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Faculty Guide
Dr. M. Manickaraj
By
Swapnil Shende
PGDM (Banking & Financial Services)
2014-16
Report submitted in Term-5 towards partial fulfillment of the requirements for the
award of
Post Graduate Diploma in Management (Banking & Financial Services)
Contents
Sl.
No.
1.
Topic
Page
no.
Acknowledgement
2.
Executive Summary
3.
4.
14
5.
17
6.
7.
Chapter 5: Conclusion
34
8.
Reference
35
Annexures
36
31
Acknowledgement
Firstly I would to like convey my sincere and heartiest thanks to my faculty guide Dr.
M.Manickaraj (Faculty Research Associate, NIBM) for constantly supporting and guiding me
for the successful completion of my Banking and Finance project. Without his rigorous support
and lucid explanation of some complex concepts to me, completion of this critical project would
not be possible.
Secondly I would to like convey my sincere gratitude to our director Dr. Achintan
Bhattacharya Dean-Education & Principal of Post Graduate Diploma in Management for
Banking and Financial Services [PGDM (B & Fs)] of National Institute of Bank Management
(NIBM), for giving me the opportunity to do this Banking and Finance project.
Executive Summary
Project Description:
In a bank-based economy like India, sound health of the banking system is an imperative for
efficient financial intermediation, the pillar on which overall development and financial stability
of the economy depends. In India, banks have dominant share of 63% of the financial assets,
compared to 19%, 8%, 6% and 4% share held by Insurance companies, non-banking financial
institutions, Mutual funds and provident fund respectively.
In banking system, public sector banks hold 72% of the banking asset compared to 22% and 6%
asset held by private and foreign banks respectively. However, current market capitalization of
the public sector banks is just 39% of the total market capitalization of the banking sector.
Literature review:
Mid-Year Economic Review of CEA (Chief Economic Advisor), Monetary Policy document for
the last 1 year was studied, CMIE Database was studied to obtain data of important factor like
M1, M0, M2, M3 and m (Money Multiplier). Research report of various broking companies
were studied and their views were taken into consideration while preparing the report.
Methodology: For Micro Economic Data and Macro Economic Data CMIE
database is used. For comparison of PSB vs PVSB, data from Indian Banking
Association was used. For obtaining Financial Statements, Adjusted Closing price
of the Stocks ACE Equity Database was used.
4
Chapter
I:
Current
Picture of India
Economic
Many factors like inflation, fiscal and current account deficit, crude oil price that were limiting
monetary and fiscal measures have fallen into place prompting surprise rate cut by RBI. Globally
also, India is the only major country that is projected to see a pickup in growth momentum. The
growth cycle has turned and moved from slowdown to a recovery mode - last seen in 2009. This
may start out gradually, but growth will pick up speed in the coming years with Indian economy
expected to grow at ~7.5% by FY17E.
Cyclicals, sector whose performance is linked with the business cycle, will benefit from the
revival in growth momentum, relatively lower interest rate and improvement in corporate
profitability.
Banks will be the key beneficiary of the expected uptrend in economic cycle as they account for
a major portion of financial intermediation and are the main channel of monetary policy
transmission, credit delivery and payment systems.
The Banking Credit History over the last decade.
Phase
GDP
NPA
Credit Growth
I - 2001-2006
Growth
Averaged
Sharp
High
6.3%
decline
in growth
growth
of averaging 25%
Gross NPA
Remarks
Companies
(ARC),
Advisory
Committees,
allowed
attachment
banks
notices
to
issue
without
5
II -2006-2009
Averaged
intervention of courts
Reversal in Credit growth Divergence between the growth in
8.8%
trend
with Registered
III
2013
2009- Averaged
7.7%
growth
slowdown
Sharp
averaging 19%
Slowdown in Sharp contrast in movement of credit
growth
averaging
averaging 17%
37%
An analysis of growth in nominal GDP and gross NPAs reveals that slowdown in GDP growth is
accompanied by rise in NPAs growth. Over the last one decade, growth in NPAs decelerated
sharply, following acceleration in GDP growth in 11 quarters, whereas growth in NPAs rose
sharply following the deceleration in GDP
Some positive Development for Banks
1.
2.
3.
4.
Another positive for public sector banks is the new approach of the new union government to
make public sector banks more efficient to meet government's social agenda. As the new
government finds its feet firmly grounded in next couple of years, we believe that main
recommendations of the PJ Kayak committee will be implemented to give banks more autonomy
and headroom to raise capital to meet Basel III requirement.
