Вы находитесь на странице: 1из 71

STUDENT DECLARATION

I, , hereby declare that the research project report entitled Economic Value Added:
A study on selected Indian Banks submitted in the partial fulfillment of the
requirement, of Master of Business Administration to Kurukshetra University,
Kurukshetra through Jan Nayak Ch. Devi Lal College of Engineering, Sirsa, is my
original work and the same has not been submitted to any other institution for the
award of any other degree and the suggestions as approved by the project guide are
duly incorporated.

Department of Management Studies


Jan Nayak Ch. Devi Lal College of Engineering
Post Box 81, Barnala Road, Sirsa 125 055,
Ph: 01666-248800-01, Fax 248802

Certificate
This is to certify that _____________ a student of Master of Business
Administration in Department of Management Studies, Jan Nayak Ch. Devi Lal
College of Engineering, Sirsa has successfully completed the Project Report on
Study of mobile users Satisfactions & uses of features under my guidance
towards the partial fulfillment of her Master of Business Administration.

ACKNOWLEDGEMENT
It is a matter of delectation for me to express my gratitude to my revered guide and
true mentor Mr. Ashok Kumar Lecturer Department of Management Studies, who
has been very generous and ever willing to help me through out this research work.
He helped me in shaping this research work by his knowledge and wisdom,
penetrating judgment and expertise. His valuable guidance, constructive criticism and
analytical approach and ever-lasting interest taken throughout this investigation in a
warm and self-offering academic environment have been a constant source of
inspiration to me.
My grateful acknowledgement is due to Dr. Kuldeep Singh, Head Department of
Management Studies, JCD College of Engineering, Sirsa who has encouraged and
inspired me from time to time during the course of my study.
I am also thankful to all staff members of our department and to the library staff of
JCD College of Engineering, Sirsa for extending me every help during my research
work. I would like to take this opportunity to thank my parents, family members,
relatives, near and dear ones who faced the brunt of this venture gracefully.

CONTENTS

Chapter

Title

Page(s)

Chapter I

Acknowledgement
List of Tables
Introduction

1-15

Introduction to Indian Banks


Economic Value Added (EVA)
EVA concept in Banking Sector
Traditional Methods of Evaluating Banks

1
3
6
7

1.5
1.6
1.7
1.8
1.9

Performance
Modern Methods of Evaluating Banks Performance
Limitation of Traditional methods
Relevance of EVA for Indian Banks
Advantages of using Economic value Added
Myths About Economic Value Added

9
9
10
12
13

1.10

Notes and References

15

Review of Literature
Research Methodology

16-28
29-34

Introduction
Objectives of Study
Research Design
Data Collection
Selection of sample
Procedure

29
29
30
30
30
31

Analysis and interpretation

35-55

Introduction

35

Tables

37-55

Conclusion

56-61
56
58
62-64
65-71

1.1
1.2
1.3
1.4

Chapter II
Chapter III
3.1
3.2
3.3
3..3.1
3.3.2
3.3.3

Chapter IV
4.1

Chapter - V
5.1
5.2

Major Findings

Recommendations
Bibliography
Annexure

List Of Tables
Table
No.

Pages

4.1

EVA of Banks Under Study

37

4.2

EVA of all Public Sector Banks under study

39

4.3
4.4

Ranking of all Public Sector Banks under study based on EVA

40
41

Ranking of all Public Sector banks under study based on EVA/Net Worth ratio
4.5

42

EVA of Private Sector Banks under study

43

4.6

Ranking of all private Sector Banks under study based on EVA


4.7

44

Ranking of all Private Sector Banks under study based on EVA/Net worth ratio

45

4.8

Combined EVA of all Banks


4.9

46

Combined ranking of all banks based

48

4.10
4.11

Ranking of EVA creators under study based on EVA/Net worth Ratio


Relationship Between EVA & Non Performing Assets

50

51

4.12

Relationship Between Eva & Business per Employee


4.13

52

Relationship between EVA & Profit per Employee

53

4.14

Model Summery, ANOVA & Regression, Coefficient between EVA & NPA
4.15

Model Summery, ANOVA & Regression, Coefficient between EVA & Business
per Employee.

54

4.16

Model Summery, ANOVA & Regression, Coefficient between EVA & Profit per
Employee.

Chapter- I

55

Introduction

Chapter - I
Introduction

1.1 Introduction to Indian Banks


The Indian banking sector is currently in a transition phase. While public sector banks
are in the process of restructuring, private sector banks are busy consolidating through
mergers and acquisitions (the sector has been recently opened up for foreign
investments). The sector, which was considered dry in the last several years, has
caught the investor fancy in expectations of changing regulations and improving
business conditions due to opening up of the economy. Entry of private and foreign
banks in the segment has provided healthy competition and is likely to bring more
operational efficiency into the sector. The sector itself is seeing many changes in the
last decade like imposition of prudential standards, greater competition among banks,

entry of new private banks, etc. this paradigm shift in the Indian banking sector can be
seen in terms of two dimensions: one relates to operational aspect especially
performance and risk-management system and the second dimension relates to
structural and external environment or exogenous aspects.

The most challenging thing today is how to evaluate these banks and from what
perspectives. Is evaluating Indian banks performance a rather straightforward issue as
any other corporation with the help of some standard conventional ratios? The answer
is no. Actually when one makes an attempt to conduct some kind of bank analysis to
differentiate good banks from bad ones, there are so many things which need to be
taken care of before the actual analysis can take shape. By merely using the standard
ratios for banks financial analysis, one can sometime reach to conclusions, which
could be far from actual. But at the sometime there has to be some mechanism
through which banks can be compared and evaluated. The traditional analysis largely
focused on parameters like Credit-Deposit Ratio commonly referred to as CD Ratio,
level of Non Performing Assets (NPAs), Capital Adequacy Ratios and the other usual
earning ratios. Things have changed now and just having a high CD Ratio doesnt
mean that you are a sound bank. The basic definition of banking business has
changed, largely due to the entry of private players and technology factor in the
banking industry who has given a totally new dimension to the banking business
which was never thought of a decade ago.

Many Indian banks are discovering that the key to their long-term growth does not lie
in the products and services along but in assets that can never be replicated, that is,
their unique relationship with customers, employees, suppliers and distributors,
investors and the communities they serve. One of the most fateful errors bankers
usually commit relates to their belief that merely reducing NPAs and thereby
maximizing profit would solve the problem of banking industry. Not only is this
belief still held by most of the bankers in India and therefore professionally

unacquainted by the changing profile of their shareholders and the capital market it
is held by virtually large number of myopic capains of the industry. Those things are
not going as well as they ought to be going for. Such banks could be due to economic
recession, poor demand for credit, rising manpower costs, political uncertainty,
inefficient ways of doing business, or is it something else?

One might point out that like a corporate; even banks can be judged from the behavior
of their stock prices. However, as bank stocks have not been very active on
exchanges, barring few on few occasions, should we conclude that Indian banks have
by and large failed to add values to their shareholders wealth. The answer is once
again no as one needs to evaluate private and public sector banks in a more dynamic
manner than just looking at their stock prices, Non-Performing Assets (NPAs), C/D
ratios and others. Many Indian banks seem to have destroyed shareholders wealth
over a period of time and only a few have positively contributed to their wealth.

With the help of EVA (Economic Value Added) which tell what the institution is doing
with investors hard earned money, the study examines an appropriate way of
evaluating banks performance and also find out which Indian banks have been able to
create ( or destroy ) shareholders wealth since March, 2001.

1.2

Economic Value Added (EVA)


EVA is a relatively new concept in the area of financial management. It is the
financial performance measure that comes closest than any other to capture the true
economic profit of a firm EVA is the performance measure most directly linked to the
creation of shareholder wealth over time. It is a value-based framework that provides
a unique insight into value creation and unites the finance theory with the competitive
strategy framework. The financial concept underlying EVA was originally propagated
by Adam Smith, who proclaimed that the social mission of an enterprise is to

maximize the value of shareholders. Further contribution was made by Merton Miller
and Stern Steward.

EVA is the net operating profit minus an appropriate charge for the opportunity cost of
all capital invested in an enterprise. Hence, EVA is an estimate of true economic
profit, or the amount by which earning exceed or fall short of the required minimum
rate of return that shareholders and lenders could get by invested in other securities of
comparable risk. Jesson (1986) argues that managers do not like to free cash investors
even when no positive present value project is available.

Capital charge is the most important characteristics of EVA. Under conventional


accounting, most companies seem profitable while, in fact, they may not be. By
taking all capital costs into account, including the cost of the equity, EVA shows the
amount of wealth in rupee a business has created or destroyed in each reporting period
in other words, EVA is the profit as defined by the shareholders. Stern Stewart
developed EVA to help managers incorporate two basic principles of finance into their
decision making: One, the primary objective of maximizing the wealth of its
shareholders; and two, accepting that the value of a company depends on the extent to
which investors expect future profits to exceed or fall short of the cost of capital. By
definition, a sustained increase in EVA will bring an increase in the market value of
the company. EVA has the advantage of being conceptually simple and easy to
explain, since it starts with familiar operating profits and deducts a charge for the
capital invested in the company. By assessing a charge for using capital, EVA makes
managers care about managing assets as well as income and helps them properly
assess the trade-off between the two.

About all, EVA helps in overcoming the ambiguity of financial goals and objectives.
Most companies use a plethora of measure to express their financial goals and
objectives. Strategic plans often are based on growth in revenue or market share.

Companies usually evaluate individual products or lines of business on the basis of


gross margins. Business unites may be evaluated in terms of return on assets. Finance
department usually analyze capital investments in terms of the net present value, but
weigh prospective acquisitions against the likely contribution to the earning growth.
The result of the inconsistent standards, goals and terminology usually results in
cohesive planning, operating strategy and decision making. EVA eliminates this
perplexity by using a single financial measure that links decision making with a
common focus. Burkette & Hedley (1997) explained that the EVA concept can be
used to assess organizational performance; it can be applied for profit-making
companies, public sector organizations and non-profit seeking organizations.

The banking industry is the repository of savings of a nation contributed by millions


of people. Thus, a bank basically acts as an intermediary between savers and
borrowers. Hence, costs to a bank are the interest cost paid to the savers and the
established cost. A banks margin arises out of the difference in interest paid to
depositors and charged to borrowers. The funds raised from savers are deployed in
three ways-loans and advances to industry and agriculture; investment in private
sector equity, debentures, commercial papers, etc. a banks sources of revenue are
interest from loans and advances, income from government securities and
dividend/interest from private sector equity investments and debt instruments. Apart
from this, a bank also earns non-fund based income and fee-based income for various
services rendered, such as treasury and forex operations, guarantee commissions, etc.

The banking industry in India is in the midst of a transformation, thanks to the


economic liberalization of the country, which has changed the business environment
in the country, during the pre-liberalization period, the industry was merely focusing
on deposit mobilization and branch expansion. Based on the recommendation of the
Narsimhan Committee, the government of India started diluting its stakeholdership in
public sector banks. Banks have been asked to maintain a minimum capital adequacy

ratio and make provision for Non-Performing Assets (NPAs). The sector has become
very competitive with the entry of many foreign and private sector banks. The face of
banking has been changing rapidly. Further, with falling spreads, rising provision for
NPAs and declining interest rates, the practical way for sustaining profitability of
banks is through reduction in transaction costs and increase in other income. Banks
are trying to trim costs but have achieved limited success because of fixed overheads.
Therefore, there is a need to reduce transaction costs and pass on a part of the savings
to customers by way of lower service charges. This will require tremendous efforts in
the area of technology and for banking to build capabilities to handle much bigger
volumes. There is no doubt that banking sector reforms have improved the
profitability, productivity and efficiency of banks, but in the days ahead, banks will
have to prepare themselves to face new challenges.

It is a known fact that banks and financial institutions in India face the problems of
swelling NPAs and the issue is becoming more and more unmanageable. What is
noteworthy is that much of the NPA burden was accumulated during the year of
reform. One would be surprised to know that the banks and the financial institutions
in India hold NPAs worth Rs. 110000 cr and the major contributors are the public
sector banks, owing around 60%of the NPAs in the system. NPA may be due to
mismanagement but it affects the financial performance. Bankers have realized that
unless the level of NPAs is reduced drastically, they will find it difficult to survive in
the global market.

