AUTHORIZATION 

The report is submitted as partial fulfillment of the requirement of MBA program of IBS. The
report is submitted to Prof. A Srikanth, faculty guide, IBS-Hyderabad.

Submitted by Submitted to

Name of Student Prof. A Srikanth

Enroll No. Faculty Guide, IBS

1 
 
ACKNOWLEDGEMENTS 

I would like to recognize the contribution, guidance and encouragement of the City Manager of
Standard Chartered Wealth Managers, Mr. P Srinivas Reddy, and also my guide Mr.M.D.Javeed,
Sales Manager, for the constant encouragement and guidance.
I would also like to express my gratitude towards my faculty guide Prof. A Srikanth for his
continuous guidance and support.

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ABSTRACT 

The project undertaken for the Summer Internship Project (SIP) is Equity Research in Banking
Sector. The sound and well regulated banking sector in India has gone through a significant
change in past two decades with liberalization and regulatory changes happening in Indian
economy. Since liberalization of Indian economy, the number of banks nationalized has
increased. Constant changes in regulation and interest rates by the Reserve Bank of India have
created many trends in the banking sector. There are many international banks now entering the
Indian Market due to the immense scope for growth and lucrative business opportunities. As the
sub-prime mortgage crisis in US continues to threaten banks world-wide, Indian banks have been
observed to be less affected by this financial slowdown showing their robustness and firm
foundations.

The attempt in this project is to do equity analysis and valuation of three major private sector
banks in Indian Banking industry – HDFC Bank, ICICI Bank and Standard Chartered Bank with
the use of various equity valuation models like dividend discount models and CAMEL ratios
approach. Only secondary data is being used in the study. The basic approach to the project is to
do fundamental equity analysis. The analysis reveals the actual value of the equity stocks of
these banks and whether they are over or under valued. The price per share of each bank has
been estimated and the suggestion given to investors according to the results is that the share
prices of HDFC and ICICI banks are overvalued and hence must be sold as these stocks will
move towards equilibrium, i.e. they will decrease in future. Also, the CAMEL ratios suggest that
HDFC and Standard Chartered bank are overall better performers than ICICI and hence the
valuation of their equity is higher than ICICI bank.

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Table of Contents
AUTHORIZATION ........................................................................................................................ 1
ACKNOWLEDGEMENTS ............................................................................................................ 2
ABSTRACT.................................................................................................................................... 3
Introduction ..................................................................................................................................... 5
Objective and Limitations ........................................................................................................... 5
Banking in India .......................................................................................................................... 6
Banking Structure in India .......................................................................................................... 6
Growth in Banking Sector in India ........................................................................................... 10
Current Trends in Banking Sector in India ............................................................................... 11
Industry Analysis .......................................................................................................................... 14
Economic Analysis of Current Scenario ................................................................................... 14
Reserve Bank of India ............................................................................................................... 17
HDFC Bank ............................................................................................................................... 18
ICICI Bank ................................................................................................................................ 20
Standard Chartered Bank .......................................................................................................... 21
CAMEL Ratios ............................................................................................................................. 24
Capital Adequacy Ratio (CAR)................................................................................................. 24
Assessing Asset Quality ............................................................................................................ 25
Assessing Management Quality ................................................................................................ 27
Assessing Earning Performance ................................................................................................ 28
Assesing Liquidity..................................................................................................................... 30
Dividend Discount Model ............................................................................................................. 32
For HDFC Bank ........................................................................................................................ 34
For ICICI Bank.......................................................................................................................... 35
For Standard Chartered Bank .................................................................................................... 36
Conclusion .................................................................................................................................... 37
References ..................................................................................................................................... 37

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Introduction:

Objective and Limitations:

The objective of this project is to valuate equity of three private sector banks, i.e.

1) ICICI Bank
2) HDFC Bank
3) Standard Chartered Bank

The purpose is to estimate the equity share price of these banks and compare the current share
price of these banks as listed in NSE and also relate it to the fundamental business and growth of
these banks. For this, two equity valuation models have been used, i.e. Dividend Discount model
and CAMEL ratios. The attempt of this project is to analyze whether the share prices of these
banks are over-valued or under-valued, and suggest the investors whether the shares should be
purchased, held or sold.