The recommendation of the Committee are
directors to boards
Fully empower boards in PSBs
Setting up of an autonomous Bank Investment Company (BIC) to hold equity stakes in
banks
Withdrawal of Reserve Bank's nominees on the boards of PSBs
Separation of CMDs' posts into executive MD and non- executive chairman (already
implemented)
Raising of the ceiling for promoter investors' stake to 25%
Permitting private equity funds including sovereign wealth funds to take a controlling
stake of up to 40% in distressed banks
GDP Forecast:
Different Global Banks like Banking organization like IMF , EIU , OECD , UN and
Goldman Sachs have predicted GDP Forecast For India.
GDP Growth Forecast
IMF Forecast
7.8% By 2020
UN Forecast
7.7% By 2017
EIU Forecast
7.9% By 2018
OECD Long Term Forecast
5.8 % By 2025
Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
OECD
6.07%
5.96%
5.89%
5.87%
5.87%
5.88%
5.90%
5.90%
5.89%
5.88%
IMF
UN
7.70%
7.70%
7.80%
Gold Man
Sachs
8%
8%
8%
8%
8%
D&B
7.50%
7.50%
7.50%
7.50%
7.50%
2x - Credit Growth
15%
15%
15%
15%
16%
12%
12%
12%
12%
12%
3x - Credit Growth
23%
23%
23%
23%
23%
18%
18%
18%
18%
18%
Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
1.4
1.4
1.2
1.3
1.3
1.2
1.2
1.3
1.2
1.2
4.8
4.7
4.3
4.9
4.8
4.7
5.2
5.5
5.5
5.5
1.4
1.3
1.2
1.2
1.2
1.2
1.2
1.2
1.2
Analysis of banking data from 1964 to 2015 for last 41 years. Following are
the observation from the data observed in the table
The Credit to GDP Ratio was as low as 7.82 % and it increased to 52.26% by 2015.
Compared to Global Standard or of Developing Country Parameter were are way below.
10
The composition of CASA and Term Deposit has remain constant over last 2
decades.
11
12
2013
2014
2015
5745697
1759056
4472845
6961988
121838
71256
50582
77.85
30.62
2.40
2.01
6589020
1974189
5101142
7968416
127653
90633
37020
77.42
29.96
2.30
2.56
7195480
2168852
5476250
8678770
138097
100277
37820
76.11
30.14
2.25
2.92
2013
2014
2015
1395836
625931
1143249
1989797
48656
19660
28995
81.90
44.84
2.98
0.52
1591694
648698
1342935
2258810
59257
25503
33754
84.37
40.76
3.11
0.66
1787761
727998
1543917
2534558
68402
30183
38219
86.36
40.72
3.15
0.89
13
Foreign Banks
Foreign Banks
2013
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
Credit To Deposit Ratio
Investment To Deposit Ratio
Spread as a % Of Assets
Net NPA / Net Advances (%)
2014
288144
228063
263680
637894
20514
8846
11586
91.51
79.15
3.69
1.01
2015
352459
260456
291142
748809
22716
12597
10131
82.60
73.90
3.28
1.09
414441
254020
327615
754356
25244
12442
12802
79.05
61.29
3.53
0.54
2013
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
7429677
2613051
5879773
9589679
191008
99763
91163
2014
8533173
2883344
6735219
10976035
209625
128732
80905
2015
9397682
3150871
7347781
11967684
231744
142902
88842
2013
Deposits
Investments
Advances
Assets
Operating
Profits
Provisions
77.3
%
67.3
%
76.1
%
72.6
%
63.8
%
71.4
2014
77.2
%
68.5
%
75.7
%
72.6
%
60.9
%
70.4
PVSB
2015
76.6
%
68.8
%
74.5
%
72.5
%
59.6
%
70.2
2013
18.8
%
24.0
%
19.4
%
20.7
%
25.5
%
19.7
2014
18.7
%
22.5
%
19.9
%
20.6
%
28.3
%
19.8
FB
2015
19.0
%
23.1
%
21.0
%
21.2
%
29.5
%
21.1
2013
2014
2015
3.9%
4.1%
4.4%
8.7%
9.0%
8.1%
4.5%
4.3%
4.5%
6.7%
10.7
%
8.9%
6.8%
10.8
%
9.8%
6.3%
10.9
%
8.7%
14
%
55.5
%
Profits
%
45.8
%
%
42.6
%
%
31.8
%
%
41.7
%
%
43.0
%
12.7
%
12.5
%
14.4
%
Deposits
Investments
Advances
Assets
Operating Profits
Provisions
Profits
Credit To Deposit Ratio
Investment To Deposit
Ratio
Spread as a % Of Assets
Net NPA / Net Advances
(%)
14.7
%
12.2
%
14.0
%
14.5
%
PVSB
FB
Total
2015
2014
2015
2014
2015
2014
2015
9.2%
14.0%
12.3%
22.3%
17.6%
14.9%
10.1%
9.9%
3.6%
12.2%
14.2%
-2.5%
10.3%
9.3%
7.4%
17.5%
15.0%
10.4%
12.5%
14.5%
9.1%
8.9%
13.5%
12.2%
17.4%
0.7%
14.5%
9.0%
4.8%
27.2
%
26.8
%
8.2%
10.6
%
21.8%
15.4%
10.7%
11.1%
9.7%
10.6%
29.7%
18.4%
42.4%
-1.2%
29.0%
11.0%
2.2%
16.4%
13.2%
-12.6%
26.4%
-11.3%
9.8%
-0.5%
-1.7%
3.0%
2.4%
-9.7%
-4.3%
-2.1%
0.6%
-9.1%
-0.1%
-6.6%
-17.1%
-4.2%
-2.1%
4.3%
1.3%
-10.9%
7.4%
27.1
%
14.3
%
25.8%
34.3%
7.5%
-50.5%
PSB have share of around 76% in Deposit segment and it is losing ground to PVSB and
FB. FB are aggressive on this front in expansion of Deposits
PVSB have gained the market share in Advances from 19.4 % in 2013 to 21.0% in 2015.