1.3

EVA concept in banking sector


While the concept of EVA has been broadly applied to industrial and manufacturing
companies for over 15 years, the banking industry has only recently begun to take a
hard look at it. This was driven in large part by initial feelings that the EVA concepts

did not really work in a financial services model, since almost everything a bank does
is cash related. Additionally, there was uncertainty as to whether deposits or
borrowings should be included. The reason this matters is that the inclusion of
deposits could dramatically reduce the weighted average cost of capital. Another
obstacle was the significant leverage implicit in a bank's balance sheet, which is
significantly different than for a manufacturing company.
In the early 1990s, many banks were failing and capital resources were rather scarce
for the survivors. Today, the banking industry as a whole is flush with capital. While
this is not a bad problem to have, compared to the crisis at the beginning of the
decade, there is increasing pressure to better manage the precious resource. For those
banks that do not have internal opportunities to utilize this capital, they often turn to
the acquisition arena or buy back their stock. Either way, they can't afford to sit on
underdeployed piles of capital. However, they are also conscious of their duty to
create shareholder value and desperately need systems to ensure that they are not
investing in businesses that actually destroy value. This was the main reason for
wsing EVA in banking sector.

Measuement of Shareholders Value:

How can we define the firm raised the

shareholder value in a particular time period or not? There are real wars between
different famous authors as well as different consulting companies whereby every
company defends its own indicators and tries to find the misuses in the others. Some
of them are considered to be better than others. The main idea of all these measures is
to help the managers to make value-created decisions and orient all employees
towards value creation.

1.4

Traditional methods of evaluating banks performance

Net Present Value(NPA): Net Present Value is

the sum of the present value of

all the cash flows-positive as well as negative-

that are expected to occur over the

life of project. Or it can be defined as the present

value of all incremental cash

flows. The cash flows are calculated for a year

by subtracting the cash flow of the

previous year. The required rate of return at

which the cash flows has been

discounted to present value was assumed to ten

percent. It is generally understood

that efforts of an organisation to maximize its

NPV are reflected in the market

price.

Return on Capital Employed (ROCE): Return on capital employed refers to


long term funds supplied by the creditors and owners of the firms. It can be
computed in two ways. First, it is equal to non-current liabilities (long term
liabilities) plus owner equities. Alternatively it is equivalent to net working
capital plus fixed assets. Thus, capital employed basis provide a test of
profitability related to long term funds. A comparision of this ratio with
familiar firm , with the industry average and over time would provide
sufficient insight into how efficiently the long term funds of owners and
creditors are being used. The higher the ratio, the more efficient is the use of
the capital employed. In traditional methods of calculating profitability ROCE
is considered as the most appropriate method of calculating long term
profitability. Thus including ROCE as an indpendent variable is quite logical
in the sense that the market assesses the firm on the basis of its long term
profitability and ROCE is the best available measure:
Net profit after taxes

ROCE=

-------------------------------------------------------------- *100
Average total capital employed

Earning Per Share (EPS): Since division of earning of the company by the
number of outstanding shares computes the earning per share, we will

concentrate on the numerators, i.e. earning. According to Rappaport (1998),


the earnings fail to reflect the real picture of the company performance
because of the following reasons. At first, it depends a lot on acconting
principles such as various methods of depriciation, pooling interest versus
purchase method for mergers and acquisitions. Secondly, it ignors time value
of money since it does not take into account that a dollar of cash valuereceived
today is worth more than a dollar tommorow. Thirdly, investment requirement
is excluded since the relationship between the change in economic value and
earnings are obscured and investments in working capital are excluded from
the earning calculations. When the business grows, the increase in account
payble and inventories is inevitable.Another problem is that the earnings dont
include the opportunity cost of equity. Lastly is fact accounting earning dont
reflect the firms financial policy, for example, whether it is a unlevered or
levered firm.

1.5 Modern Methods of Evaluating Banks Performance


Market Value Added(MVA): MVA represent the value added to a particular share
over its face value. It tells us how much value a shareholder has added to its wealth,
which he has invested in a particular share. Thus, a company with an objective of
enhancing the shareholders wealth should try to maximise its MVA. MVA can be
calculated by subtracting the bok value of shares from the market value of shares.
MVA = Market value of shares Book value of shares

Economic value Added (EVA):

EVA is a relatively new concept in the area of financial management. It is


the financial performance measure that comes closest than any other to
capture the true economic profit of a firm EVA is the performance measure

most directly linked to the creation of shareholder wealth over time. EVA
is the operating profit minus an appropriate charge for the opportunity
cost of all capital invested in a firm. It is a value-based framework that
provides a unique insight into value creation and unites the finance theory
with the competitive strategy framework.

1.6

Limitations of traditional method


Most of the accounting based measures such as Price: Earnings, Book Value, Returns
on Equity, Return on Net worth etc. fail to provide a clear understanding of the major
variables that drive value, except to some extent Returns on Invested Capital. These
methods are easily influenced by the smart and perhaps mischievous management
through window dressings. They also do not incorporate risk or time value of money
also and do not help investors understand the intricate process of value creation. In
addition, these traditional measures use, for most part, historical data to measure
current performance. Ideally, one would like to measure how current decisions will
affect the firms future performance. Unlike accounting measures, Economic Value
Added, raises the issue highlighted in the Nobel Prize work of Franco Modigliani and
Merton Miller: just as debt holders of a bank expect a specific return, the shareholders
of the bank, expect a certain rate of return for taking risk of investing in the bank.

1.7

Relevance of EVA for Indian Banks


In order to help management understand their own economics and arrive at value
creating
Investment decision that adequately satisfies the two sensitive factors mentioned
earlier, bankers must understand the concept and relevance of Economic Value
Added (EVA), a period based measure of value creation. EVA provides a unique

insight into value creation and links theory of finance with the competitive strategy
framework as enumerated by Michael Porter. EVA is also a quantifiable driver of
value creation for the stock markets. Large number of International banks (such as
Citibank, Deutsche Bank, Barclays, ABN AMRO) use value based frameworks such
as EVA to run their banking operations. Although EVA an a yardstick in India may be
at an evolving stage, banks like HDFC Bank, ICICI Bank etc. have gradually started
adapting such measure to cater to the increasingly discerning investor base. A banks
management creates value when it takes decisions that provide benefits, in excess of
costs. These benefits may come to banks in the near or distant future depending on the
strategies involved in decision making process. The bankers of todays world
therefore must be sensitive to two fundamental drivers that drive shareholders wealth.
First, there must be an unrelenting focus to ensure that funds mobilized by the banks
(whether through depositors, equity or debt issues) generate returns in excess of the
cost of capital (or can reasonably be expected to do so) with an eye toward returning
non productive capital back to providers of the capital or shareholders. Second,
bankers should constantly seek to invest in technology that increases their reach and
also be open to strategic alliances, mergers & acquisitions and restructuring. In the
same context it is worth considering that the capital mobilized by banks earns a
satisfactory return. While it is true that substantial amount of value creation for a bank
or corporate takes place from less than half of the capital employed, it proves that the
entity can unlock huge amount of capital employed for adding to the value for the
shareholders. The second point mentioned earlier, a necessary corollary to the first
point, emphasizes on the importance of investing in value creating projects and
strategies. It implies criticality of the fact that bankers must remain sensitive to all
such balance sheet items that add value either through mergers or acquisitions or
simply through restructuring, re-capitalization or any other method such as sell-off of
unproductive assets. Further, Banks management must be able to differentiate
between projects and strategies. While projects are generally viewed financially from
NPV or IRR point of view, they may not really convey the fact that whether value is

being added to the shareholders. For example, what distinguishes HDFC Bank, the
new futuristic bank from other savvy banks is its position in the new e-economy. The
anywhere-anytime bank is not averse of accepting the fact that customer is the
king and the bank has to tailor its products as per his requirements even if the new
product has a negative NPV assist alternative strategy of doing nothing may only
destroy value for HDFC Bank. Having established a massive base of customers and
holding extensive information about them, banks such as ICICI Bank and HDFC
Bank have already made major head start. They are now all set to leverage these
assets. As we all know the Internet has already started radically affecting fundamental
structures of even Indian banks, not only in retail operations, but in many other areas
including private banking. The bankers in the new millennium therefore must attempt
to make investment in strategies and not merely remain confined to borrowing and
lending. They should now play a role of financial service providers for increasing
their shareholders value.

1.8

Advantages of using Economic Value Added

By forecasting economic profit for each year it shows how much value will be
added to the capital employed each year.

It is the only method that can clearly connect capital budgeting and strategic
investment decisions with a methodology for subsequent evaluation of actual
performance.

By forecasting economic profit amounts it automatically produces a series of


targets for management to achieve in order to justify the valuation.

It can be readily communicated to and understood by operational


management.

Through the computation of economic profit amounts economic profit creates


a meaningful performance measurement which can be used to judge

subsequent performance. (The cash flow performance of one business just


cannot be compared with another).

For a project to be favorably considered, market value added must be positive.


On the other hand free cash flow may fluctuate from positive to negative and
back again over the life of the project.

Economic profit focuses managements attention on the fundamental three


ways to create value. These are:-

Improve profits without making a further investment in additional capital.


Only invest in projects where earnings exceed the cost of capital.
Dis-invest from projects where the savings on the capital cost exceeds
earnings foregone.
Discounting the benefits of these strategies in free cash flow terms makes
them difficult to understand.

Because economic profit is a powerful overall measurement of managements


performance, it is an ideal method for setting corporate goals, management
incentives and the payment of performance bonuses. This cannot be achieved
with cash flow.

It links planning to performance.....and performance to value

1.9 Myths about Economic Value Added


There are some common myths about the EVA. In his view, to understand financial
management more comprehensively, financial analyst should be aware of these myths.
Some of common myths with regard to EVA described by Harihar (1999) are as
follows:

General Motors was the first company to use the concept of EVA, and the
economic analysis based on it was presented in their annual report in 1920s.

but myth about EVA is that Stern Steward & Company of USA has
promulgated it. Stern Stewart & Company has just polished the concept.

Second myth about EVA is that, EVA based financial system can be
implemented by a company only by managing its cost of equity correctly. But
in practice, there are hundreds of adjustments to be incorporated in the
financial statements of a company if it has to implement such an EVA based
financial statements of a company if it has to implement such an EVA based
financial measurement system.

A very dangerous myth about EVA is that the value generated by different
companies as well as industries is comparable. But how can the EVA of a less
capital-intensive company be compared with a high capital-intensive
company. Thus, EVA of fast moving consumer goods or pharmaceutical
company can not be compared with the EVA of steel or a cement company.
However, the only comparison that can be made is regarding whether the
company has generated positive or negative EVA.

EVA can be used as a technique of performance measurement of various


department/divisions with varying risk levels and cost of capital. Further,
divisional managers may be reluctant to invest in fixed assets to improve their
divisional performance by presenting positive EVA.

A company will be cash rich when its EVA is high. It is widely prevalent myth
about EVA. As Israel Shaked has mentioned that the basic sign in financial
analysis is to interpret EVA as an indicator of financial liquidity. For those
companies which are cash sensitive, Shaked recommends a measure called
Cash Value Added which takes into considerations operating cash flows in
place of net operating cash flows in place of net operating profit after taxes.

Hence, the EVA is not a model that is free from defect. It may provide best
results if one applies this tool after evidently understanding the facets in which

EVA cannot be of much use and by appreciating the nuts and bolts essential
for the execution of EVA.

The foregoing discussion on the concept of EVA,

reveals that EVA is

considered as a contemporary tool in financial management that have been


developed throughout the course of the 20th century by some distinguished
economists and managers. Its simplicity is both its attraction and its
limitations. While it fairly reflects the basic concept of single period residual
income.

