should look at EV multiples (and not equity

multiples). If we use revenues, we have to use an EV/ Sales multiple.

The standard adjustment for financial leverage is to assume that debt has no

market risk (a beta of zero) and to use what is called the "Hamada" adjustment:

Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))

We can use the current debt to equity ratio for the firm we are analysing or even

a target debt to equity (if a feeling of change is on the horizon) in making this

computation.

If we feel uncomfortable about the assumption that debt has no market risk,

estimate a beta for debt and compute the levered beta as follows

Levered Beta = Unlevered Beta (1 + (1-t)*(D/E)) Beta of debt (1-t)*(D/E)

The tricky part is estimating the beta of debt.

Yes, and for two reasons. One is that the mix of businesses can change over

time, leading to a different unlevered beta. The other is that the debt to equity

ratio for the firm can change over time, leading to changes in the levered beta.

Bottom up betas are better than a regression beta for three reasons

They are more precise. The standard error in a bottom-up beta estimate is

more precise because you are averaging across regression betas. The

savings will approximate 1/ Square root of number of firms in the sample.

Thus, even if there is only one firm is the business and has not changed

its debt to equity ratio over time, we will be better off using bottom up

betas.

If a firm has changed its business mix, one can reflect that more easily in

a bottom-up beta because you set the weights on the different businesses.

A regression beta reflects past business mix choices.

If a firm has changed its debt to equity ratio, the bottom up beta can be

easily adjusted to reflect those changes. A regression beta reflects past

debt to equity choices.

Research Methodology

Objectives

To investigate the impact of Bottom-up Beta Analysis on Banking Index.

Methodology

Sample selection

The sample selection for this study will include all the banking companies listed

on the BSE Bankex.

Hypothesis

There is positive relationship between the bankex and individual stocks;

assuming certain risk associated with each security with respect to the market;

and Return from all securities are equal, i.e. r1 = r2 = r3=..= r15; i.e. here as

null hypothesis, as against the alternative hypothesis that all returns

are not equal.

H01: > 0 (Positive risk of overall Beta)

H02: r1 = r2 = r3=..= r15 (Return from all security are equal)

Data required was collected in the form of secondary data on fundamental

variables from March 20012- March 2014 taken from BSE Index website for

the analysis purposes.

Natural Logarithm and Regression Model):

Beta of Stock

Daily Return on Stock

Daily Return on Sensex

Risk free rate

Average Daily Market Return

Annualised Market returns

The present study is an attempt to test the impact of various macro factors on

the BSE BANKEX during the period from 2012 to 2014.

In this research, linear regression model has been used to determine the

explanatory power of each valuation model. A linear regression line has an

equation of the form Y = a + bX, where X is the explanatory variable and Y is

the dependent variable. The slope of the line is b, and a is the intercept (the

value of y when x = 0).

Tests include the estimation of linear regressions with dependent variable the

bank stock price and several components of financial statements as the

independent variables. For comparing the explanatory power of research models

in valuing the stock of companies listed on Indian stock exchange, we use

adjusted R-square of the models.

In another expression, we can show that which valuation models, results are

closer to real stock prices. To do so, different regression models must be tested.

In this section, first the significance of impacts of independent variables on the

dependent variable and determining R in each model will be regarded and in

the second place the relative importance of each independent variable will be

discussed.

The integrity of regression assumptions can be determined by considering

residuals distribution and its relationships with other variables. Residuals

include the difference between the observed values of a dependent variable and

the predicted values by regression line. The assumptions of these models should

variance and independence of observations is of vital importance. In this

research, these assumptions were considered, but not mentioned here for

brevity.