Growth in operating profits has been 1.5X that of PSB for FB and 2X that of PSB for
PVSB.
Profit Share of PSB has drastically reduced from 52.0% to 42.5% while that has
increased for PVSB from 31.5 to 43%.
Spreads of PSB is under constant stress and has reduced by 4.2% and 2.1% sequentially
over the last 2 years.
For PVSB there has been a sharp increase in Net NPA over the last year.
15
Ratios
Return on Total Assets
Return on Equity
Operating Cost to Total
Income Ratio
Provisions to Operating
Income
Cost of Funds (Deposits and
Borrowings)
Return on Interest Earning
Assets
Interest Spread
Net Interest Margin
(NIM)
2015
1.98
%
20.29
%
HDFC Bank
2014 2013
1.97
1.87
%
%
22.00 20.87
%
%
2012
1.71
%
19.07
%
2011
1.61
%
17.13
%
2010 2009
1.50
% 1.42%
16.58 16.97
%
%
24.21
%
3.76
%
24.52
%
3.39
%
26.87
%
4.05
%
27.77
%
5.61
%
29.71
%
7.83
%
29.75 28.60
%
%
10.49
% 9.52%
6.05
%
9.82
%
3.78
%
4.78
%
6.37
%
10.11
%
3.74
%
4.76
%
6.57
%
10.36
%
3.79
%
4.88
%
6.12
%
9.82
%
3.69
%
4.90
%
4.67
%
8.44
%
3.77
%
4.89
%
4.69
% 6.92%
8.33 10.78
%
%
3.64
% 3.86%
4.68
% 5.36%
Composition of Deposits
CASA
16.27
%
27.71
%
55.91
%
43.98
%
16.69
%
28.08
%
55.17
%
44.76
%
17.63
%
29.78
%
52.54
%
47.41
%
18.36
%
29.99
%
51.57
%
48.36
%
22.19
%
30.42
%
47.25
%
52.61
%
22.19
%
29.79
%
47.96
%
51.98
%
19.87
%
24.45
%
55.56
%
44.32
%
81.08
%
82.49
%
80.92
%
79.21
%
76.70
%
75.17
%
69.24
%
Composition of Assets
0.54
0.61
0.69
0.71
%
%
%
%
0.80
%
Demand Deposits
Savings Deposits
Term Deposits
Fixed Assets
0.97
% 0.96%
17
Cash balances
Advances
Investments
PAT/PBT
PBT/Operating Profit
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost /
Total Income
- Rent, Taxes, Lighting
Cost / Total Income
- Other Operating
Costs / Total Income
Total Income/Total
Assets
- Interest Income /
Total Assets
- Other Income / Total
Assets
Total Assets/Equity
ROE
6.15
%
61.90
%
28.19
%
8.05
%
61.64
%
24.60
%
6.81
%
59.88
%
27.88
%
DuPont Analysis
66.54 66.34 68.97
%
%
%
116.4 115.0 121.0
0%
3%
8%
22.94 22.59 19.22
%
%
%
45.32 46.10 45.81
%
%
%
8.57
8.84
9.77
%
%
%
1.81
1.86
2.00
%
%
%
13.83 13.82 15.09
%
%
%
10.20 10.34 10.74
%
%
%
9.36
9.54
9.72
%
%
%
1.76
1.86
1.93
%
%
%
10.26 11.19 11.16
18.59 19.95 19.24
%
%
%
Cost Structure (%
45.32 46.10
Interest cost
%
%
8.57
8.84
Employee cost
%
%
1.81
1.86
Rent, lighting, etc
%
%
13.83 13.82
Other costs
%
%
24.21 24.52
Total operating cost
%
%
22.94 22.59
Operating Profit Margin
%
%
3.76
3.39
Provisioning
%
%
to Total
45.81
%
9.77
%
2.00
%
15.09
%
26.87
%
19.22
%
4.05
%
6.20
%
57.83
%
28.85
%
10.70
%
57.68
%
25.57
%
13.46
% 9.55%
56.56 53.95
%
%
26.35 32.09
%
%
68.77
%
133.3
3%
16.82
%
44.19
%
10.45
%
2.15
%
15.17
%
10.12
%
9.16
%
1.95
%
11.13
17.36
%
67.44
%
147.8
2%
16.36
%
38.27
%
12.09
%
2.61
%
15.01
%
8.88
%
8.02
%
1.83
%
10.66
15.44
%
68.62 67.88
%
%
194.2 230.7
5%
1%
11.13
% 7.28%
38.14 45.08
%
%
11.69 11.65
%
%
2.82
% 2.62%
15.24 14.34
%
%
9.19 10.78
%
%
8.00 10.31
%
%
2.08
% 2.17%
11.09 11.92
15.12 14.65
%
%
Income)
44.19 38.27
%
%
10.45 12.09
%
%
2.15
2.61
%
%
15.17 15.01
%
%
27.77 29.71
%
%
16.82 16.36
%
%
5.61
7.83
%
%
38.14 45.08