1.10 Notes and References


Singh, Karam Pal and Garg M.C. (2004). EVA: a PERFORMANCE
Measuremant Tool. JIMS *M, April-June, 2004.pp.39-45.
Irala, Lokanadha reddy (2005). EVA: The Right Measure of Managerial
Performance? the Journal of Accounting and Finance, Vil.19,
No. 2, April-September 2005, pp.77-87.
Ghanbari, Ali M. and Sarlak Narges (2006). Economic Value Added: An
Appropriate Performance Measure in Indian Automobile
Industry. Ihe Icfaian Journal of Management Research, Vol. V,
No. 8, 2006, pp. 45-62.
Thakor Anyan, Quinn Robert, DeGraff Jeff (2003) Creating Sustained
Shareholder Value And Dispelling Some Myths, Mastering
Strategy Candian performance. At
http://www.handles.gu.se/epc/archive/00001314
Eitemann, Stonehill, Mofett; (2003), Multinational Business Finance, 9th
edition, USA: Reading Mass : Addison-Wesley Longman, at
http://www.handles.gu.se/epc/archive.
Brealey, Myers; (2002) Principles of Corporate Finance, USA: McGraw
Irwin.
Copeland, Tom and Koller, Tim and Muller, Jack (2002) Valuation: Measuring
and Managing the value of Companies, Third Edition Mc Kinsey
& Company, Inc.
Mangala, Deepa and Jora Simpy, Linkages between Economic Value Added
and Market Value: An Analysis in Indian Context, Indian
Management Studies Journal, June 2002, pp.55-56.
Dr. B P Verma (Associate Professor of Finance at UTI Institute of Capital
Markets, 2002), Economic Value Addition by Indian Banks.

Chapter II

Review of
Literature

Chapter - II
Review of literature

EVA calculations or measuring shareholders value has been the subject of intellectual
interest among the academic and practitioners in recent times. Earlier academic
studies have documented the literature that can measure the shareholders value
through different traditional models. Recent studies, using a variety of evaluation
technique and enlarged database, have reexamined the issue and found the earlier
conclusion less unequivocal than was thought to be. Stern (1990) documented that
EVA as a performance measurement model captures the true economic profit of an
organization. EVA based financial management and incentive compensation scheme
gives manager better quality information and superior motivation to make decisions
that will create the maximum shareholders wealth in an organization.
EVA is a performance evaluation model which is most closely linked to the creation
of shareholders wealth over a period of time. The financial management and the
incentive compensation system based on EVA give the manager superior information
and higher motivation. Accordingly, EVA makes the measurement process as the focal
point for financial reporting, planning and decision making. The executives of an
organization need to look out appropriate techniques that may guard them against any
future attacks by corporate offender. The best way of maximizing shareholder return
is to offer incentives to managers for making decisions that boost long term corporate
value. A major step is to provide cash bonus or stock option arrangements with
incentives that create built-in share value. The objective is to motivate the managers
to look beyond short term measures of economic performance by essentially turning

managers into owners. The manager may be guided by EVA and pursue such
objectives that improve operating profits investing more capital. Managers can be
remunerated a proportion of both the total EVA and the positive change in EVA.
The present section briefly throws light on the researches carried out so far by
the scholars actively engaged in the field. The studies have been appraised and
summed up in order of their latest occurrence and the subsequent paragraphs offer a
chronological account of the literature reviewed:
Kyriazis and Anastassis (2007)1 investigates the relative explanatory power of the
Economic Value Added (EVA) model with respect to stock returns and firms' market
value, compared to established accounting variables (e.g. net income, operating
income), in the context of a small European developing market, namely the Athens
Stock Exchange, in its first market-wide application of the EVA measure. Relative
information content tests reveal that net and operating income appear to be more
value relevant than EVA. Additionally, incremental information tests suggest that EVA
unique components add only marginally to the information content of accounting
profit. Moreover, EVA does not appear to have a stronger correlation with firms'
Market Value Added than the other variables, suggesting that for our Greek dataset
EVA, even though useful as a performance evaluation tool, need not necessarily be
more correlated with shareholder's value than established accounting variables.
P. Mohanty (2006)2 this study was conducted basically by taking 3 major
companies: Tata Steel limited, Godrej Consumer Product Limited & NIIT limited
which is an information technology company in India. In this study data of 4 years i.e.
from 2001-2005 was taken. This study argued that, contrary to popular perception.
EVA is actually the excess free cash flow the company generates to meet the
1

Dimitris Kyriazis, Christos Anastassis (January 2007). The Validity of the Economic Value
Added Approach:
an Empirical Application, European Financial Management Volume 13
Issue 1, Page71 (January, 2007).
2

Pitabas Mohanty (September, 2006). Modified TVA-based Performance Evaluation. IIMB


Management Review, Issue: September, 2006, Pages: 265-273.

expectations of the investors. In this sense, it is both a cash flow based measure and it
is also positively associated with the return the investors get on their investment in the
company. This study recommends an alternative performance measurement that
addresses some of the limitations of both the traditional Eva-based and ESOP-based
performance measurement systems.

Ghanbari and Sarlak (2006)3 make it clear that maximizing shareholders


value is fast becoming the new corporate standard in India. EVA is an appropriate
performance measure which evaluates the manner in which managerial actions affect
shareholders value. EVA is a tool for identifying whether the management of
company has created wealth or destroyed it. In his study he reviews the trends of EVA
of Indian automobile companies. The result indicates that there is a significant
increasing tread in EVA during the period of the study and the firms of the automobile
industry are moving towards the improvements of their firms value.

Roji George (2005)4 reveals that there is a positive relationship between EVA and
productivity, and a negative one between EVA and non-performing assets. The
main objectives of this study were to measure the economic value added; to
analyze relationship between EVA and non-performing assets; and the relationship
between EVA and employee productivity. This study analyzed the performance of
21 banks (8public sector banks and 13 private sector banks) during the years
2000-01, 2001-02 and 2002-03. A comparative study based on the public and
private sector was also made. It was found that banks, both private and public
sector ones, create economic value and that there was a positive relationship
between EVA and productivity, and a negative one between EVA and nonperforming assets.
3

Ghanbari, Ali M. and Sarlak Narges (2006). Economic Value Added: An Appropriate Performance
Measure in Indian Automobile Industry. The Icfaian Journal of Management Research, Vol. V, No. 8,
2006, pp. 45-62.
4
Roji George (May, 2005): Computation of EVA in Indian Banks. The ICFAI Journal of Bank
Management, Vol IV. No. 2, May, 2005B.M, pp.30-44.

Misra (2005)5 Indian capital market has undergone a radical transformation,


both in terms of its behavior and rationality. Market valuation of securities
listed on the Indian Stock Exchanges is more aligned to the intrinsic value
today than it has been in the past. The objective of this research is to study the
relationship that exists between the wealth of shareholders, which has
traditionally been recognized as the goal of business firms, and various
standard measures of firms financial performance. Basic thrust of the study is
to establish the supremacy of EVA as a measure of financial performance over
the traditional measures. The hypothesis of this study is that of the nine chosen
independent variables, EVA is the single most significant explanatory variable
in explaining the variation in the Market Value Added and it finds a better
reflection in the market value of the share as compared to the traditional
measures of financial performance. The above hypothesis is tested on the time
series data of BSE-100 companies. The period of the study is five years,
beginning from the Financial Year 1998-99 and ending with Financial Year
2002-03. Cross-sectional analysis of the sample firms has been done for the
period of study (from 1998 to 2003) using the tool of Regression Analysis.

K. Bhattacharya, B.V. Phani (2005)6 this study explains the concept of


Economic Value Added (EVA) that is gaining popularity in India. The study
examines whether EVA is a superior performance measure both for corporate
reporting and for internal governance. It relied on empirical studies in U.S.A.
and other advance economies. It concluded that though EVA does not provide
additional information to investors, it can be adapted as a corporate philosophy

Anil Misra (November, 2005): Linkages between Economic Value Added and Share Prices: An empirical

study of Indian Corporate Sector. The ICFAI Journal of Industrial Economics, Volume: II, Issue: 4, Pages:
30-57.
6

Asish K. Bhattacharya, B.V. Phani (Indian Institute of Management Calcutta,(April, 2005):


Economic Value Added --- A General Perspective. Financial Economics - - Corporate Finance and
Governance - - - General.

for motivating and educating employees to differentiate between value


creating and value destructing activities. This would lead to direct all efforts in
creating shareholder value. The study brings to attention the dangerous trend
of reporting EVA casually that might mislead investors.

Irala, Lokanadha Rddy (2005)7 find that EVA stories in the west are quite
encouraging, empirical research is not sufficient for establishing the claim of
EVA as a better measure. However, there is also not much research to provide
it otherwise. In the case of India either way research is very inadequate.
Although not a panacea, EVA based compensation plans will drive managers
to employ a firms assets more productively and EVA should help reduce the
difference in the interest of managers and shareholders, if not perfectly align
them.

Worthington (2004)8 reveals returns to be more closely associated with EVA


than residual income, earning and net cash flow respectively. He used Pooled
time series, cross-sectional data on 110 Australian companies over the period
1992-1998 is employed to examine whether trademark variant of residual
income known as Economic value added (EVA) is more highly associated
with stock return than other commonly used accounting-based measures.
These other measures of internal & external performance include earnings, net
cash flow & residual income.

Karam Pal and Garg M C (2004)9 concluded that EVA may be a broader
gauge of judging the contribution of an organization towards the national
economic development and growth. Pressure for better financial performance

Irala, Lokanadha Reddy (2005). Eva: The Right Measure of Managerial Performance? The Journal
of Accounting and Finance, Vol. 19, No.2, April-September 2005, pp.77-87.
8
Andrew C. Worthington (December, 2004): Australian Evidence concerning the information content
of Economic Value Added., Australian Journal of Management, Vol 29, No.2, Dec 2004.
9
Karam Pal and Garg M.C. (2004), EVA: A Performance Measurement Tool. JIMS 8M, April-June,
2004, pp.39-45.

has been increasing mainly because of increasing competition in the present


globally competitive era, the researchers has been duty bound to come out
their

previous

recommendations

and

to

investigate

some

research

opportunities for newer ways of analyzing and interpreting corporates


financial statements. Now, Economic Value Added is, to certain extent an
acceptable model around the globe.

Mitali Sen (2003)10 as per the concept of EVA, there are basically two
fundamental drivers of shareholders wealth to which manager should be
sensitive. First being, the identification of the fact that al capital lodged in the
business generates returns in excess of the cost of capital, with the intention of
returning non-productive capital back to shareholders. Secondly, the finance
manager should constantly go for investing in value creating projects and
strategies. These two drivers adopted systematically, empowers the managers
to develop strategies by which the company can become EVA positive and
continues to add value to shareholders wealth. In this study an attempt was
made to analyze the EVA trends of TATA STEEL for a period of 11 years i.e.
from 1990-91 to 2000-01 and chalked out the course of action for making
TISCOs EVA positive through sensitivity analysis.

Stern, Joel (2003)11 explained in an ASCIs workshop on Value Based


Management in collaboration with SCOPE and Stern Stewart and Co. it was
conducted at Hyderabad on 21st and 22nd March 2003. The program was
augurated by the Principal, ASCI Dr EAS Sharma, who emphasized the failure
of the traditional accounting metrics in measuring the value of an organization
and hence leading to problems like Enron. He hoped that the current endeavor
of ASCI in bringing about the awareness of the VBM concept would gather

10
11

Stern, Joel (2003). Workshop on value-Based Management, Hyderabad, March 21-22,


2003.

momentum in future. Mr. U.K. Dikshit, Director of SCOPE was happy that the
PSUs are showing active interest in the subject and he hoped that the PSUs
may also adopt such a framework to improve their performance.

Mclaren (2003)12 in his study conducted on three firms in New Zealand


observed that none of the company saw EVA as a complete measure of
performance. They all made use of extra measures such as payback period for
investment decision making, a focus on earning interest and tax both internally
and externally, the balanced scorecard for its focus on value drivers. In
findings he suggested that its meaningless to classify firms simply as EVA
users and non-users, because usage level can differ widely. The three firms
could all be described as integrated network business, yet they all varied in
how they used EVA.

Rappaport (2002)13 study reveals that whether considering New Economy


firms during their success or failure, the problem has always been that of
determining their true value with equitable dispassion. Standard corporate
valuations was determined by four factors: cash flow from existing
investments, growth expected from this cash flow, length of time this growth
is sustained, and cost of capital to sustain it. The research details various ways
to adapt conventional valuation methods for companies that lack key
traditional variables ( such as profits, track records, and even competitors with
which they can be compared) in order to arrive at realistic valuations.