This project has given the opportunity to understand the method to analyze and valuate banks
and financial institutions, which is unique and different from other sector firms like
manufacturing.

The limitations of the project are:

1. Only secondary data is considered for the project and not any primary data.
2. Only two models have been used, i.e. Dividend Discount model and CAMEL ratios. The
equity valuation can be done using other models which can help in validating the findings
of this project.
3. The various economic parameters like inflation have not been considered which influence
the value of equity in market.
4. The stock markets are influenced by investor confidence and sentiments which make a
significant impact on the share prices leading to a gap between the calculated values and
the actual values. This factor of investor confidence has not been considered in the
valuation.

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Banking in India:
Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the
nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient
bank transferred money from one branch to other in two days. Now it is simple as instant
messaging or dial a pizza. Money have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the
journey of Indian Banking System can be segregated into three distinct phases. They are as
mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.

Banking Structure in India:

Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled
banks constitute of commercial banks and co-operative banks. There are about 67,000 branches
of Scheduled banks spread across India. During the first phase of financial reforms, there was a
nationalization of 14 major banks in 1969. This crucial step led to a shift from Class banking to

6 
 
Mass banking. Since then the growth of the banking industry in India has been a continuous
process.

As far as the present scenario is concerned the banking industry is in a transition phase. The
Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for
more than 78 per cent of total banking industry assets. Unfortunately they are burdened with
excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.

On the other hand the Private Sector Banks in India are witnessing immense progress. They are
leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public
Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20
percent in the employee strength of the private sector in the wake of the Voluntary Retirement
Schemes (VRS). As far as foreign banks are concerned they are likely to succeed in India.

Indusland Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank, SBI
Commercial and International Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd, Bank
of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include
Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank
etc.

ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank etc are some
foreign banks operating in India.

Banks in India

• Allahabad Bank
• American Express Bank Ltd
• Andhra Bank
• ABN AMRO Bank
• Bank Muscat (S A O G)
• Bank Of America
• Bank Of India
• Barclays Bank PLC

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 • Centurion Bank Ltd
• Citibank
• Corporation Bank
• Dhanlakshmi Bank Ltd
• Deutsche Bank India
• Export-Import Bank Of India
• Global Trust Bank Ltd
• Hongkong Shanghai Banking Corporation Ltd
• ICICI Bank Ltd
• IDBI Bank Ltd
• IndusInd Bank Ltd
• Syndicate Bank India
• Industrial Development Bank Of India
• ING Vysya Bank Ltd
• JP Morgan Chase Bank
• Punjab National Bank
• Standard Chartered Bank
• State Bank Of India
• State Bank Of Indore
• Canara Bank India
• Reserve Bank Of India
• SBI Commercial and International Bank
• Bank Of Baroda India
• Federal Bank India
• HDFC Bank India
• Union Bank Of India
• YES BANK India
• State Bank Of Bikaner And Jaipur
• Ceylon Bank
• Catholic Syrian Bank
• Dena Bank
• Mizuho Corporate Bank
• Indian Overseas Bank
• Karnataka Bank
• Punjab and Sind Bank
• Kotak Mahindra Bank
• State Bank of Hyderabad
• Karur vysya Bank Limited
• State Bank of Patiala
• Oriental Bank of Commerce

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 • State Bank of Travancore
• United Bank of India
• State Bank of Mysore
• Axis Bank
• Vijaya Bank
• Tamilnad Mercantile Bank
• Ratnakar Bank
• Jammu and Kashmir Bank
• UCO Bank
• DBS Bank Ltd.
• Lakshmi Vilas Bank
• The Nainital Bank Ltd.

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SCBs). As at end-March

2002, there were 296 Commercial banks operating in India. This included 27 Public Sector
Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67
scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16
scheduled state co-operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3 % of the
earlier year.