%
%
11.69 11.65
%
%
2.82
% 2.62%
15.24 14.34
%
%
29.75 28.60
%
%
11.13
% 7.28%
10.49
% 9.52%
18
15.85
%
16.32
%
16.59
%
17.53
%
18.62
%
20.59
%
17.40
%
Return on Total Assets has been increasing over the years but the increase has been very
low. An increase of 1.42% in the year 2009 to 1.98% in the year 2015.
Return on equity has been increasing from 16.97% in 2009 to 20.29% in 2015. This is a
positive result for the bank.
Operating Cost to Total Income Ratio did not have much change over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has been around 3.7% throughout the years.
Credit to deposit ratio has increased from 69.24% in the year 2009 to 81.08% in the year
2015.
Deposits have grown around 22% in the last 5 years.
Advances have grown around 23.77% in the last 5 years.
The employee cost has grown around 16.67% in the last 5 years.
EPS has grown around 26% in the last 5 years.
YES Bank
Yes Bank, a private bank incorporated in 2003, is promoted and led by Mr. Rana
Kapoor, who is currently the MD & CEO of the bank. Yes Bank has steadily built a
full-service commercial bank with Corporate, Retail and SME Banking platforms,
with a comprehensive product suite. It was the first bank to offer differentiated
rates on savings account following RBI's deregulation of savings account rates in
October 2011. The number of branches and ATMs stood at 700 and 1,371
respectively
From the last fiscal year data following observations are made w.r.t financial
statements.
The bank has a large corporate bond portfolio, which could be exposed to default risks in
a volatile economic environment. High exposure to iron & steel, EPC players and CRE
could lead to greater impairment.
Its credit cost is one of the lowest in the industry and would likely move up, given the
weak macro environment, coupled with greater exposure in stressed sectors
The RoE would continue under pressure, given the frequent dilution expected, coupled
with lower earnings
Valuations will reflect stress in large corporate loans even if they are not identified as
impaired
While there are multiple indicators of growing stress in the large over-leveraged
companies, these loans are classified as performing loans in the books of banks. Banks
have huge, concentrated exposure to these groups. Classifying one of them as stressed
would mean a sharp increase in impaired loans. These loans are still performing loans
because banks continue to provide additional funds to these groups to enable them to repay dues on time and run daily operations. While loans to large corporate group may not
figure as impaired loans, investors have already started building in a valuation discount
for the corporate banks (state-owned and private) that have exposure to these groups.
This explains why stock price performance of corporate private banks has been volatile
despite good results and low NPL formation.
Yes Bank has high exposure to the following sectors
o Metals
o Infrastructure
o Power
o Telecommunications
Valuation View
o YES has navigated well even during the toughest period of economic
environment.