12

Mclaren, Josie (2003). A Sterner Test. Financial Management, July/August 2003, pp. 1819.
13
Alfred Rappaport (November, 2002), Creating Shareholder Value: A Guide for Managers
and Investors. The ICFAI Journal of Applied Finance, Vol. 8, No. 6, November 2002. pp.6883.

Dr. B P Verma (2002)14 this research studies Indian banks profile to

demonstrate a direct correlation between the investment in stakeholder


relationships and corporate performance. Many Indian banking seems to have
destroyed shareholders wealth over a period of time and only a few have
positively contributed to their wealth. With the help of EVA (Economic Value
Added) and MVA (Market Value Added) which tell what the institution is
doing with investors hard earned money, the paper examines an appropriate
way of evaluating banks performance and also finds out which Indian banks
have been able to create (or destroy) shareholders wealth since 1996-1997 to
2000-2001. The overriding message of this paper is that banks must always
strive to maximize shareholders value without which their stocks can never be
fancied by the market. This analysis helps us to dig below the surface numbers
to tell us more about the underlying business and whether there is a prima
facie case for using EVA as one of the range of performance measurement
tools.

Jagannathan (2002)15 observed that companies though more about squeezing


higher revenues in protected markets and less about the cost of achieving these
revenues. But another equally important reason is the way companies have
been looking at returns; earning per share, which is basically post tax profits
per share. For an accountant company is doing fine as long as debtors and the
taxman are paid and depreciation provided for. Since equity is post tax charge
on profit, it doesnt figure much in calculation. Management has been happy
to treat equity as free money on which no return are due unless there is profit.
Result: Shareholder Value is often the result of fortuitous circumstances rather
than great management.

14

Dr. B P Verma (Associate Professor of Finance at UTI Institute of Capital Markets, 2002),
Economic Value Addition by Indian Banks.
15

Jagannathan, R (2002). Romancing EVA, Indian Management, July, 2002, pp.30-34.

Sangameshwaran, Prasad (2002)16 find that EVA taking care of the


performance-related aspects of compensation, many organizations like Godrej
have decided to do without stock options (ESOPs). Not TCS though. You
have to get into ESOPs. This EVA is certainly not in lieu of that, he says.
EVA focuses on value creation and ESOPs provide the commitment as well as
reward over the long term. EVA in TCS is being administered for a large
number of employees whereas ESOPs will be restricted to few.

Salmi, Timo and Ilkka Virtanen (2001) 17. The value-based management
performance measure EVA introduced by Stern Stewart & Co. is an
incarnation of the underlying residual income (RI) concept. The concept is
evaluated and compared with traditional profitability measures within a
controlled simulation framework. It is observed that EVA is very sensitive to
its cost of equity component, but it is unexpectedly insensitive to its cost of
debt component under regular conditions. EVA and its variability are observed
to be strongly affected by the firm's growth policies because of leverage
effects. EVA is observed to be much more unstable than the traditional return
on investment and directly related to the return on equity measure.
Methodologically, the paper demonstrates the advantages of using a controlled
simulation approach in financial research.

Saha (2000)18 observed that liberalization of the Indian economy over the last
10 years has lead to a shift in the corporate goal of the public and private
corporates in the country. Earlier it was mandatory for their goal to have a

16

Sangameshwaran, Prasad (2002). Couting EVA, the TCS Way. Indian Management, August 2002,
pp.68-83.
17

Salmi, Timo and Ilkka Virtanen (2001): Economic Value Added: A simulation analysis of the trendy,

owner-oriented management tool. Acta Wasaensia No. 90, 33 p.

18

Saba, Gurudas (2000). Shareholders Value and EVA, New Corporate Goals, The Charted
Accountant, April 2000, pp.46-51.

socio-economic focus. There is a major change with the focus now being
primarily on enhancing the shareholder value and recommend shift from
Earning Per Share, Price Earning Ratio, etc., to Economic Value Added and
Market Value Added. He demonstrated how EVA is the best measure for
measuring shareholders value enhancement.

Ben-Hsien Bao (1999)19 this study investigates the association between


economic value added and value of Indian firms which are included in the
COMPUSTAT-global Vantage database. In this study data of 54 Indian firms
were used for the period from1989-1995. Results show that:-

1. Consistent with the theory , economic value added is positively and significantly
associated with firm value, and
2. Contrary to Stewarts (1991) expectations, the explanatory power of economic
value added is smaller than that of earning. Earnings are still the most important
determinant of firm value.

N. Roztocki (1998)20 study reveals that looking at the operating profit


derived by ABC alone; management can obtain a distorted impression of
profitability for particular cost objects. This distortion may lead to poor
decisions. An integrated ABC-and-EVA system has the potential to help
managers improve the business performance of their companies by giving
them a better understanding of their true costs. In this study the impact of
the increased reliability of cost information on the companys decisionmaking, potential long-term business performance, and expected
shareholder wealth creation was discussed.

19
20

Chapter III

Research
Methodology

Chapter - III
Research Methodology

3.1 Introduction:One of the most often used terms in business today is Shareholders value. The
equity culture wild fire is spreading rapidly from the US to the rest of the world
(Thakor et al, 2000). It is seen as crucial all over the world. In Sweden the new
measurement systems of shareholder value creation were introduced in the last decade
and have been slowly introduced in various companies. Indeed, some of the leading
companies have made the creation of shareholders value as one of their key corporate
objectives, here in this chapter; an attempt has been made to design a comprehensive
methodology to carry out the research work. From research point of view, the
methodology needs to be cautiously designed to present results that are as objective as
realistic. A healthy comprehensible modus operandi empowers the new research
investigator to re-examine the study situation. Good methodology follows the
standards of the established conventions.

3.2 Objective of the study


The objectives of this study are as follows:

To measure the economic Value Added by Indian banks.

To analyze the relationship between the level of Non-Performing Assets and


Economic Value added.

To analyze the relationship between employee productivity and Economic


Value Added.

An attempt has been made to analyze the EVA of banks on the ownership
structure. For this, banks have been classified as public sector banks and private
sector banks. This study also tries to rank the wealth creators. Further, it examines
the cost of equity capital of banks.

3.3 Research Design:It is not possible in practice for an individual research work to approach all the bits
and pieces in the universe. In the present study, only only a small amount of bits and
pieces from the universe have been taken for the purpose of the study on the basis of
stratified sampling. The sample so selected constitutes the sample design for the
purpose. A research design is a definite plan for obtaining a sample from a given
population. Research design means a sketch or a drawing of a research projects
structure. It comprises a series of prior pronouncements that, taken together, provide
a roadmap for carrying out a research project. The research design of the present
study is outlined hereunder:

3.3.1 Data Collection: For the purpose of this study, secondary data have been used.
The relevant secondary data have been collected from a financial database of
Centre for Monitoring Indian Economy (CMIE) called Prowess, Business
Newspapers and via Internet etc. The study required variety of data; therefore
websites like www.indiainfoline.com, www rbi.org and www.indiasat.com have
been searched.

3.3.2 Selection of Sample: This study has been conducted among Indian
commercial banks. Listing its shares on an Indian stock exchange was a
prerequisite. For the present study data on 32 Indian private and public sector
banks that are listed on the Bombay Stock Exchange are taken. The period
covered in the study is five years from 2001-02 to 2005-06. These banks are:-

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Public sector banks


Allahabad Bank
Andhra Bank
Bank Of Baroda
Bank Of India
Corporation Bank
Dena Bank
Indian Overseas Bank
Oriental Bank Of Commerce
Punjab National Bank
State Bank Of Bikaner & Jaipur
State Bank Of India
State Bank Of Mysore
State Bank Of Travancore
Syndicate Bank
Union Bank Of India
Vijaya Bank

17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32

Private Sector Banks


Bank Of Punjab Ltd. [Merged]
Bank Of Rajasthan Ltd.
Centurion Bank Of Punjab Ltd.
City Union Bank Ltd.
Dhanalakshmi Bank Ltd.
Federal Bank Ltd.
H D F C Bank Ltd.
I C I C I Bank Ltd.
I N G Vysya Bank Ltd.
Indusind Bank Ltd.
Industrial Development Bank Of India Ltd.
Jammu & Kashmir Bank Ltd.
Kotak Mahindra Bank Ltd.
South Indian Bank Ltd.
U T I Bank Ltd.
United Western Bank Ltd. [Merged]

3.3.3 Procedure: - EVA is the operating profit minus an appropriate charge for the
opportunity cost of all capital invested in a firm. The standard and widely accepted
method for calculating EVA is,
EVA = Net operating Profit Adjusted for Taxes-(Invested Capital*Weighted
Average Cost of capital).
This method is known as Entity method.

Thampy and Baheti have followed a method which was proposed by Tom
Copeland, Tim Koller and Jack Murrain in 1996. Parasuraman also proposes this
method. This method, named as the equity approach, is for valuation of banks.
They say, The equity approach is more suited to banks compared to the entity
approach since a big part of banking business is liability management, i.e., raising
deposits at rates below the opportunity cost of capital. The deposit franchise given
by the banking license gives the bank the potential to create value on the liability
side of its balance sheet. The liability side of the banks balance sheet is part of
the business operations of the bank, and it is not pure financing. This makes the
equity approach more appropriate.

In equity approach,

EVA = Adjusted Net Profit (Capital* Cost of Equity)


Where,
Adjusted net Profit is profit after tax plus depreciation less non-recurring income
plus non-recurring expenses adjusted for tax.
Means

Adjusted Net Profit = profit after tax + Depreciation non-recurring income +


non-recurring expenses adjusted for tax.

Capital = Equity capital + retained earnings.

Cost of Equity: Cost of equity is the minimum rate of return, which has to be
made from an equity-financed project, in order to maintain the present wealth of
the shareholders unaffected. It can be computed based on Capital asset pricing
model (CAPM). According to CAPM,
Cost of equity, Ke = Risk free rate + (Beta * Market Premium).

Risk-free Rate: Risk free rate is the rate of return from securities, which are

free from any type of risk. Generally, government-backed securities are


considered as risk-free securities. So, the yield on the 364-day Government of
India Treasury bill is considered as risk-free rate. These show 6.98%, 5.83%,
4.71%, 5.02% & 5.51%for years 2001-02, 2002-03, 2003-04, 2004-05, 2005-06
respectively.

Beta: beta is the measure of the volatility of a stock in relation to the market. It is
the index of systematic risk. Beta for the each stock was calculated based on the
daily stock price with Bombay Stock Exchanges sensex returns as the proxy for
the market returns. Beta was calculated by using the data from the period April 1,
2001 to March 31, 2006.

Market Premium: Market premium is the excess return offered by the market
over the risk-free rate.
i.e. Market Premium= Return of Market- Return from risk free securities.
It is -7.11, -6.74, .66, -3.54 & -.63 for the years 2001-02, 2002-03, 2003-04,
2004-05, 2005-06 respectively.

Non-Performing Assets: In simple words, NPAs are assets which are not
performing, i.e., which are not giving return. An asset is classified as NPA, if dues
in the form of either principal or interest or both are not paid by the borrower for a
period of 180 days. However, with effect from March 2004, the period of 180
days would be reduced to 90 days. In case of multiple facilities granted to a
borrower, if one of his accounts qualifies for NPA, all other accounts, irrespective
of their status, have to be classified as NPAs. For this study, net NPAs are
considered.

Employee Productivity: Employee productivity can be defined as the total


quantity of output/result generated by the banks during a specific period divided
by the number of employees. Business per employee and Profit per Employees
are the two variables under employee productivity used for this study.

Correlation: Correlation is a statistical tool which measures the relationship


between two variables. The relationship of the EVA with NPA and with employee
productivity is computed with the help of simple correlation. This has been done
company-wise and industry-wise. Correlation coefficient lies between -1 and +1.
If the correlation coefficient is negative, the relationship between the variable is
also negative and vice versa. A coefficient of zero implies no relationship.

