ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9
PERFORMANCE EVALUATION OF SELECTED BANKS USING ECONOMIC VALUE ADDED

Dr. Shivappa,
Mrs. Jyoti N Talreja,
Associate Professor, Kousali Institute of Management Studies,
Assistant
Karnatak
ProfessorDept.
UniversityofDharwa
MBA,
Belgaum

ABSTRACT
Every business requires to win stakeholders confidence by presenting their reports in the most
sophisticated manner. The measurement tools like cash flow statements analysis, fund flow
statements analysis, ratio analysis, common size statements Return on Investment (ROI), Return on
Net worth (RONW), Return on Capital employed (ROCE), Earning per share (EPS) are the
most popular traditional used techniques to measure the performance. In the recent years many
modern techniques have also gained popularity like Balanced score card, value added statements,
Economic value Added (EVA) Cash value Added, Shareholders Value Added etc. Out of the
modern techniques available Economic value added has gained popularity to measure performance
from shareholders point of view. Through this paper an attempt is made to calculate EVA for two
banks selected each one from public and private sector The main objectives of this paper are To
determine the value added by the banks to shareholders wealth using Economic Value added and To
calculate Beta and analyse the Risk of SBI and ICICI
Keywords: EconimicValue Added, Banking, Shareholders Wealth, Beta, Cost of capital

Introduction:
Banking Sector in India has seen a
tremendous growth since its inception,
introduction
of
Liberalization,
globalization and Privatization LPG in
1990s has significantly changed the
structure of banking sector. This sector
plays a crucial role in the economic
development of the country and is an
important part of Indian Financial system.
EVA concept was developed by Stern
Stewart and Co. in the 1990s in U.S. Since
then many companies have used this
technique to measure their financial
performance. Economic value Added uses
the residual income approach to measure
performance. EVA is calculated by
deducting total cost of capital (Debt +
Equity) known as capital charge from the
Net operating profit after tax. Traditional
techniques dependent on the net profit
which considers only cost of debt or
borrowings. Therefore EVA is considered

ELK Asia Pacific Journals Special Issue

ISBN: 978-81-930411-0-9

superior to Traditional techniques

EVA enables the stakeholders to get a
true picture about the organizations
performance.
Review of Literature: The literature
relating to EVA begins with the
publication of the book The Quest
for Value by Stewart (1991), in this
book the author highlights the
significance of EVA as the basis of
performance measurement of a
company and its management. In his

empirical research Stewart examined the

informational content of EVA, by testing
613 American companies comparing two
periods, namely 198485 and 198788. He
found a strong correlation between EVA
and MVA. His ideas were further
supported by OByrne (1996), Grant
(1996), Dodd and Chen (1996), Peterson
and Peterson (1996), Biddle et al. (1997)
and many more
R.SATISH AND Dr.S.S.RAO (2010): have
studied
on
PERFORMANCE

MEASUREMENT OF BANKS: AN
APPLICATION OF ECONOMIC VALUE
ADDED & BALANCED SCORECARD
this paper focuses on awareness of EVA as
a performance measurement technique in
Indian banks. In this comparison the
researcher emphasizes on BSC as a better
technique as CAMEL entirely ignores
qualitative measures of performance, in
section D the researcher concentrates on
EVA as a performance measurement tool
and in this section the researcher used
primary data to analyze the awareness
about EVA among the Indian banks, he
used 39 banks listed on BSE as sample.
The respondents selected were General
Managers and assistant managers and
almost 23% of the respondents assigned
highest rank to EVA as a performance
indicator in banking system.
G Soral and Shurveer S Bhanawat (2009)
have worked on Shareholder Value
Creation in the Indian Banking Industry:
An EVA Analysis sample of 14 public
sector banks and 12 private sector banks
was selected by the authors to measure
bank performance on the basis of EVA.
The analysis was done for 4 years and
equity approach was been followed to
calculate EVA. After finding the EVA
the authors found out the correlation
between EVA and other financial figures.
The authors conclude that in Public sector
SBI has contributed highest EVA they
also conclude that EVA has significant
correlation with Operating profit
Roji George(2005): has conducted research
on Computation of EVA in Indian Banks
the research concluded that banks add
value to the shareholders wealth and do
not destroy them and a positive
relationship was found between EVA,
NPA and employee productivity. The

study reveals that public sector banks

perform better than private sector banks for
the selected period in spite of high cost
of capital. The

researcher suggests that public sector

banks can use EVA as their USP
while reaching the capital market.

Samuel C. Weaver (2001): the author

has worked on Measuring Economic
Value Added: A survey of the
practices of EVA proponents A
survey was conducted by the author by
selecting 29 respondents who were
clients of Stern Stewart and Company
The survey demonstrates that the
calculation of EVA varies widely from
company to company. The author
concludes that EVA is primarily
implemented to enhance financial
performance
metrics
and
EVA
proponents perceive a link between
EVA and shareholders returns.