Strong capitalization
Rapid branch expansion
Best in class asset quality
Ratios
Return on Total Assets
Return on Equity
2015
1.64%
21.33
%
Yes Bank
2014 2013
1.55% 1.51%
25.02 24.81
%
%
2012
1.47%
23.07
%
2011
1.52%
21.13
%
2010
1.61%
20.27
%
2009
1.52%
20.65%
20
16.78
%
14.95
%
13.97
%
13.02
%
14.57
%
16.98
%
17.17%
Provisions to Operating
Income
2.49%
3.09%
2.26%
1.26%
2.11%
4.65%
2.53%
7.59%
7.92%
10.16
%
2.23%
2.88%
8.04%
10.15
%
2.12%
2.81%
8.09%
10.01
%
1.92%
2.68%
6.64%
6.15%
8.74%
8.81%
2.17%
2.88%
8.39%
2.23%
2.96%
10.65%
1.90%
2.88%
Interest Spread
Net Interest Margin (NIM)
9.97%
2.37%
3.14%
Composition of Deposits
Demand Deposits
Savings Deposits
Term Deposits
CASA
Credit to Deposit Ratio
Fixed Assets
Cash balances
Advances
Investments
PAT/PBT
PBT/Operating Profit
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost / Total
Income
- Rent, Taxes, Lighting Cost
/ Total Income
- Other Operating Costs /
Total Income
9.32%
13.80
%
76.88
%
23.12
%
9.46%
12.57
%
77.97
%
22.03
%
9.95%
9.95%
8.56%
9.06%
7.54%
8.99%
81.05
%
18.95
%
5.09%
84.96
%
15.04
%
1.78%
89.66
%
10.34
%
1.46%
89.48
%
10.52
%
1.19%
82.86
%
74.99
%
70.20
%
77.29
%
74.80
%
82.81
%
of Assets
0.22% 0.23%
4.10% 4.87%
47.42 51.60
%
%
43.36 37.70
%
%
0.22%
5.92%
58.24
%
31.91
%
0.31%
7.35%
61.00
%
28.06
%
67.38
%
106.6
3%
18.98
%
65.49
%
66.58
%
109.8
8%
21.31
%
59.91
%
65.76
%
123.2
1%
20.02
%
53.71
%
Composition
0.22% 0.25%
5.55% 5.40%
55.48 51.03
%
%
34.23 37.56
%
%
DuPont Analysis
68.91 69.54 67.54
%
%
%
113.2 118.4 112.6
1%
1%
3%
18.88 16.79 17.90
%
%
%
59.36 62.08 63.61
%
%
%
91.27%
8.73%
76.71%
0.57%
8.40%
54.16%
31.08%
65.21%
115.28
%
16.58%
61.19%
7.19%
6.70%
6.86%
6.63%
7.77%
8.72%
8.94%
1.96%
1.96%
1.90%
1.75%
1.86%
2.48%
2.31%
7.63%
6.29%
5.21%
4.63%
4.95%
5.78%
5.91%
21
Interest cost
Employee cost
Rent, lighting, etc
Other costs
Total operating cost
Operating Profit Margin
Provisioning
Other Income to Total
Income
10.00
%
10.74
%
9.64%
9.73%
7.91%
8.10%
10.65%
9.44%
9.59%
9.60%
9.51%
8.47%
7.99%
10.04%
1.67%
13.04
19.20
%
1.65%
16.10
23.89
%
1.46%
16.48
21.62
%
1.29%
15.66
20.78
%
1.31%
13.86
17.08
%
1.94%
12.58
16.51
%
2.19%
13.55
Income)
65.49 59.91
%
%
6.63% 7.77%
1.75% 1.86%
4.63% 4.95%
13.02 14.57
%
%
18.98 21.31
%
%
1.26% 2.11%
53.71
%
8.72%
2.48%
5.78%
16.98
%
20.02
%
4.65%
14.71
%
13.16
%
11.96
%
13.36
%
19.54
%
17.98%
61.19%
8.94%
2.31%
5.91%
17.17%
16.58%
2.53%
17.92%
Return on Total Assets has been same throughout. It has been around 1.6%
Return on equity has been increasing from 20.65% in 2009 to 25.02% in 2014. But In the
last year it has reduced to 21.33%. This is a negetive result for the bank.
Operating Cost to Total Income Ratio did not have much change over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has been around 2.3% throughout the years.
Credit to deposit ratio has increased from 76.71% in the year 2009 to 82.86% in the year
2015.
Deposits have grown around 27% in the last 5 years.
Advances have grown around 27.77% in the last 5 years.
The employee cost has grown around 30.7% in the last 5 years.
EPS has grown around 27.83% in the last 5 years
22
1.
2.
3.
4.
5.