ANOVA (Analysis of Variance): ANOVA is essentially a procedure for


testing the difference among different groups of data for homogeneity. The
ANOVA technique is important in the context of those entire situations where we
want to compare more than two populations. The ANOVA technique enables us to
perform this simultaneous test and as such is considered to be an important tool of

analysis. With the help of this technique we can draw inferences about whether
the samples have been drawn from population having the same mean.
-

Chapter IV

Analysis

Chapter - IV
Analysis
Introduction
The results of the study give a picture of positive EVAs, contrary to previous study. This
clearly shows that Indian banks are improving their performance not only in making
profits but also in EVAs. EVA is a relatively new concept in the area of financial
management. It is the financial performance measure that comes closest than any other to
capture the true economic profit of a firm EVA is the performance measure most directly
linked to the creation of shareholder wealth over time. It is a value-based framework that
provides a unique insight into value creation and unites the finance theory with the
competitive strategy framework. After the data has been collected the next step is to
analyze the data. The analysis of data requires a number of closely related operations
such as establishment of categories, the application of these categories to raw data

through coding, tabulation and then drawing statistical inferences. The data should
necessarily be condensed into a few manageable groups and tables for further analysis.
Editing is the procedure that improves the quality of data for coding. With coding the
stage is ready for tabulation. Tabulation is the part of the technical procedure wherein the
classified data are put into the forms of tables. In the present study also I have converted
the whole amount of data into various tables so that to convert the data into more
understandable and manageable form.

By analysis we mean the computation of certain indices or measures along with searching
for patterns of relationship that exist among the data groups. Analysis can be of two
types descriptive analysis & inferential analysis. For the analysis of data I have used
various tools like correlation. With the help of correlation relationship between EVA&
NPA and EVA& Employee Productivity has been calculated. Also ranking of different
banks have been done by using ENA Net worth Ratio.

So the analysis part with the help of different tables & graphs are showing here to arrive
at a conclusion about the performance of banks in the current scenario.

The first table here is the EVA of all the banks under study.

Second table is of EVA of all the banks of public sector under study.

Table 4.1 EVA of Banks under study


Company Name

Allahabad Bank

2001-02

2002-03

2003-04

2004-05

2005-06

EVA

EVA

EVA

EVA

EVA

93.47

67.02

295.71

473.35

595.46

Andhra Bank

190.65

318.19

444.74

410.05

431.08

Bank Of Baroda

425.92

648.63

694.32

607.14

456.20

Bank Of India

415.44

752.75

899.98

301.72

29.23

41.73

47.87

-78.96

Bank Of Punjab Ltd. [Merged]


Bank Of Rajasthan Ltd.

629.21
n.a

27.71

47.70

49.49

-38.53

-15.81

-120.59

-4.11

-102.02

-31.00

-64.62

22.15

33.87

51.74

43.24

53.55

Corporation Bank

256.67

377.68

470.62

339.87

294.49

Dena Bank

-67.50

89.12

221.45

-38.27

-19.18

11.16

13.65

20.32

-32.99

12.81

Centurion Bank Of Punjab Ltd.


City Union Bank Ltd.

Dhanalakshmi Bank Ltd.


Federal Bank Ltd.

87.61

115.08

146.96

106.82

177.12

H D F C Bank Ltd.

304.13

461.88

560.52

752.75

1016.23

I C I C I Bank Ltd.

25.99

-212.65

1917.36

2147.57

2619.72

I N G Vysya Bank Ltd.

98.08

131.61

104.57

-43.37

34.23

Indian Overseas Bank

202.80

384.13

618.66

629.47

876.88

39.57

74.45

280.22

115.25

-55.72

-2280.06

389.77

-102.83

61.49

-1589.97

236.66

332.31

408.03

136.89

198.63

38.41

34.29

84.89

76.85

102.59

Oriental Bank Of Commerce

335.09

473.90

689.57

474.02

426.51

Punjab National Bank

620.34

880.12

1320.60

1484.98

1416.04

Indusind Bank Ltd.


Industrial Development Bank Of India Ltd.
Jammu & Kashmir Bank Ltd.
Kotak Mahindra Bank Ltd.

South Indian Bank Ltd.

47.74

41.13

53.73

7.98

59.63

State Bank Of Bikaner & Jaipur

91.29

204.01

276.26

95.18

181.25

2068.34

3243.25

3814.51

3423.86

2871.91

State Bank Of India


State Bank Of Mysore

67.88

111.52

165.28

152.55

111.02

State Bank Of Travancore

93.35

160.79

228.75

193.72

222.94

Syndicate Bank

171.75

259.11

375.78

274.60

418.15

U T I Bank Ltd.

125.42

195.42

263.13

346.60

424.90

Union Bank Of India

315.91

545.59

671.79

495.87

631.76

31.10

8.41

25.46

-112.63

0.00

131.60

223.41

412.54

254.62

107.67

4137.32

10443.76

15410.01

13030.71

12624.66

United Western Bank Ltd. [Merged]


Vijaya Bank
Total EVA

Table 1 shows the calculated EVA of all the banks under study whether it is private sector
banks or public sector banks for this the formula explained in research methodology for
calculating EVA has been used. The total EVA for the year 2001-02 is Rs.4137.32cr, for
the year 2002-03 it is Rs10443.76cr. for the year 2003-04 it is Rs.15410.01cr, for the year
2004-05 it is Rs. 13030.71cr & for the year 2005-06 it is 12624.66cr. By analyzing this
chart we can say that banks are continuously improving its position by increasing the
EVA of its shareholders continuously. In the last year of study the EVA was declining
because of merger of Bank of Punjab (Merged). In the first year i.e in 2001-02 only three
banks named Centurion Bank of Punjab, Dena Bank & Industrial Development Bank of
India had negative EVA. In the second year i.e in 2002-03 two banks named Centurion
Bank and ICICI Bank Ltd. had negative EVA. In 2003-04 again Centurion Bank Ltd. &
Industrial Development Bank of India Had negative EVA. In 2004-05 total 7 banks had
negative EVA where as in 2005-06 out of all banks 5 banks were contributing negative
EVA.

Table4. 2 EVA of Public Sector Banks


(Rs. In
cr.)

Public sector banks

S.No.

Company Name

Allahabad Bank

2001-02

2002-03

2003-04

2004-05

2005-06

EVA

EVA

EVA

EVA

EVA

93.47

67.02

295.71

473.35

595.46

Andhra Bank

190.65

318.19

444.74

410.05

431.08

Bank Of Baroda

425.92

648.63

694.32

607.14

456.20

Bank Of India

415.44

752.75

899.98

301.72

629.21

Corporation Bank

256.67

377.68

470.62

339.87

294.49

Dena Bank

-67.50

89.12

221.45

-38.27

-19.18

Indian Overseas Bank

202.80

384.13

618.66

629.47

876.88

Oriental Bank Of Commerce

335.09

473.90

689.57

474.02

426.51

Punjab National Bank

620.34

880.12

1320.60

1484.98

1416.04

91.29

204.01

276.26

95.18

181.25

2068.34

3243.25

3814.51

3423.86

2871.91

10

State Bank Of Bikaner & Jaipur

11

State Bank Of India

12

State Bank Of Mysore

67.88

111.52

165.28

152.55

111.02

13

State Bank Of Travancore

93.35

160.79

228.75

193.72

222.94

14

Syndicate Bank

171.75

259.11

375.78

274.60

418.15

15

Union Bank Of India

315.91

545.59

671.79

495.87

631.76

16

Vijaya Bank

131.60

223.41

412.54

254.62

107.67

5413.01

8739.23

11600.56

9572.74

9651.39

Total

Average EVA

338.31

546.20

725.04

598.30

603.21

Table 2 explains the EVA of the public sector banks. In all the years from 2001-2006
among all the public sector banks which are included in this study, State Bank of
India is the No. 1 performer. In the year 2001-02 total EVA of public sector banks was
Rs338.31cr, in year 2002-03 EVA was Rs546.20cr, in year 2003-04 it reaches to
Rs725.04cr, in the year 2004-05 it was Rs598.30cr & in the year 2005-06 EVA was
Rs603.21cr. So public sector banks are improving their performance continuously.

Public sector banks


2001-02

S.
No.

2002-03

2003-04

2004-05

2005-06

Company Name

EVA

State Bank Of India

2068.34

3243.25

3814.51

3423.86

2871.91

Punjab National Bank

620.34

880.12

1320.60

1484.98

1416.04

Indian Overseas Bank

202.80

384.13

618.66

629.47

876.88

Union Bank Of India

315.91

545.59

671.79

495.87

631.76

Bank Of India

415.44

752.75

899.98

301.72

10

629.21

Allahabad Bank

93.47

12

67.02

16

295.71

12

473.35

595.46

Bank Of Baroda

425.92

648.63

694.32

607.14

456.20

190.65

318.19

444.74

410.05

431.08

Andhra Bank
Oriental Bank Of
Commerce

335.09

473.90

689.57

474.02

426.51

10

Syndicate Bank

171.75

10

259.11

10

375.78

11

274.60

11

418.15

10

11

Corporation Bank
State Bank Of
Travancore

256.67

377.68

470.62

339.87

294.49

11

93.35

13

160.79

13

228.75

14

193.72

13

222.94

12

12

Rank

EVA

Rank

EVA

Rank

EVA

Rank

EVA

Rank

13

State Bank Of Bikaner


& Jaipur

91.29

14

204.01

12

276.26

13

95.18

15

181.25

13

14

State Bank Of Mysore

67.88

15

111.52

14

165.28

16

152.55

14

111.02

14

15

Vijaya Bank

131.60

11

223.41

11

412.54

10

254.62

12

107.67

15

16

Dena Bank

-67.50

16

89.12

15

221.45

15

-38.27

16

-19.18

16

Table 4.3 Ranking of all Public Sector Banks under study based on EVA

Table 3 shows the ranking of all public sector banks under study. The very important
thing to be noted under this study is that in all the 5 years of stdy i.e from 2001-2006 one
bank named State Bank of India is at No. one position. Second position from the last
years was occupied by Punjab National Bank. Whereas the remaining positions are not
fixed they are continuously changing in the whole period of study.

Public Sector Banks


200304
EVA
to Net
worth
Ratio

2001-02

2002-03

EVA to Net
worth
Ratio

Rank

EVA to
Net worth
Ratio

22.70

29.78

31.24

24.74

27.60

Indian Overseas Bank


State Bank Of
Travancore

15.30

22.25

10

24.72

17.14

16.74

Allahabad Bank

10.69

15

6.13

16

19.65

13

20.49

16.37

Punjab National Bank

21.90

23.59

27.17

18.28

15.18

Andhra Bank

24.51

30.46

31.38

22.32

14.90

Syndicate Bank

12.18

14

22.09

11

22.66

11

13.00

11

14.76

17.31

23.05

22.62

12

13.90

10

13.90

Union Bank Of India


State Bank Of Bikaner
& Jaipur

13.27

11

23.71

24.05

7.33

14

12.89

Bank Of India

17.03

23.02

23.23

10

6.76

15

12.63

State Bank Of Mysore

26.20

30.28

30.10

20.24

11.91

10

S.No.

10

Company Name

Rank

Rank

2004-05
EVA to
Net
worth
Ratio

Rank

2005-06
EVA to
Net
worth
Ratio

Rank

11

State Bank Of India

14.61

10

19.66

12

19.19

14

14.22

10.39

11

12

12.54

13

16.02

15

17.06

15

11.15

12

8.73

12

13

Corporation Bank
Oriental Bank Of
Commerce

21.33

22.82

25.92

14.25

8.25

13

14

Vijaya Bank

26.32

27.54

30.89

16.02

6.45

14

15

Bank Of Baroda

12.85

12

16.04

14

14.00

16

10.79

13

5.82

15

16

Dena Bank

-22.19

16

17.82

13

28.95

-3.49

16

-1.44

16

Table4. 4 Ranking of all Public Sector Banks based on EVA/ Net worth Ratio

Table 4 shows that if we do ranking on the bases of EVA/Net Worth Ratio then in the
years 2004-05, 2005-06 Indian Overseas Bank is at No. one. State Bank of Travencore
was at 9th rank in the year 2001-02 but it is at 2nd rank in the year 2005-06.Allahabad
Bank was at 9th rank in the year 2001-02 and in the year it came at 3 rd rank, which means
that it is improving continuosly.Vijaya Bank was at 1st rank in the year 2001-02 and now
it is at 14th rank which states that its performance is declining continuously in
consideration to other banks.

Table4.5: EVA of Private Sector Banks


Private Sector Banks
S.
No.