Since in this research we intend to review 6 valuation models

a. Levered Beta

b. Unlevered Beta

c. Cost of Equity

d. Total Unlevered Beta

e. Levered Total Beta

f. Total Cost Unlevered Beta

g. Debt-Equity Ratio

P-Value & R-Square

Name

Type of

Bank

Axis Bank

Private

Sector

Public

Sector

Public

Sector

Public

Sector

Private

Sector

Private

Sector

Private

Sector

Private

Sector

Private

Sector

Public

Sector

Public

Sector

Private

Sector

Bank of Baroda

Bank of India

Canara Bank

Federal Bank

HDFC Bank

ICICI Bank

IndusInd Bank

Kotak

Mahindra Bank

Punjab National

Bank

State Bank of

India

Yes Bank

Intercept

X(Alpha) Variable

(Beta)

0.00

1.21

PValue

RSquare

0.00

0.70

-0.06

1.10

0.00

0.53

-0.14

1.22

0.00

0.47

-0.16

1.19

0.00

0.50

-0.34

0.91

0.00

0.04

0.04

0.79

0.00

0.67

0.02

1.12

0.00

0.81

0.04

1.10

0.00

0.61

0.81

0.81

0.00

0.54

-0.09

1.12

0.00

0.56

-0.06

0.94

0.00

0.63

-0.04

1.45

0.00

0.63

acceptable. This is because of Stock-Split.

Banks

Axis Bank

Bank of Baroda

Bank of India

Canara Bank

Federal Bank

HDFC Bank

ICICI Bank

IndusInd Bank

Kotak Mahindra

PNB

SBI

Yes Bank

Equity

Debt

Rat

io

38,220.

49

35,985.

58

29,923.

08

29,620.

11

6,860.7

1

43,478.

63

73,213.

32

9,030.1

9

19,084.

54

38,516.

33

1,18,28

2.25

7,115.2

2

2,80,944

.57

5,68,894

.39

4,76,974

.05

4,20,722

.82

59,729.0

4

3,67,337

.48

3,31,913

.66

60,502.2

9

56,929.7

5

4,61,203

.53

13,94,40

8.51

74,185.6

3

7.3

5

15.

81

15.

94

14.

20

8.7

1

8.4

5

4.5

3

6.7

0

2.9

8

11.

97

11.

79

10.

43

Average R-Square

BET

A

Axis

1.20

7.49

0.696258759

DEBT

EQUIT

Y

RATIO

R

SQ

UA

RE

Bank

Bank

of

Baroda

Bank

of

India

Canara

Bank

Federa

l Bank

HDFC

Bank

ICICI

Bank

IndusI

nd

Bank

Kotak

Mahind

ra

Bank

Punjab

Nation

al

Bank

State

Bank

of

India

Yes

Bank

AVERA

GE

8958

812

1.09

8264

434

1.22

0476

653

1.19

0616

604

0.90

8005

105

0.79

3590

929

1.12

2456

1.09

6498

15.32

0.534453942

15.95

0.468494047

14.25

0.504452098

8.82

0.038204284

8.32

0.670829371

4.64

0.805553

6.9

0.611049

0.80

8344

5.11

0.541481

1.11

5365

0.561559

0.94

4480

0.631300

0.629042

7.2333

33333

0.557723038

1.45

3794

1.08

007

077

9

SQUARE ROOT

R SQUARE

OF AVG 0.746808569

Axis Bank

Bank of

Baroda

Bank of India

Canara Bank

Federal Bank

HDFC Bank

ICICI Bank

IndusInd

Bank

Kotak

Mahindra

Bank

Punjab

National

Bank

State Bank of

India

Yes Bank

AVERAGE

SQUARE ROOT

BETA

1.21

DEBT

EQUITY

RATIO

7.35

R

SQUAR

E

0.70

1.10

1.22

1.19

0.91

15.81

15.94

14.20

8.71

0.53

0.47

0.50

0.04

0.79

1.12

8.45

4.53

0.67

0.81

1.10

6.70

0.61

0.81

2.98

0.54

1.12

11.97

0.56

0.94

11.79

1.45

10.43

1.08

9.91

OF AVG R SQUARE

0.63

0.63

0.56

0.75

Estimated Valuation Models

UNLEVERED BETA

Rates

0.14

LEVERED BETA

1.08

1.45

0.11

CAPITAL

0.11

Note: Rates which are used for determination of the calculation of the above

estimated valuation models

MARGINAL TAX RATE

0.30

RISK FREE RETURN (Rf)