SBI
2014
0.48%
8.49%
Provisions to Operating
Income
Ratios
Return on Total Assets
Return on Equity
2012
0.67%
12.34
%
2011
0.53%
8.00%
2013
0.71%
12.20
%
22.10%
23.06%
21.58
%
11.20%
10.29%
8.20%
21.57
%
10.83
%
23.67
%
10.68
%
9.92%
2010
0.67%
11.79
%
2009
0.78%
13.65
%
23.64
%
20.46
%
5.11%
4.88%
23
Interest Spread
Net Interest Margin (NIM)
4.47%
4.47%
4.43%
4.26%
3.71%
4.02%
4.38%
6.19%
1.73%
2.36%
6.22%
1.75%
2.36%
6.28%
1.86%
2.44%
6.39%
2.14%
2.76%
5.47%
1.77%
2.35%
5.37%
1.36%
1.90%
5.76%
1.38%
2.02%
8.41%
32.28
%
59.31
%
40.69
%
12.28
%
32.62
%
55.10
%
44.90
%
12.99
%
29.66
%
57.35
%
42.65
%
13.05
%
25.40
%
61.55
%
38.45
%
82.26
%
80.16
%
77.88
%
74.15
%
0.38%
6.97%
63.59
%
25.19
%
0.37%
9.43%
61.07
%
25.43
%
0.38%
7.71%
59.96
%
28.46
%
0.38%
9.60%
57.51
%
28.53
%
63.34
%
342.72
%
55.27
%
327.02
%
4.46%
52.31
%
14.04
%
4.70%
50.27
%
15.65
%
65.82
%
146.11
%
11.09
%
55.05
%
14.84
%
64.32
%
135.75
%
13.66
%
56.11
%
12.75
%
Composition of Deposits
Demand Deposits
7.46%
7.66%
Savings Deposits
31.98%
32.68%
Term Deposits
60.57%
59.66%
CASA
39.43%
40.34%
8.36%
32.39
%
59.25
%
40.75
%
82.43%
85.83%
85.57
%
Fixed Assets
Cash balances
Advances
Investments
PAT/PBT
PBT/Operating Profit
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost / Total
Income
- Rent, Taxes, Lighting
Cost / Total Income
- Other Operating Costs /
Total Income
Total Income/Total Assets
- Interest Income / Total
Assets
Composition of Assets
0.44%
0.43% 0.41%
7.73%
6.98% 6.81%
65.29
62.67% 65.86%
%
24.35
25.77% 24.18%
%
DuPont Analysis
70.70
67.83% 67.34%
%
###### 6780.74 226.20
##
%
%
-0.16%
0.15%
55.66%
56.21%
13.45%
14.53%
6.50%
55.51
%
13.55
%
1.95%
1.91%
1.80%
1.71%
1.85%
1.85%
1.69%
6.71%
6.48%
6.63%
6.46%
6.24%
6.36%
5.82%
6.61%
6.18%
5.90%
6.95%
5.93%
6.02%
5.86%
5.98%
6.02%
6.04%
6.13%
5.25%
5.15%
5.47%
24
0.89%
16.51
0.82%
16.63
ROE
8.01%
7.56%
Interest cost
Employee cost
Rent, lighting, etc
Other costs
Total operating cost
0.81%
17.14
11.33
%
-0.16%
0.15%
6.50%
Provisioning
11.20%
10.29%
12.90%
11.98%
0.83%
18.33
11.73
%
1.02%
18.59
9.33%
50.27
%
15.65
%
1.85%
6.18%
23.67
%
8.20%
4.46%
10.83
%
4.70%
10.68
%
11.82
%
11.87
%
16.28
%
1.09%
17.71
11.20
%
1.09%
17.45
12.20
%
55.05
%
14.84
%
1.85%
6.95%
23.64
%
11.09
%
56.11
%
12.75
%
1.69%
6.02%
20.46
%
13.66
%
5.11%
4.88%
17.41
%
16.59
%
Return on Total Assets has reduced over the years and also has been low.
Return on equity has decreased from 13.65% in 2009 to 8.49% in 2015. This is a negative
result for the bank.
Operating Cost to Total Income Ratio did not have much change over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has been around 1.7% throughout the years.
Credit to deposit ratio has increased from 74.15% in the year 2009 to 82.43% in the year
2015.
Deposits have grown around 12.96% in the last 5 years.
Advances have grown around 14.24% in the last 5 years.
The employee cost has grown around 13.04% in the last 5 years.
EPS has grown around 3.98% in the last 5 years.
25
Bank of Baroda
Bank of Baroda (BoB), established in 1908, is amongst the oldest commercial banks
in India with a substantial footprint in the domestic and international markets. BoB
has a wide presence overseas with almost one-third of the total business, coming
from its international business. As of Sep-15, BOB has a network of 5,242 domestic
branches, 105 overseas branches and 8,621 ATMs. The Government of India holds
59.2% stake in the bank.
BOB was the fastest growing PSB in last decade. However NII growth was much lower
due to low margins in international operations.