Company Name

(Rs. In cr.)

2001-02

2002-03

2003-04

2004-05

2005-06

EVA

EVA

EVA

EVA

EVA

Bank Of Punjab Ltd. [Merged]

29.23

41.73

47.87

-78.96

Bank Of Rajasthan Ltd.

27.71

47.70

49.49

-38.53

-15.81

Centurion Bank Of Punjab Ltd.

-120.59

-4.11

-102.02

-31.00

-64.62

City Union Bank Ltd.

22.15

33.87

51.74

43.24

53.55

Dhanalakshmi Bank Ltd.

11.16

13.65

20.32

-32.99

12.81

Federal Bank Ltd.

87.61

115.08

146.96

106.82

177.12

H D F C Bank Ltd.

304.13

461.88

560.52

752.75

1016.23

I C I C I Bank Ltd.

25.99

-212.65

1917.36

2147.57

2619.72

I N G Vysya Bank Ltd.

98.08

131.61

104.57

-43.37

34.23

Indusind Bank Ltd.

39.57

74.45

280.22

115.25

-55.72

10

n.a

11

Industrial Development Bank Of India


Ltd.

12

Jammu & Kashmir Bank Ltd.

13

-2280.06

389.77

-102.83

61.49

-1589.97

236.66

332.31

408.03

136.89

198.63

Kotak Mahindra Bank Ltd.

38.41

34.29

84.89

76.85

102.59

14

South Indian Bank Ltd.

47.74

41.13

53.73

7.98

59.63

15

U T I Bank Ltd.

125.42

195.42

263.13

346.60

424.90

16

United Western Bank Ltd. [Merged]

31.10

8.41

25.46

-112.63

0.00

-1275.69

1704.53

3809.45

3457.96

2973.27

-79.73

106.53

238.09

216.12

185.83

Total
Average EVA

It can be understood from Table 3 that from 2001-2002 to 2003-04 EVA of private sector
banks are increasing continuously but after that from years 2004-05 it starts declining. In
the year 2005-06 total EVA generated by private sector banks was 185.83. In year 200506 three banks were generating negative EVA and the maximum EVA was generated by
ICICI bank Ltd. among all public sector banks.

Table4.6: Ranking of all Private Sector Banks under study based on EVA

Private Sector Banks


2001-02

S.No.

Company Name

EVA

2002-03
Rank

EVA

2003-04
Rank

EVA

2004-05
Rank

EVA

2005-06
Rank

EVA

Rank

I C I C I Bank Ltd.

25.99

12

-212.65

16

1917.36

2147.57

2619.72

H D F C Bank Ltd.

304.13

461.88

560.52

752.75

1016.23

U T I Bank Ltd.
Jammu & Kashmir
Bank Ltd.

125.42

195.42

263.13

346.60

424.90

236.66

332.31

408.03

136.89

198.63

Federal Bank Ltd.


Kotak Mahindra Bank
Ltd.
South Indian Bank
Ltd.

87.61

115.08

146.96

106.82

177.12

38.41

34.29

11

84.89

76.85

102.59

47.74

41.13

10

53.73

7.98

10

59.63

22.15

13

33.87

12

51.74

10

43.24

53.55

98.08

131.61

104.57

-43.37

14

34.23

10

City Union Bank Ltd.


I N G Vysya Bank
Ltd.
Dhanalakshmi Bank
Ltd.

11.16

14

13.65

13

20.32

14

-32.99

12

12.81

10

11

United Western Bank

31.10

8.41

14

25.46

13

-112.63

16

0.00

11

4
5
6
7
8
9

12
13
14

15
16

Ltd. [Merged]
Bank Of Rajasthan
Ltd.
Indusind Bank Ltd.
Centurion Bank Of
Punjab Ltd.
Industrial
Development Bank
Of India Ltd.
Bank Of Punjab Ltd.
[Merged]

27.71

11

47.70

49.49

11

-38.53

13

-15.81

12

39.57

74.45

280.22

115.25

-55.72

13

-120.59

15

-4.11

15

-102.02

15

-31.00

11

-64.62

14

2280.06

16

389.77

-102.83

16

61.49

1589.97

15

29.23

10

41.73

47.87

12

-78.96

15

n.a

16

Table 6 shows the ranking of banks according to their EVA. According to EVA, ICICI
Bank Ltd. is at Ist rank from the last 3 years i.e. from 2003-04, 2004-05, 2005-06. HDFC
Bank is at No. 2 from the last 2 years. In the year 2001-02, 2002-03 & 2003-04 this bank
was at 1st rank. Out of all private sector banks ICICI Bank Ltd. has improved a lot
because it was at 12th rank in the year 2001-02, whereas its rank is 1st in the year 200506.

Private Sector Banks

Company Name

2001-02
EVA to
Net
Worth
Ratio

2002-03

Rank

EVA to Net
Worth Ratio

Rank

2003-04
EVA to
Net
Worth
Ratio

Rank

2004-05
EVA to
Net
Worth
Ratio

2005-06

Rank

EVA to
Net Worth
Ratio

H D F C Bank Ltd.

15.59

20.51

20.81

16.65

19.45

City Union Bank Ltd.

15.57

20.56

25.50

17.96

18.72

U T I Bank Ltd.

20.40

21.27

23.12

14.31

14.72

Federal Bank Ltd.

19.52

21.73

22.65

14.77

14.17

Kotak Mahindra Bank Ltd.

7.52

12

6.46

12

14.23

13

10.23

11.93

I C I C I Bank Ltd.

0.39

14

-2.92

15

23.40

16.95

11.70

Rank

Jammu & Kashmir Bank Ltd.

25.25

26.76

25.60

8.38

11.19

Dhanalakshmi Bank Ltd.

13.54

11.34

11

15.15

10

-28.91

14

9.53

South Indian Bank Ltd.

17.38

13.22

13.89

14

1.77

9.35

I N G Vysya Bank Ltd.

15.12

20.52

15.05

11

-6.41

11

3.41

Bank Of Rajasthan Ltd.

11.86

11

16.72

15.02

12

-10.99

13

-4.36

7.04

13

12.36

10

35.01

13.90

-6.43

-217.60

16

-20.37

16

-165.73

16

-6.61

12

-6.94

-34.84

15

5.71

13

#DIV/0!

1.04

10

-25.14

15.28

19.45

19.64

-42.85

15

#VALUE!

12.25

10

3.02

14

8.38

15

-54.18

16

#DIV/0!

Indusind Bank Ltd.


Centurion Bank Of Punjab Ltd.
Industrial Development Bank Of
India Ltd.
Bank Of Punjab Ltd. [Merged]
United Western Bank Ltd.
[Merged]

Table 4. 7 Ranking of all Private Sector Banks based on EVA/ Net worth Ratio

Table 7 shows that if we do ranking on the bases of EVA/Net worth Ratio then HBFC
Bank is at No. 1 which was at 5 th rank in the year 2001-02. According to only EVA ICICI
Bank Ltd. was at rank 1 whereas if we look on the bases of EVA/Net worth Ratio then it
is at No. 6. Biggest growth in banks is at Kotak Mahindra Bank which was at12th No in
the year 2001-02 but in the year 2005-06 it is at 5 th no. Bank of Rajasthan Ltd., Indusind
Bank Ltd., Centurion Bank of Punjab, & Industrial Development Bank of India Ltd. has
negative EVA/Net worth Ratio.

Table 4.8 Combined EVA of all Banks


Sl.
No.

Banks

No. of
Banks

EVA
2001-02

Public Sector
Banks

Av. EVA
Private Sector
Banks

16

16

Av. EVA
Total
Total Av.

32

2002-03

2003-04

2004-05

2005-06

5413.01

8739.23

11600.56

9572.74

9651.39

338.31

546.20

725.04

598.30

603.21

-1275.69

1704.53

3809.45

3457.96

2973.27

-79.73

238.09
15410.0
1

216.12
13030.7
1

185.83

4137.32

106.53
10443.7
6

12624.66

129.29

326.37

481.56

407.21

394.52

Table 4 explains the Total EVA & Av. EVA made by public sector banks & private
sector banks. The combined EVA of both the banks have also calculated. In the year
2001-02, the combined EVA of banks was Rs.4137.32cr. in this year private sector
banks EVA was in negative, it was Rs.1275.69cr. by 2002-03 both public sector
banks and private sector banks started making positive EVAs. It is interesting to note
that public sector banks have outperformed the private sector banks in every year.
Graphical representation of EVA is giving the clear picture of position of EVA of
banks by demarcating into private sector banks and public sector banks.

2001-02

2002-03
RAN
K

Rank

EVA

2004-05
Ran
k

EVA

2005-06
Ran
k

Company Name

EVA

State Bank Of India

2068.34

3243.25

3814.51

3423.86

2871.91

25.99

27

-212.65

32

1917.36

2147.57

2619.72

Punjab National Bank

620.34

880.12

1320.60

1484.98

1416.04

H D F C Bank Ltd.

304.13

461.88

560.52

752.75

1016.23

I C I C I Bank Ltd.

EVA

2003-04

EVA

Rank

Indian Overseas Bank

202.80

10

384.13

618.66

629.47

876.88

Union Bank Of India

315.91

545.59

671.79

495.87

631.76

Bank Of India

415.44

752.75

899.98

301.72

13

629.21

Allahabad Bank

93.47

16

67.02

23

295.71

15

473.35

595.46

Bank Of Baroda

425.92

648.63

694.32

607.14

456.20

Andhra Bank

190.65

11

318.19

12

444.74

11

410.05

10

431.08

10

Oriental Bank Of Commerce

335.09

473.90

689.57

474.02

426.51

11

U T I Bank Ltd.

125.42

14

195.42

16

263.13

18

346.60

11

424.90

12

Syndicate Bank

171.75

12

259.11

13

375.78

14

274.60

14

418.15

13

Corporation Bank

256.67

377.68

10

470.62

10

339.87

12

294.49

14

93.35

17

160.79

17

228.75

19

193.72

16

222.94

15

236.66

332.31

11

408.03

13

136.89

18

198.63

16

91.29

18

204.01

15

276.26

17

95.18

21

181.25

17

Federal Bank Ltd.

87.61

19

115.08

19

146.96

22

106.82

20

177.12

18

State Bank Of Mysore

67.88

20

111.52

20

165.28

21

152.55

17

111.02

19

131.60

13

223.41

14

412.54

12

254.62

15

107.67

20

Kotak Mahindra Bank Ltd.

38.41

23

34.29

27

84.89

24

76.85

22

102.59

21

South Indian Bank Ltd.

47.74

21

41.13

26

53.73

25

7.98

25

59.63

22

City Union Bank Ltd.

22.15

28

33.87

28

51.74

26

43.24

24

53.55

23

I N G Vysya Bank Ltd.

98.08

15

131.61

18

104.57

23

-43.37

30

34.23

24

Dhanalakshmi Bank Ltd.


United Western Bank Ltd.
[Merged]

11.16

29

13.65

29

20.32

30

-32.99

27

12.81

25

31.10

24

8.41

30

25.46

29

-112.63

32

0.00

26

Bank Of Rajasthan Ltd.

27.71

26

47.70

24

49.49

27

-38.53

29

-15.81

27

-67.50

30

89.12

21

221.45

20

-38.27

28

-19.18

28

39.57

22

74.45

22

280.22

16

115.25

19

-55.72

29

-120.59
2280.06

31

-4.11

31

-102.02

31

-31.00

26

30

32

389.77

-102.83

32

61.49

23

-64.62
1589.97

29.23

25

41.73

25

47.87

28

-78.96

31

n.a

32

State Bank Of Travancore


Jammu & Kashmir Bank Ltd.
State Bank Of Bikaner &
Jaipur

Vijaya Bank

Dena Bank
Indusind Bank Ltd.
Centurion Bank Of Punjab
Ltd.
Industrial Development Bank
Of India Ltd.
Bank Of Punjab Ltd.
[Merged]

Table:4.9 Combined ranking of all the banks under study according to EVA

Table 9 shows that on the bases of overalls ranking of all the banks based on EVA, State
Bank of India is at 1st rank from the last five years whose EVA was Rs2871.91cr in the
year 2005-06, Rs.3423.86cr. in the year 2004-05, Rs3814.51cr in the year2003-04, Rs
3243.25cr in the year 2002-03, and its EVA was 2068.34cr. in the year 2001-02. The

31

highest improvement we can see in ICICI Bank ltd which was at 27 th rank in the year
2001-02 and in the year 2005-06 it reached at 2nd rank. The most important thing to be
noted in this study is that out of the top ten ranks 8 ranks have occupied by Public Sector
Banks. Only 2 banks i.e. ICICI Bank Ltd & HDFC Bank Ltd have got 2 nd & 4th Rank
respectively in the year 2005-06. Industrial Development Bank of India is at 31st rank in
the year 2005-06 whereas it was at 32 nd rank in the year 2001-02. it shows that this bank
have made no great improvement in the last 5 years.