RISK PREMIUM (Rm - Rf)

0.10

0.08

0.02

The empirical tests that are applied to equity valuation for Banks in the

examined banking sector are based on the following models: a) Levered Beta,

b) Unlevered Beta, c) Cost of Equity, c) Total Unlevered Beta, d) Levered Total

Beta, f) Total Cost Unlevered Beta, and g) Debt-Equity Ratio which captures

the spirit of the value relevance of linear regression analysis. The valuation

models are introduced and tested empirically, using the estimation method on a

sample of 14 Indian bank stocks included in BSE BANKEX. These tests include

the estimation of linear regressions with the various banks market price as the

dependent variable and various components taken from the financial statements

as independent variables. Overall, the results of the empirical analysis indicate

that the linear accounting-based valuation model (EBO Model) that incorporates

both stock and flow components, provides greater explanatory power and thus

better captures the different aspects of equity values of bank stocks in the Indian

banking sector .

SUGGESTION

A fairer way to compute alpha would be to add back a reasonable expense ratio

(something in the 1.0% range) to the funds return. This seems only fair since a

funds expected returns should actually be less than its benchmark, given the

same risk level as the index. A funds expected returns should be less than its

benchmark because an index has no expense ratio, does not factor in trading

costs when securities are bought or sold, and does not provide shareholder

services. This fairer way would be used when comparing a fund or ETF

against its peer group. A potential shortcoming of alpha is it may not reflect

management skill in selecting securities. Instead, a low alpha might simply

mean the fund has high expensessomething largely beyond the control of the

people selecting fund securities. A second flaw with alpha is that a positive or

negative number could be the result of good or bad luck. By reviewing a funds

alpha over several periods, the impact of luck becomes less and less.

Remember, alpha is considered a valid measurement only if the portfolio has a

high or very high R-squared number (75100).

potentially generate more earnings than it would have without this outside

financing. If this were to increase earnings by a greater amount than the debt

cost (interest), then the shareholders benefit as more earnings are being spread

among the same amount of shareholders. However, the cost of this debt

financing may outweigh the return that the company generates on the debt

through investment and business activities and become too much for the

company to handle. This can lead to bankruptcy, which would leave

shareholders with nothing.

For a suggestion to have a more control debt-equity ratio then Optimal debtto-equity ratio is considered to be about 1, i.e. liabilities =

equity, but the ratio is very industry specific because it

depends on the proportion of current and non-current assets.

The more non-current the assets (as in the capital intensive

industries), the more equity is required to finance these long

term investments.

CONCLUSION

On an overall, the null hypothesis is accepted. After computation, out of 14

banks listed in BANKEX, 8 of them has a significance value of more than one,

which represent the stock is aggressive and quite volatile. For example, YES

BANK has an estimation of Beta around 1.45, indicates that the stock is 45

percent more volatile than the market beta of Sensex 1. The stated stock will

deliver 14.5 percent return if the market has delivered 10 percent return in same

time period. Its opposite is also true if Sensex delivers 10 percent negative

return then the stated stock will fall by 14.5 percent in the same time period. A

beta of less than 1 implies lesser volatility. But on an average after formulation

and computation the overall return is 1.08 percent, therefore slightly volatile of

8 percent as the remaining banks are of less risky i.e., under 1.

The desirable value of beta depends upon the individual risk bearing capacity.

So, one can expect a high return from a stock that has a beta of 2, but will have

to expect it to drop much more when the market falls.

R-squared is a statistical measure of how close the data are to the fitted

regression line. It is also known as the coefficient of determination, or the

coefficient of multiple determination for multiple regression.

The definition of R-squared is fairly straight-forward; it is the percentage of the

response variable variation that is explained by a linear model. Or:

R-squared = Explained variation / Total variation

R-squared is always between 0 and 100%:

0% indicates that the model explains none of the variability of the

response data around its mean.

100% indicates that the model explains all the variability of the response data

around its mean.

In general, the higher the R-squared, the better the model fits the data.