Research Methodology:
Objectives of the study

To study Economic Value Added

and its applications in Indian Banks
To determine the value added by
the banks to shareholders wealth
using Economic Value added
To calculate Beta and analyse the
Risk of selected banks
To calculate the Return on capital
employed by the selected banks
To compare the value added by
public sector banks and private
sector banks using the selected
banks

Sample size: The study is conducted by

selecting two leading banks in India one
each from Public Sector and Private Sector
namely State Bank of India and ICICI
Bank
Collection of Data: Secondary data is used
for the study. The data is collected from the
annual reports of the banks, Publications
by RBI and stock prices of the banks are
collected from stock market websites like
yahoo finance, money control and NSE

Tools for Analysis:

Various financial tools are used for
different analysis like Capital Asset pricing
Model is used to calculate the cost of
Equity, regression technique using excel is
used to calculate the Beta values for the
selected banks, ratios and Graphical
representation is used to analyse and
interpret the data
Duration of Study:
The study is conducted for a period of two
years i.e., 2012-13 and 2013-14
NOPAT (Net operating profit after Tax)

Results and Discussions:

Net Operating Profit is considered instead
of Net profit to find the Economic value
added
Net Operating Profit = Income- Operating
Expenses
Net Operating Profit after Tax is used
instead of Net Profit to get a true Picture of
the value created
NOPAT= Operating Profit Tax

Banks

SBI

ICICI

Year
Total Income
Operating
expenses
Operating Profit
Taxes
NOPAT

2012-13 (Rs. In
Cr)
135,691.9
4
29,284.4
2
106,407.5
2
5846

2013-14 (Rs. In
Cr)
154,903.7
2
35,725.8
5
119,177.8
7
5283

100,561.5
2

113,894.8
7

Invested Capital is calculated by adding

Equity Capital, Reserves and Surplus and
Borrowings
Invested Capital
2012-13
2013-14
Ba
(Rs.
(Rs.
nk/
In
In
Yea
Cor
SBI
328756.2 Cor
371130.2
2
5
ICICI
Bank
212042.9
227965.8
6
0
Return on Invested Capital: is calculated
by dividing Net Operating Profit after
Tax with the total capital Invested

2012-13 (Rs.
In Cr)

2013-14 (Rs.
In Cr)

2221
2
901
3
13,199.0
0
307
2
10,127.0
0

2690
3
1030
9
16,594.0
0
415
8
12,436.0
0

Return on Invested Capital

Bank/Ye
ar s
SBI
ICICI
Bank

201213
35
%
4.78
%

201314
27
%
5.46
%

BETA ()
Beta can be defined as the risk co-efficient
higher the Beta higher is the RisK. It is used
to calculate Cost of Equity. Beta is the
systematic risk which is calculated using
the following formula. Calculations of Beta
are done using Excel the calculation is
shown in the annexure
nxy - (x) (y) nx2 - (x)2

Beta ()
Bank/Yea
rs
SBI

ICICI

Market Return (Rm)

201213
0.98
1.54

201314
2.37
2.78

Bank/Ye
20122013ar s
13
14
SBI
8.15
17.72
%
%
ICICI
8.15
17.72
%
Market Return (Rm)%
Market return is calculated using 2 years
Market Monthly return of NIFTY,
calculations are done using excel,
calculations are shown in the annexure

Cost of Equity (Ke):

Cost of Equity (Ke):

It determines the expected rate of return for
the investors it is calculated by using
Capital Asset Pricing Model CAPM by
taking inputs such as Beta risk factor, Rm
Market Return, Rf Risk Free Rate (364
days treasury bill rate is taken for each
year)

SBI

ICICI Bank

Years
Risk free rate
of return Rf
Market Return Rm
Beta
Ke

201213
7.79
%
8.15
%0.9
8
8.14
%

201314
8.96
%
17.72
% 2.3
7
29.72
%

Years
Risk free rate
of return Rf
Market Return Rm
Beta
Ke

201213

201314

7.79
%
8.15
%1.5
4
8.34
%

8.96
%
17.72
% 2.7
8
33.31
%

201213
(Rs.
In
10701.
7 7
14534
1. 49

201314
(Rs.
In
11291.
5 9
15475
9. 05

Cost of Debt (Kd)

Cost of debt is calculated by: Interest/ Borrowings*100
Cost of Debt (Kd)
SBI
Years
Interest
expenses
Borrowings
Cost of
Debt (Kd)

ICICI Bank

2012-13 (Rs. In
Cr)
7861.2
5
203723.2
0
3.86
%

WACC (Weighted Average Cost of

Capital)

2013-14 (Rs. In
Cr)