Table: 4.10 Ranking of EVA Creators under study based on EVA/Net worth Ratio

200102
Company Name

200203

200304

200405

2005-06

E/N*100

Rank

E/N*100

Rank

E/N*100

Rank

E/N*100

Rank

Indian Overseas Bank

22.70

29.78

31.24

24.74

E/N*100
27.60

Rank
1

H D F C Bank Ltd.

15.59

13

20.51

17

20.81

19

16.65

19.45

City Union Bank Ltd.


State Bank Of
Travancore

15.57

14

20.56

15

25.50

15.30

15

Allahabad Bank
Punjab National
Bank

10.69

26

22.25

11

6.13

28

21.90

23.59

Andhra Bank
Syndicate Bank

24.51

12.18

24

U T I Bank Ltd.

20.40

Federal Bank Ltd.

19.52

Union Bank Of India


State Bank Of Bikaner
& Jaipur
Bank Of India
Kotak Mahindra Bank
Ltd.
State Bank Of Mysore
I C I C I Bank Ltd.
Jammu & Kashmir
Bank Ltd.

10

17.96

18.72

24.72

11

17.14

16.74

19.65

20

20.49

16.37

27.17

18.28

15.18

30.46

31.38

22.32

14.90

22.09

12

22.66

16

13.00

17

14.76

21.27

14

23.12

15

14.31

12

14.72

21.73

13

22.65

17

14.77

11

14.17

10

17.31

11

23.05

22.62

18

13.90

15

13.90

11

13.27

20

23.71

24.05

12

7.33

22

12.89

12

17.03

12

23.02

23.23

14

6.76

23

12.63

13

7.52

27

6.46

27

14.23

27

10.23

20

11.93

14

26.20

30.28

30.10

20.24

11.91

15

0.39

29

-2.92

31

23.40

13

16.95

11.70

16

25.25

26.76

25.60

8.38

21

11.19

17

State Bank Of India


Dhanalakshmi Bank
Ltd.

14.61

18

19.66

18

19.19

22

14.22

14

10.39

18

13.54

19

11.34

26

15.15

24

-28.91

30

9.53

19

South Indian Bank Ltd.

17.38

10

13.22

24

13.89

29

1.77

24

9.35

20

Corporation Bank
Oriental Bank Of
Commerce

12.54

22

16.02

23

17.06

23

11.15

18

8.73

21

21.33

22.82

10

25.92

14.25

13

8.25

22

Vijaya Bank

26.32

27.54

30.89

16.02

10

6.45

23

Bank Of Baroda

12.85

21

16.04

22

14.00

28

10.79

19

5.82

24

I N G Vysya Bank Ltd.


Dena Bank
Bank Of Rajasthan
Ltd.
Indusind Bank Ltd.
Centurion Bank Of
Punjab Ltd.
Industrial
Development Bank Of
India Ltd.
Bank Of Punjab Ltd.
[Merged]
United Western Bank
Ltd. [Merged]

Where E= EVA

15.12

17

20.52

16

15.05

25

-6.41

27

3.41

25

-22.19

30

17.82

20

28.95

-3.49

26

-1.44

26

11.86

25

16.72

21

15.02

26

-10.99

29

-4.36

27

7.04

28

12.36

25

35.01

13.90

16

-6.43

28

-217.60

32

-20.37

32

-165.73

31

-6.61

28

-6.94

29

-34.84

31

5.71

29

32

1.04

25

-25.14

30

15.28

16

19.45

19

19.64

21

-42.85

31

#VALUE!

31

12.25

23

3.02

30

8.38

30

-54.18

32

#DIV/0!

32

#DIV/0!

N= Net Worth

Table 1 ranks the banks according to EVA/Net worth ratio based on years 2001-02,
2002-03, 2003-04, 2004-05, 2005-06 figures. This ratio in percentage is known as
standardized EVA means greater efficiency in use of capital. Among all the banks
considered for the study, in the year 2005-06 Indian Overseas Bank has the first rank,

which is a Public Sector Bank. Two Private sector Banks i.e HDFC & City Union
Bank have got 2nd & 3rd rank respectively. Out of the first ten ranks public banks have
occupied 6 ranks and 4 private sector banks found their place in the list. Whereas in
the years 2001-02,2002-03, 2003-04, 2004-05 Vijaya Bank, Andhra Bank, Indusind
Bank & Indian Overseas Bank were at No. 1 respectively as per EVA/Net Worth
Ratio.

Table: 4.11 Relationship between EVA & Non-Performing Assets

Correlation between EVA & NPA

eva02

eva03

eva04

eva05

eva06

npa02

npa03

npa04

npa05

npa06

eva02

Pearson
Correlation

.616(**)

.668(**)

.584(**)

.758(**)

0.074

-.727(**)

0.006

.537(**)

.576(**)

eva03

Pearson
Correlation

.616(**)

.838(**)

.769(**)

.555(**)

0.035

0.044

0.06

.903(**)

.926(**)

eva04

Pearson
Correlation

.668(**)

.838(**)

.967(**)

.883(**)

0.155

-0.068

0.125

.892(**)

.896(**)

eva05

Pearson
Correlation

.584(**)

.769(**)

.967(**)

.896(**)

0.065

-0.051

-0.03

.818(**)

.827(**)

eva06

Pearson
Correlation

.758(**)

.555(**)

.883(**)

.896(**)

0.141

0.046

.645(**)

.645(**)

npa02

Pearson
Correlation

0.074

0.035

0.155

0.065

0.141

0.29

.871(**)

0.104

0.043

npa03

Pearson
Correlation

-.727(**
)

0.044

-0.068

-0.051

-.374(*)

0.29

.926(**)

0.12

0.058

npa04

Pearson
Correlation

0.006

0.06

0.125

-0.031

0.046

.871(**)

0.202

0.12

npa05

Pearson
Correlation

.537(**)

.903(**)

.892(**)

.818(**)

.645(**)

0.104

0.12

0.202

.992(**)

npa06

Pearson
Correlation

.576(**)

.926(**)

.896(**)

.827(**)

.645(**)

0.043

0.058

0.12

.992(**)

**

Correlation is significant at the 0.01 level (2-tailed).

Correlation is significant at the 0.05 level (2-tailed).

-.374(*)

.926(**)

Table 5 explains the relationship between the EVA & Non-Performing Assets. The
correlation between EVA & NPA in the year ending 2002 was .074, in the year 2003,
2004, 2005, 2006 it was .044, .125, .818 & .645 respectively. So we can say that the
EVA & NPA are positively related to each other. It is important to note that in the year
2002, 2003 & 2004 there is low degree of positive correlation between the two. In the
year 2005 there is high degree of positive correlation, where as in the year 2006 there
is moderate degree of positive correlation between the two.

EVA and Employee Productivity


Table 6 & Table 7 explain the relationship between EVA & productivity. Productivity
is measured based on the business done per employee and the net profit made per
employee.

Table 4.12 Relationship between EVA & Business per Employee

eva0
2

Correlation between EVA & Besiness Per Emploee


eva0
eva0
eva0
eva0
3
4
5
6
bpe02 bpe03 bpe04

bpe06

Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation
Pearson
Correlation

**

Correlation is significant at the 0.01 level (2-tailed).

Correlation is significant at the 0.05 level (2-tailed).

eva02
eva03
eva04
eva05
eva06
bpe02
bpe03
bpe04
bpe05

bpe05

bpe06

1.00

0.63

0.68

0.60

0.76

0.06

0.07

-0.16

-0.55

-0.64

0.63

1.00

0.84

0.77

0.57

-0.12

-0.18

-0.20

-0.13

-0.10

0.68

0.84

1.00

0.97

0.88

-0.01

0.12

0.08

-0.05

-0.07

0.60

0.77

0.97

1.00

0.90

0.01

0.18

0.15

0.04

0.01

0.76

0.57

0.88

0.90

1.00

0.09

0.31

0.23

-0.17

-0.25

0.06

-0.12

-0.01

0.01

0.09

1.00

0.89

0.86

0.52

0.36

0.07

-0.18

0.12

0.18

0.31

0.89

1.00

0.99

0.59

0.42

-0.16

-0.20

0.08

0.15

0.23

0.86

0.99

1.00

0.96

0.94

-0.55

-0.13

-0.05

0.04

-0.17

0.52

0.59

0.96

1.00

0.97

-0.64

-0.10

-0.07

0.01

-0.25

0.36

0.42

0.94

0.97

1.00

This table illustrates that in the year ending 2002, 2003, 2004, 2005 & 2006the
relationship between the EVA & Business per Employee was .06, -.18, .08, .04 & -.25
respectively. In simple words in the year ending 2002, 2004 & 2005 there is positive
correlation means by that they both are moving in the same direction but in the year
ending 2003 & 2006 they are negatively correlated means they both are moving in the
opposite direction

Table 4.13 Relationship between EVA & Profit per Employee

Correlation between EVA & Profit per Employee


EVA02

EVA03

EVA04

EVA05

EVA06

PPE02

PPE03

PPE04

PPE05

PPE06

EVA02

Pearson
Correlation

1.00

0.63

0.68

0.60

0.76

0.03

-0.48

-0.11

-0.16

-0.46

EVA03

Pearson
Correlation

0.63

1.00

0.84

0.77

0.57

-0.14

-0.16

-0.16

-0.02

-0.08

EVA04

Pearson
Correlation

0.68

0.84

1.00

0.97

0.88

-0.05

-0.03

0.10

0.20

0.07

EVA05

Pearson
Correlation

0.60

0.77

0.97

1.00

0.90

-0.01

0.06

0.15

0.30

0.20

EVA06

Pearson
Correlation

0.76

0.57

0.88

0.90

1.00

0.08

-0.10

0.19

0.21

0.04

PPE02

Pearson
Correlation

0.03

-0.14

-0.05

-0.01

0.08

1.00

0.66

0.74

0.46

0.31

PPE03

Pearson
Correlation

-0.48

-0.16

-0.03

0.06

-0.10

0.66

1.00

0.94

0.76

0.77

PPE04

Pearson
Correlation

-0.11

-0.16

0.10

0.15

0.19

0.74

0.94

1.00

0.84

0.61

PPE05

Pearson
Correlation

-0.16

-0.02

0.20

0.30

0.21

0.46

0.76

0.84

1.00

0.75

PPE06

Pearson
Correlation

-0.46

-0.08

0.07

0.20

0.04

0.31

0.77

0.61

0.75

1.00

**

Correlation is significant at the 0.01 level (2-tailed).

Correlation is significant at the 0.05 level (2-tailed).

Table 7 explain that the relationship between EVA & Profit per Employee for the year
ending 2002, 2003, 2004, 2005 & 2006 is .03, -.16, .10, .30 & .04 respectively. This
shows that relationship for only one year i.e. 2003 is negatively correlated & others
are positively correlated. It means that they both are moving in the opposite direction.
Whereas for all other years they are positively correlated means by they are moving
in the same direction.

Table 4.14

Model Summary, ANOVA and Regression Coefficient between


EVA & NPA

Model Summaryb
Years

200102

0.15

R2

0.02

ANOVAb

Adjusted R2

-0.01

Coefficientsb
Sig.

0.66

0.42

Unstandardized
Coefficients

Standardized
Coefficients

Beta

Std. Error

0.15

0.18

0.15

Sig.