Furthermore, if R-squared value is low but have statistically significant

predictors, one can still draw important conclusions about how changes in the

predictor values are associated with changes in the response value. Regardless

of the R-squared, the significant coefficients still represent the mean change in

the response for one unit of change in the predictor while holding other

predictors in the model constant. Obviously, this type of information can be

extremely valuable. Such in the cases of the banks which have above 0.50 rsquare value, which is meeting 50 percent of the explained variation with total

variation.

Higher R-Square depends on the decision-making situation, and it depends on

the objectives or needs, and it depends on how the dependent variable is

defined. In some situations it might be reasonable to hope and expect to explain

99% of the variance, or equivalently 90% of the standard deviation of the

dependent variable. In other cases, one might consider it to be doing very well

if there is a proper explanation of 10% of the variance, or equivalently 5% of

the standard deviation, or perhaps even less.

The overall debt-equity ratio is high, for BOI it is around 15.94 and overall

nearly 10 %. Therefore it generally means that this sector is very aggressive in

financing its growth with debt. This can result in volatile earnings as a result of

the additional interest expense. Only Kotak Mahindra Bank has the lowest debt

in terms of equity and similarly ICICI stands seconds in terms of lower D/E

ratio.

PROFITABILITY AND PRODUCTIVITY OF BANKING INDUSTRY: A

CASE STUDY OF SELECTED COMMERCIAL BANKS IN INDIA,

about the profitability, there is a significant difference between

the selected banks of public and private sector. And when

productivity is concerned, there is no significant difference

between the selected banks of public and private sector.

Although both sectors show increasing trend in productivity

ratios but in comparison private sector banks are having high

productivity and high profitability. Public sector bank shows low

productivity, the reason may be high staffing. Staff needs to be

managed according tothe business and forecasting of human

resource planning can be done accordingly.

Alpha is one of five technical risk ratios; the others are beta, standard deviation,

R-squared, and the Sharpe ratio. These are all statistical measurements used in

modern portfolio theory (MPT). All of these indicators are intended to help

investors determine the risk-reward profile of a mutual fund. Simply stated,

alpha is often considered to represent the value that a portfolio manager adds to

or subtracts from a fund's return.

A positive alpha of 1.0 means the fund has outperformed its benchmark index

by 1%. Correspondingly, a similar negative alpha would indicate an

underperformance of 1%. Most of the Firms under BANKEX is

underperforming.

If a CAPM analysis estimates that a portfolio should earn 10% based on the risk

of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would

be 5%. This 5% is the excess return over what was predicted in the CAPM

model.

The cost of equity is very difficult to estimate, partly because it as an implicit

cost and partly because it varies across equity investors. For publicly traded

firms, we estimate it from the perspective of the marginal investor in the equity,

who we assume is well diversified. This assumption allows us to consider only

the risk that cannot be diversified away as equity risk, and to measure it with a

beta (in the CAPM) or betas (in the arbitrage pricing and multi-factor models).

We also presented three different ways in which we can estimate the cost of

equity: by entering the parameters of a risk and return model, by looking and

computing at return differences across stocks over long periods, and by backing

out an implied cost of equity from stock prices.

The Cost of Debt is the rate at which a firm can borrow money today and will

depend on the default risk embedded in the firm. This default risk can be

measured using a bond rating (if one exists) or by looking at financial ratios. In

addition, the tax advantage that accrues from tax-deductible interest expenses

will reduce the after tax cost of borrowing.

REFERENCES

Damodaran on Valuation :Estimating Discount Rates

Manisha Luthra and Shikha Mahajans journal (2014), The Impact of Macro

Factors on BSE BANKEX,

Reddy and Prasad (2011) analyses the effect of announcements made by RBI

and S&P ratings on public and private bank stocks and BANKEX respectively.

Ghosh et al. paper Determinants of BSE Sensex: A Factor Analysis Approach

Neha Sainis paper MEASURING THE PROFITABILITY AND

PRODUCTIVITY OF BANKING INDUSTRY: A CASE STUDY OF

SELECTED COMMERCIAL BANKS IN INDIA

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