Years
Interest
expenses

9182.9
3
223759.7 Borrowings
1
Cost of
4.10
7.36
Debt (Kd)
%
%
Weight of equity and debt in
capital invested is calculated
weighted average cost of capital

7.30
%
the total
to find

WACC (Weighted Average Cost of Capital)

SBI
2012-13
2013-14
(Rs.
(Rs.
Years
In
In
Cor
Cor
Total
203723.1
223759.7
9
0
Borrowings
69
95
Total Equity
684.03
746.573
4
1
Reserves
124348.9
146623.9
and
9
6
Total
328756.2
371130.2
capital
2
5
Debt weight
0.6
0.6
2
0
Equity weight
0.3
0.4
8
0
Weighted Average Cost of Capital is
calculated using the following formula
WACC= (Ke* weight of equity)+(Kd*
weight of debt)
WACC (%)
Bank/Ye
ar s
SBI
ICICI

2012201313
14
5.49
14.28
%
%
7.67
15.65
%
%
Capital Charge :
Capital Charge is calculated by multiplying
total Capital Invested with WACC
(Invested Capital*WACC)
Economic Value Added (EVA)
SBI
2012-13
2013-14
(Rs.
(Rs.
Years
In
In
Cor
Cor
NOPAT
100561.5
113894.8
2
7
Capi
18042.4
52983.2
tal
4
2
EVA
82519.0
60911.6
8
5

ICICI Bank
2012-13
(Rs.
Years
In
Cor
Total
145341.4
9
Borrowings
44
Total Equity
1153.6
4
Reserves
65547.8
and
3
Total
212042.9
capital
6
Debt weight
0.6
9
Equity weight
0.3
1

2013-14
(Rs.
In
Cor
154759.0
5
39
1155.0
4
72051.7
1
227965.8
0
0.6
8
0.3
2

Capital Charge
2012-13
2013-14
(Rs.
(Rs.
In
In
Cor
Cor
18042.4
52983.2
4
2
16267.6
35678.8
1
1
Economic Value Added (EVA)
EVA= Net Operating Profit after TaxCapital Charge
Bank/Y
ea rs
SBI
ICICI
Bank

Years
NOPAT
Capi
tal
EVA

ICICI Bank
2012-13
(Rs.
In
Cor1012
7
16267.6
16140.6

Economic Value Added (%age)

EVA = Return on Capital Employed Weighted Average Cost of Capita

2013-14
(Rs.
In
Cor1243
6
35678.8
-1
23242.8

Economic Value Added (%)

SBI
Years
Return on Invested
Capital SBI

201213

201314

35
%
5.49
%29
%

ICICI Bank
201213

Years
Return on
Invested Capital

201314

27
4.78
5.46
%
%
%15.6
14.2
8
5
WACC
WACC
7.67
%
%
EVA
13
EVA
- %
%
3
10
deteriorating it. In order to determine this,
Findings
bankers need to apply the Economic value
It was observed through the analysis
added measure.
that State bank of India added value to
the shareholders wealth by generating a
positive Economic Value Added and
meeting its capital charge entirely.
Whereas ICICI bank could not add
value to the shareholders wealth
Return on Capital Employed of SBI is
greater than its cost whereas in case of
ICICI Cost is higher than the Returns
Beta values are calculated to find the
risk co-efficient of the banks it is
observed that beta of both the banks is
high in the year 2013-14. This shows
the banks stocks were very volatile in
this period as compared to the market.

Conclusion:
Banking sector in India is growing in leaps
and bounds and is also approaching capital
market for infusion of funds to escalate
further growth in the banking sector. It is
now predominantly significant for bankers
to increase the shareholders wealth and
encourage them for more investment in
banks. To do this the banks have to
measure
their
performance
from
shareholders perspective, bankers will
have to follow wealth maximization as an
objective to indicate that they are adding
value to shareholders wealth and not

Through this paper an attempt is

made to evaluate bank performance
using Economic Value Added as a
Performance measurement technique, it
is concluded that EVA can be used to
value
bank
performance
from
shareholders
point
of
view.
Shareholders can use EVA values to
decide on their investment decisions
in different banks.

Vol.VI.No.1.October 2010.pp. 74 101

[2] Roji George Computation of EVA
in Indian Banks The IUP Journal
of Bank Management, 32 May
2005
[3] Samuel C. Weaver Measuring
EVA A survey of the practices of
EVA proponents Journal of
applied finance 2001

References
[1] R.Satish
and Dr.S.S.Rao
Performance measurement of
banks: an application of
Economic Value Added &
Balanced Scorecard Journal
of
Management

[4] G Soral and Shurveer S Bhanawat

Shareholder Value Creation in the
Indian Banking Industry: An EVA
Analysis The IUP Journal of
Accounting Research & Audit
Practices, Vol. VIII, Nos. 3 & 4,
2009