State Bank of India is still the largest bank in India with the market share of 20%. ICICI and its
two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with
a balance sheet size of Rs1040 bn.

Higher provisioning norms, tighter asset classification norms, dispensing with the concept of
‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and
group exposure etc., are among the important measures in order to improve the banking Sector.
A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of
banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed
to hike the CAR to 12% by 2004 based on the Basel Committee recommendations.

9 
 
Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly
two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is
expected to grow at 30-40% in the coming years.

Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words
that banks are using to lure customers.

With a view to provide an institutional mechanism for sharing of information on borrowers/

potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India)
Ltd. (Cibil) was set up in August 2000. The Bureau provides a framework for collecting,
processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are
the promoters of the Cibil.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National Bank for
Agricultural and Rural Development to the private players. Also, the Government has sought to
lower its holding in PSBs to a minimum of 33 per cent of total capital by allowing them to raise
capital from the market.

Banks are free to acquire shares, convertible debentures of corporates and units of equity-
oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including
Commercial Paper) as on March 31 of the previous year.

The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (Arcil), this pilot project of the ministry would pave
way for smoother functioning of the credit market in the country. The Government will hold
49% stake and private players will hold the rest 51% - the majority being held by Icici Bank
(24.5%).

Growth in Banking Sector in India:

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is
expected to remain the same in the coming years. Based on the projections made in the "India
Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts
that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets
of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That
10 
 
will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in
2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during
the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95
and 2002-03. It is expected that there will be large additions to the capital base and reserves on
the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks.
Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000
branches of Scheduled banks spread across India. As far as the present scenario is concerned the
Banking Industry in India is going through a transitional phase.

The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for
more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with
excessive Non Performing assets (NPAs), massive manpower and lack of modern technology.
On the other hand the Private Sector Banks are making tremendous progress. They are leaders in
Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned
they are likely to succeed in the Indian Banking Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING
Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks
from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank,
Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express
Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.

Current Trends in Banking Sector in India:

The Indian banking industry is currently termed as strong, having weathered the global economic
slowdown and showing good numbers with strong support flowing in from the Reserve Bank of
India (RBI) measures.

Furthermore, a report "Opportunities in Indian Banking Sector", by market research company,

RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth
rate (CAGR) of around 23.3 per cent till 2011.

11 
 
Banking, financial services and insurance (BFSI), together account for 38 per cent of India's
outsourcing industry (worth US$ 47.8 billion in 2007). According to a report by McKinsey and
NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US
by the year 2010. Outsourcing by the BFSI to India is expected to grow at an annual rate of 30–
35 per cent.

According to a study by Dun & Bradstreet (an international research body)—"India's Top Banks
2008"—there has been a significant growth in the banking infrastructure. Taking into account all
banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088
ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all
offices, 82 per cent of staff and 60.3 per cent of all ATMs.

According to the RBI, Indian financial markets have generally remained orderly during 2008-09.
In view of the tight liquidity conditions in the domestic money markets in September 2008, the
Reserve Bank announced a series of measures beginning September 16, 2008. Thus, the average
call rate which was at 10.52 per cent declined to 7.57 per cent in November 2008 under the
impact of these measures.

Measures aimed at expanding the rupee liquidity, included significant reduction in the cash
reserve ratio (CRR), reduction of the statutory liquidity ratio (SLR), opening a special repo
window under the liquidity adjustment facility (LAF) for banks for on-lending to the non-
banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds
(MFs), and extending a special refinance facility, which banks could access without any
collateral.

Banking capital (net) amounted to US$ 4.8 billion in April-September 2008 as compared with
US$ 5.7 billion in April-September 2007. Among the components of banking capital, non-
resident Indian (NRI) deposits witnessed a net inflow of US$ 1.1 billion in April-September
2008, a turnaround from net outflow of US$ 78 million in April-September 2007.