0.81

0.42

200203
200304
200405
200506

0.06

0.00

-0.03

0.12

0.73

0.03

0.08

0.06

0.35

0.73

0.04

0.00

-0.03

0.04

0.84

0.07

0.34

0.04

0.20

0.84

0.82

0.67

0.66

61.62

0.00

0.61

0.08

0.82

7.85

0.00

0.65

0.42

0.40

20.17

0.00

0.58

0.13

0.65

4.49

0.00

Predictors: (Constant), npa02


Dependent Variable: eva02

The regression analysis was carried out with NPA as the independent
variable and EVA as the dependent variable. Table 14 presents the summary
results of regression model and F ratio. The value of coefficient of
determination (R2) and adjusted R2 were the highest in case of NPA for the
year 2004. From the table14 we may infer that the coefficient of
determinants (R2) ranged from .000, the lowest (in case of year ending
2006), to 0.136, the highest (in case of year ending 2001) both R 2 adjusted
R2 obtained values less than 0.67 though out the study. The above analysis
provides us the clear conclusion that the independent variables under
consideration are capable of explaining very small variations in EVA. It is
true for all years.
The test for significance of overall model was made through F-Test. The Fratios of in case of NPA was found to be insignificant for all the years at 5%
level of significance except 2002-03, 2003-04. Thus, the overall model is
insignificant in case of NPA for each and every year except 2002-.3, 200304.
Table 4.15

Model Summary, ANOVA and Regression Coefficient between


EVA & Business per Employee

Model Summaryb

Years

R2

Adjusted
R2

ANOVAb

Sig.

Coefficientsb
Unstandardized
Coefficients

Standardized
Coefficients

Sig.

200102
200203
200304
200405
200506

0.15

0.02

-0.01

0.67

0.42

1.97

2.40

0.15

0.82

0.42

0.07

0.00

-0.03

0.15

0.70

0.94

2.44

0.07

0.38

0.70

0.03

0.00

-0.03

0.02

0.88

0.46

3.11

0.03

0.15

0.88

0.05

0.00

-0.03

0.07

0.79

0.82

3.02

0.05

0.27

0.79

0.02

0.00

-0.03

0.02

0.90

0.42

3.36

0.02

0.12

0.90

Dependent Variable: eva03

The regression analysis was carried out with Business per Employee(BPE)
as the independent variable and EVA as the dependent variable. Table 15
presents the summary results of regression model and F ratio. The value of
coefficient of determination (R2) and adjusted R2 were the highest in case of
BPE for the year 2001-02. From the table15 we may infer that the
coefficient of determinants (R2) ranged from .000, the lowest, to 0.02, the
highest (in case of year ending 2001-02). The above analysis provides us
the clear conclusion that the independent variables under consideration are
capable of explaining very small variations in EVA. It is true for all years.
The test for significance of overall model was made through F-Test. The Fratios of in case of BPE was found to be significant for all the years at 5%
level of significance except 2001-02. Thus, the overall model is significant
in case of BPE for each and every year 2001-02.

Table 4.16

Model Summary, ANOVA and Regression Coefficient between


EVA & Profit per Employee

Model Summaryb

ANOVAb

Coefficientsb
Unstandardized
Coefficients

Standardized
Coefficients

Sig.

Years

200102
200203
200304
200405
200506

R2

0.03

0.00

0.16

Adjusted
R2

Sig.

Std. Error

Beta

-0.03

0.02

0.88

437.41

2772.71

0.03

0.03

-0.01

0.79

0.38

-2569.48

2899.53

0.10

0.01

-0.02

0.28

0.60

2095.82

0.30

0.09

0.06

3.03

0.09

0.04

0.00

-0.03

0.04

0.84

0.88

-0.16

0.16
0.89

3950.92

0.10

0.53

0.60

6402.43

3680.20

0.30

1.74

0.09

1107.82

5284.21

0.04

0.21

0.84

Predictors: (Constant), ppe


Dependent Variable: eva

The regression analysis was carried out with Profit per Employee(PPE) as
the independent variable and EVA as the dependent variable. Table 16
presents the summary results of regression model and F ratio. The value of
coefficient of determination (R2) and adjusted R2 were the highest in case of
PPE for the year 2004-05. From the table16 we may infer that the
coefficient of determinants (R2) ranged from .000, the lowest, to 0.09, the
highest (in case of year ending 2004-05). The above analysis provides us
the clear conclusion that the independent variables under consideration are
capable of explaining very small variations in EVA. It is true for all years.
The test for significance of overall model was made through F-Test. The Fratios of in case of PPE was found to be significant for all the years at 5%
level of significance except 2002-03& 2004-05. Thus, the overall model is
significant in case of BPE for each and every year except 2002-03& 200405.

0.38

Chapter V

Conclusion

Chapter - IV

Conclusion

One might point out that like a corporate; even banks can be judged from the behavior of
their stock prices. However, as bank stocks have not been very active on exchanges,
barring few on few occasions, should we conclude that Indian banks have by and large
failed to add values to their shareholders wealth. The answer is once again no as one
needs to evaluate private and public sector banks in a more dynamic manner than just
looking at their stock prices, Non-Performing Assets (NPAs), C/D ratios and others.
Many Indian banks seem to have destroyed shareholders wealth over a period of time
and only a few have positively contributed to their wealth.

With the help of EVA (Economic Value Added) which tell what the institution is doing
with investors hard earned money, the study examines an appropriate way of evaluating
banks performance and also find out which Indian banks have been able to create ( or
destroy ) shareholders wealth since 2001-02 to 2005-06. Literally, EVA is the quantum of
economic value (or profit) generated by a company in excess of its Cost of Capital
(COC). Mathematically, it is the difference between the Net Operating Profits After
Taxes(NOPAT) and the capital charge; or, the product of capital employed and the
difference between the Return on Capital Employed (ROCE) and the COC. In, principle,
it is a comprehensive financial management system that encompasses a range of
functions like capital budgeting, acquisition pricing, goal-setting, and strategic planning.
This study helps us to dig below the surface numbers to tell us more about the underlying
business and whether there is a prime facie case for using EVA as one of the range of
performance measurement tools. The overriding message of the study is that banks must

always strive to maximize shareholders value without which their stock can never be
fancied by the market.
The above discussion explains the importance of using EVA as a tool for measuring
financial performance. Contrary to the past studies, it is found that Indian Banks are
creating economic value for their shareholders. The study reveals that public sector
banks outperform private sector banks, even though their cost of capital is higher than
that that of private sector banks. The public sector banks could use EVA as their
Unique Selling Proposition in marketing while approaching the capital market. The
finding that profit-making banks have negative EVA supports the irrelevance of the
traditional evaluation criteria of profit-making concept. The cost of equity of Indian
banks is also in a downward path. The study also found that there is a positive
correlation between Economic Value Added and Non-Performing Assets and a
negative correlation between Business per Employee and Profit per Employee. In
other words we can say that study found that there is a negative relationship between
Economic Value Added and Employee Productivity because the combination of
Business per Employee and Profit per Employee becomes Employee Productivity. By
the introduction of SARFAESI Act and controlled credit management, Indian Banks
will be able to reduce the level of NPAs. Profitability of banks is also increasing. So
in future, the banks will be able to show much more economic value in their
performance. This will give them a better edge while approaching the capital market.
Extensive study is required to establish the influence of other factors like non-fund
based income, spread, deployment of funds, market price, etc. it is also expected that
the usage of EVA as a financial performance tool will also be more in India.
This study shows that State Bank of India which is a public sector bank is at rank 1 st
based on the EVA ranking. But if we do ranking on the bases of EVA/Net worth
Ratio, then ranking has been changed at that time Indian Overseas bank comes at 1st

rank. If we look at overall study then Public sector banks are doing very well during
the whole period of study by creating shareholder wealth as far as Private sector
banks are concerned their performance was continuously increasing upto 2002-03 but
after that their overall performance is declining. But some of the private sector banks
like ICICI bank have improved a lot in the last 3 year period.

Bibliography

Alfred Rappaport (November, 2002), Creating Shareholder Value: A Guide for


Managers and Investors. The ICFAI Journal of Applied Finance, Vol.
8, No. 6, November 2002. pp.68-83.
Andrew C. Worthington (December, 2004): Australian Evidence concerning the
information content of Economic Value Added., Australian Journal of
Management, Vol 29, No.2, Dec 2004.
Anil Misra (November, 2005): Linkages between Economic Value Added and Share
Prices: An empirical study of Indian Corporate Sector. The ICFAI
Journal of Industrial Economics, Volume: II, Issue: 4, Pages: 30-57.
Asish K. Bhattacharya, B.V. Phani (Indian Institute of Management Calcutta,(April,
2005): Economic Value Added --- A General Perspective. Financial
Economics - - Corporate Finance and Governance - - - General.
Brealey, Myers; (2002) Principles of Corporate Finance, USA: McGraw Irwin.
Copeland, Tom and Koller, Tim and Muller, Jack (2002) Valuation: Measuring and
Managing the value of Companies, Third Edition Mc Kinsey &
Company, Inc.
Dimitris Kyriazis, Christos Anastassis (January 2007). The Validity of the
Economic Value Added Approach:

an Empirical Application,

European Financial Management Volume 13 Issue 1, Page71


(January, 2007).
Dr. B P Verma (Associate Professor of Finance at UTI Institute of Capital Markets,
2002), Economic Value Addition by Indian Banks.
Dr. B P Verma (Associate Professor of Finance at UTI Institute of Capital Markets,
2002), Economic Value Addition by Indian Banks.

Eitemann, Stonehill, Mofett; (2003), Multinational Business Finance, 9th edition,


USA: Reading Mass: Addison-Wesley Longman, at
http://www.handles.gu.se/epc/archive.
Ghanbari, Ali M. and Sarlak Narges (2006). Economic Value Added: An
Appropriate Performance Measure in Indian Automobile Industry.
Ihe Icfaian Journal of Management Research, Vol. V, No. 8, 2006, pp.
45-62.
Ghanbari, Ali M. and Sarlak Narges (2006). Economic Value Added: An
Appropriate Performance Measure in Indian Automobile Industry.
The Icfaian Journal of Management Research, Vol. V, No. 8, 2006, pp.
45-62.
Irala, Lokanadha reddy (2005). EVA: The Right Measure of Managerial
Performance? the Journal of Accounting and Finance, Vil.19, No. 2,
April-September 2005, pp.77-87.
Irala, Lokanadha Reddy (2005). Eva: The Right Measure of Managerial
Performance? The Journal of Accounting and Finance, Vol. 19,
No.2, April-September 2005, pp.77-87.
Jagannathan, R (2002). Romancing EVA, Indian Management, July, 2002, pp.3034.
Karam Pal and Garg M.C. (2004), EVA: A Performance Measurement Tool. JIMS
8M, April-June, 2004, pp.39-45.
Mangala, Deepa and Jora Simpy, Linkages between Economic Value Added and
Market Value: An Analysis in Indian Context, Indian Management
Studies Journal, June 2002, pp.55-56.
Mclaren, Josie (2003). A Sterner Test. Financial Management, July/August 2003,
pp. 18-19.

Pitabas

Mohanty

(September,

2006).

Modified

TVA-based

Performance

Evaluation. IIMB Management Review, Issue: September, 2006,


Pages: 265-273.
Roji George (May, 2005): Computation of EVA in Indian Banks. The ICFAI
Journal of Bank Management, Vol IV. No. 2, May, 2005B.M, pp.30-44.
Saba, Gurudas (2000). Shareholders Value and EVA, New Corporate Goals, The
Charted Accountant, April 2000, pp.46-51.
Salmi, Timo and Ilkka Virtanen (2001): Economic Value Added: A simulation
analysis of the trendy, owner-oriented management tool. Acta
Wasaensia No. 90, 33 p.
Sangameshwaran, Prasad (2002). Couting EVA, the TCS Way. Indian
Management, August 2002, pp.68-83.
Singh, Karam Pal and Garg M.C. (2004). EVA: a PERFORMANCE Measuremant
Tool. JIMS *M, April-June, 2004.pp.39-45.
Stern, Joel (2003). Workshop on value-Based Management, Hyderabad, March 2122, 2003.
Thakor Anyan, Quinn Robert, DeGraff Jeff (2003) Creating Sustained Shareholder
Value And Dispelling Some Myths, Mastering Strategy Candian
performance. At http://www.handles.gu.se/epc/archive/00001314