Second largest Indian bank in the overseas market (based on loans)
Some of the positive for the BOB are
o First PSB with private sector leadership
o lower exposure to sensitive sectors and low concentration risks
o Future capital infusions to be BV additive
o RoAs have bottomed at 0.5%we expect the number to improve
o During the last up cycle, ROA improved from 0.5% to 1.2% in three years
o Prolong economic slowdown leading to further asset quality pressures remains a
key risk to our estimates
The banks 26% loan CAGR over last 10 years was led by a strong growth in overseas
operations. The share of international book has been increasing and now accounts for a
third of loans. The growth in international book was historically driven by syndicated
loans for Indian corporates.
What management is currently pursuing.
o Management would be preparing a strategic roadmap for next
three years
NPA management a key priority
Diversification of portfolio and focus on revenue maximization
Digitalization
Revamping the human resource management
View :
o
o
o
o
o Near term asset quality trends are expected to be weak led by managements
aggressive stance on errant customers
o Appointment of Chairman and MD&CEO with private sector background and
healthy capitalization is likely to lead to much improved medium term prospects
and deserves premium to other state-owned banks.
26
Ratios
Return on Total Assets
2015
0.48%
Return on Equity
8.51%
Provisions to Operating
Income
Cost of Funds (Deposits and
Borrowings)
Return on Interest Earning Assets
Interest Spread
Net Interest Margin (NIM)
BOB
2014
2013
0.74% 0.88%
12.77
14.50
%
%
16.20
%
16.44
%
9.49%
4.64%
6.24%
1.59%
1.98%
2012
1.22%
19.89
%
2011
1.30%
22.60
%
2010
1.19%
21.06
%
2009
1.07%
18.05%
15.59
%
18.75
%
19.54
%
20.03%
8.74%
15.32
%
10.73
%
7.72%
5.39%
3.57%
5.39%
4.79%
6.45%
1.66%
2.04%
5.16%
7.10%
1.94%
2.37%
5.16%
7.40%
2.24%
2.72%
4.41%
6.89%
2.48%
2.93%
4.59%
6.65%
2.06%
2.49%
5.41%
7.53%
2.12%
2.69%
7.76%
Composition of Deposits
Demand Deposits
Savings Deposits
Term Deposits
CASA
Fixed Assets
Cash balances
Advances
Investments
PAT/PBT
PBT/Operating Profit
8.53%
17.91
%
73.57
%
26.43
%
8.79%
17.04
%
74.17
%
25.83
%
7.56%
17.90
%
74.54
%
25.46
%
7.52%
19.47
%
73.02
%
26.98
%
7.60%
21.21
%
71.18
%
28.82
%
7.87%
21.94
%
70.18
%
29.82
%
69.12
%
69.61
%
69.13
%
74.39
%
74.48
%
72.25
%
Composition of Assets
0.41% 0.42% 0.46% 0.53%
20.66
19.87
15.68
14.39
%
%
%
%
59.32
59.71
59.64
63.85
%
%
%
%
17.75
18.06
22.46
18.95
%
%
%
%
0.65%
14.04
%
63.37
%
20.25
%
0.83%
12.86
%
62.51
%
22.22
%
75.07
%
130.8
2%
72.16
%
119.6
9%
DuPont Analysis
62.69
82.61
92.74
%
%
%
585.3
322.6
728.3
1%
9%
6%
83.09
%
173.6
1%
22.22%
70.02%
29.98%
74.04%
1.11%
10.88%
62.86%
23.16%
66.62%
140.41%
27
Operating Profit/Total
Income
- Interest Cost / Total
Income
- Employee Cost / Total
Income
- Rent, Taxes, Lighting
Cost / Total Income
- Other Operating Costs /
Total Income
Total Income/Total Assets
- Interest Income / Total
Assets
- Other Income / Total
Assets
Total Assets/Equity
ROE
1.96%
62.86
%
3.93%
62.15
%
1.71%
61.51
%
10.49
%
58.49
%
9.02%
17.49
%
52.98
%
11.81
%
18.15
%
55.16
%
12.05
%
9.00%
9.54%
8.88%
1.47%
1.43%
1.35%
1.26%
1.45%
1.55%
1.46%
5.74%
6.45%
5.48%
6.42%
5.08%
6.94%
5.31%
7.24%
5.49%
6.74%
5.94%
6.86%
5.42%
7.71%
6.09%
6.30%
6.92%
7.21%
6.73%
6.47%
7.27%
0.62%
17.66
0.72%
17.37
11.67
%
0.71%
16.45
13.18
%
0.83%
16.36
17.91
%
0.86%
17.33
20.07
%
1.09%
17.76
19.11
%
1.33%
16.82
8.18%
Interest cost
Employee cost
Rent, lighting, etc
Other costs
Total operating cost
Operating Profit Margin
Provisioning
Other Income to Total
Income
9.29%
10.28
%
9.35%
10.34
%
11.38
%
55.16
%
12.05
%
1.55%
5.94%
19.54
%
18.15
%
13.34%
55.85%
13.16%
16.17%
55.85%
13.16%
1.46%
5.42%
20.03%
13.34%
3.57%
5.39%
14.39
%
15.45%
Return on Total Assets has reduced over the years and also has been low.