The reserve money lying with the RBI as on November 21, 2008 as per the January 2009
bulletin, is a total amount of US$ 179.28 billion and RBI’s credit to the commercial sector stood
at US$ 3.65 billion. Further, banks in India put up strong growth and profit numbers in the

12 
 
October-end-December 2008 period owing to high credit growth and easing of yield on
government bonds. Top Indian banks have increased their earnings by almost 40 per cent year-
on-year for the same period. According to latest Reserve Bank of India (RBI) data, bank credit
grew by 24.6 per cent year-on-year as of December 19, 2008. The resulting credit growth was
even better at 41 per cent during the April-end-December 2008 period. Deposits grew by 20.6
per cent as of December 19, 2008.

The growth in advances reflects that the net interest income (NIM) too would indicate higher
growth rate. RBI has taken a number of steps to lower the cost of credit in this quarter like
cutting cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, repo
and reverse repo rate. The CRR rate, which had been reduced in December 2008, to 5.50 per
cent, repo rate to 6.50 and reverse repo rate to 5.00, were further reduced – CRR to 5 per cent,
(its lending rate) repo rate to 5.5 per cent and reverse repo, at which it absorbs cash from the
banking system, to 4 per cent in January 2009.

Responding to these measures, banks have cut the prime lending rates (PLR). Further, according
to several brokerage research teams, NIM may remain stable in the last quarter. For instance, a
Motilal Oswal report on earnings preview reveals, "We expect margins to remain stable despite
the PLR cut of 125-150 basis points (75 bps w.e.f January 1, 2009), as the banks have reaped the
benefit of CRR cut (350 bps in December quarter) and have demonstrated their pricing power to
corporate."

According to brokerage Prabhudas Lilladher’s preview report, "among the banks, SBI, Bank of
Baroda and Union Bank stand to gain the most on account of mark-to-market (MTM) reversals.”
Banks however, have to face the challenge of rising non-performing assets (NPAs) owing to the
slowdown in exports and industrial production. Also, RBI has taken steps like one-time
restructuring of real estate loans and second-time restructuring of loans given to other sectors to
counter the NPA scenario.

13 
 
Industry Analysis:

Economic Analysis of Current Scenario:

Government is committed to the objective of achieving faster and inclusive growth by increasing
allocation to social sectors at the same time increasing allocation to infrastructure to boost
employment investment and consumption levels. The Fiscal deficit in 2008/09 is seen at 2.5
percent of GDP compared to 3.1 percent during the previous year. Revenue deficit is seen at 1
percent of GDP compared to 3.1 percent in the previous year. Plan spending in 2008/09 seen at
2.4 trillion rupees ($60.3 billion) and Non-plan spending seen at 5.07 trillion rupees.
Government has decided to waive debts of small farmers and the total cost of debt waiver
scheme will be 600 billion rupees.

Prime Lending Rates: 12.75% to 13.25%

Savings Bank Rate: 3.5%
Deposit Rate: 7.50% to 9.60%
CRR: 5.%
SLR: 24%
Money Market Call Rates: 2.35% to 4.30%

Rate of inflation was 7.74% for the corresponding year. It has been around 12.10 % in the last
few months but the government has taken stringent steps to curb such a high inflation rate.
As for the matter of the investor’s confidence in investing in India, we can see from the AT
Kearney FDI confidence Index that China and India continue to rank first and second in the
December 2007 Foreign Direct Investment Confidence Index, a regular survey of global
executives conducted by management consulting firm AT Kearney.

China leads the Index rankings for the fifth consecutive year and ranks first among Asian
investors, 34% of whom plan to invest there over the next three years. Whereas India retains
second place in the Index, a position it has held since displacing the United States in 2005.

14 
 
India has seen a CAGR of 42% in the last 9 years in the Foreign Investments and it is expected to
reach 60 billion USD in 2007-08 from USD 2 billion in 1998-99. Unemployment is present at
7.2% of the total population of more than 1.14 billion. (Source: CIA Fact book, estimates as of
2007)

The last year has witnessed significant developments in the global economy. Following the
deterioration in the US sub-prime housing loan market, the US economy is expected to
experience a sharp slowdown in growth. The Federal Reserve has reduced its forecast for US
GDP growth in calendar year 2008 from the 1.3%–2.0% range to between 0.3%–1.2%. Growth
in the Euro zone remained above expectations at 0.8% in the first quarter of calendar year 2008.
However, downside risks to growth remain on account of adverse financial market conditions
and increases in energy and food prices. Growth in China moderated slightly during the first
quarter of calendar year 2008 to 10.6% as compared to 11.7% during the same period last year.