Return on equity has decreased from 18% in 2009 to 8.5% in 2015. This is a negative
result for the bank.
Operating Cost to Total Income Ratio has reduced over the years.
Cost of funds for deposits and borrowings have been constant throughout the years.
Interest spread has reduced over the years.
Credit to deposit ratio has reduced from 74.15% in the year 2009 to 69% in the year
2015.
28
29
Sensex Vs Bankex
35000.00
30000.00
25000.00
20000.00
15000.00
10000.00
5000.00
0.00
Sensex
Bankex
Sensex and Bankex have high correlation and both of them have moved in Tandem for the last 7
Years.
30
HDFC always enjoyed premier valuation compared to all the 4 stock in PVSB and
PSB.
HDFC enjoyed has premium in valuation during the bubble of 2007-2008 which was
almost 8.0X its Book value. Then it sharply contracted till 4x in Oct 2008 and from
then it is moving in the same range of around 3.5x to 4.5x of BV
31
Yes Bank despite growing at faster space is always below HDFC valuation. It did
cross the valuation once in Jan 2010.
SBI continues to enjoy premium valuation in comparison with all its peers in PSB
SUB Group.
But, SBI was never able to enjoy premium valuation of the HDFC due lower CAGR ,
ROE, ROA and lower efficiency ratio. Despite being the leader in the Banking
Domain.
BOB valuation are always below that of SBI. Both the SBI and BOB has higher
correlation with each other.
P/E Ratio For All the for Stock over the period of Last 7
Years.
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
HDFC Bank
Yes Bank
SBI
BOB
HDFC always enjoyed premier valuation compared to all the 4 stock in PVSB and PSB.
HDFC enjoyed has premium in valuation during the bubble of 2007-2008 which was
almost 45X to its EPS. Then it continued to move in range of 25x to 30x
BOB continue to move in tight range of 6.0x to 10.00x of earnings, being lowest in the
group of 4.
Valuation Enjoyed by Yes Bank has reduced over the years.
32
Stock Name
HDFC Bank
Yes Bank
SBI
BOB
Beta
0.28
0.08
-0.14
1.34
Abnormal Period
Transition Period
Stable Period
33
MP : Market Price as on
Chapter V: Conclusion
Banks will be the key beneficiary of the expected uptrend in economic cycle as they
account for a major portion of financial intermediation and are the main channel of
monetary policy transmission, credit delivery and payment systems.
34
Among banks, public sector banks (PSB) would benefit as they are highly leveraged
to the corporate cycle recovery due to its large infrastructure exposure. PSBs would
also benefit from reduction in nonperforming assets.
In the past also we have witnessed strong outperformance by PSU bank index
during initial phase of turnaround in economy Secondly, while private sector banks
have always traded at premium to public sector banks, the valuation gap between
the two is at highest levels.
While the valuation gap is in line with sharp deterioration in asset quality of public
sector banks, it offers buying opportunity in well managed public sector banks as
they will benefit when the valuation spread retraces to its long term average led by
improvement in asset and earnings quality.
The private sector banks enjoy higher valuation as they are efficient with higher
return ratios and well capitalized to grow at a healthy pace compared to public
sector banks which follows lazy banking - poor asset quality, low profitability and
capital starved. While lazy banking, which is more systemic in nature, explains part
of the underperformance of public sector banks, current woes of public sector
banks, mainly poor asset quality and low return on asset, is due to pro-cyclical
nature of banking sector and also systemic organizational shortcomings.
For value investors and those willing to take higher risk leaders in PSB like SBI and
BOB offer good value to CMP. While the old generation PVSB and new generation
private sector bank are expected to give stellar earnings growth and also
appreciation to shareholders due to their robust structure of banking. For Growth
investors and Balance investors PVSB banking stocks like HDFC and YES Bank offer
safer bets and more assured returns.
References
35
Database : CMIE
http://cci.gov.in/images/media/ResearchReports/mergers%20banking.pdf
http://www.scribd.com/doc/52893843/mergers-and-acquisitions-in-indian-bankingsector#scribd
Annexure
36
Bank of Baroda
37
YES Bank
38
HDFC Bank
39
Assumptions/Inputs
DPSo
EPSo
ROE
Payout Ratio
Abnormal Growth Period (No. of years)
Transition Period (No. of years)
Growth Rate
Stable Growth
Beta
Beta for stable growth
Risk-free rate (Rf)
Market return (Rm)
8
40.76
18.59%
19.63%
5
5
14.94%
14.00%
0.27
1
7.50%
15.00%
40