During fiscal 2008, the Indian economy continued on its high growth path, despite some
moderation due to difficult conditions in global markets and increasing inflationary pressures and
monetary tightening. The Central Statistical Organization (CSO) put GDP growth at 9.0% during
fiscal 2008 following the 9.6% GDP growth in fiscal 2007, reflecting a slight moderation in
growth of the economy. Growth in fiscal 2008 was driven mainly by double-digit growth in the
services sector and growth in the industrial sector. The Index of Industrial Production (IIP)
recorded an annual average growth rate of 8.1% in fiscal 2008, moderating from 11.5% in fiscal
2007. This was mainly due to moderation of growth in the manufacturing sector from 12.5% in
fiscal 2007 to 8.6% in fiscal 2008. The momentum of growth in the services sector (including
construction) continued with 10.7% growth during fiscal 2008 following the 11.2% growth in
fiscal 2007. Growth in agriculture and allied activities increased to 4.5% during fiscal 2008 as
compared to 3.8% in fiscal 2007.

Inflation remained under control for most of fiscal 2008 with the annual average rate of inflation
as measured by the Wholesale Price Index easing from 5.3% in fiscal 2007 to 4.4% in fiscal
2008. However, inflationary pressures picked up sharply from March 2008 with the year-on-year
rate of inflation increasing from 5.1% for the week ending March 1, 2008 to 8.8% for the week
ending May 31, 2008. The sharp increase in inflation was mainly due to the higher prices of
15 
 
primary articles, fuel group items and some manufactured products. The increase in inflation was
in line with global price movements. Global oil prices increased sharply during fiscal 2008,
increasing inflationary pressures experienced on this account. International crude oil prices
increased from US$ 65.87 per barrel at March 30, 2007 to US$ 101.58 per barrel at March 31,
2008 and further increased to US$ 135.90 per barrel at June 13, 2008. In view of rising inflation,
Reserve Bank of India (RBI) increased the Cash Reserve Ratio (CRR) from 6.00% to 7.50%
during fiscal 2008 and further to 8.25% effective May 2008.

India’s exports were US$ 155.5 billion during fiscal 2008, a growth of 23.0% over the previous
year. During April–December 2007, exports of agriculture and allied products recorded a growth
of 34.9% and exports of petroleum products recorded a growth of 37.3%. According to RBI, net
invisibles receipts reached US$ 50.50 billion during the first nine months of fiscal 2008, a
growth of 39.2% over the corresponding period in the previous year. Growing import demand for
capital goods due to the strong investment climate and the sharp increase in oil prices have led to
a deficit in the current account (US$ 16.05 billion during first nine months of fiscal 2008). Net
Foreign Direct Investment (FDI) into India was US$ 8.40 billion during the first nine months of
fiscal 2008 while net portfolio investment was US$ 33.00 billion. Foreign exchange reserves
continued to grow, reaching US$ 309.16 billion on March 28, 2008.

The resilience displayed by the economy in fiscal 2008, in light of the developments in the
global economy and the sharp increase in global oil and commodity prices, is evidence of the
broad-based and sustainable nature of India’s growth momentum. The investment pipeline and
demand for credit from corporate continue to be robust.

Inflation conditions, global developments and external inflows will be key factors impacting
liquidity and interest rates during the current year. Continued investment in infrastructure,
reorienting education and skill-building to the needs of the new economic drivers and holistic
development of the agricultural sector and the rural economy are the key imperatives to realize
India’s full potential in the long run.

16 
 
Reserve Bank of India:

Reserve Bank of India was established on 1 April 1935 and nationalized on 1 January 1949, the
Reserve Bank of India (RBI) has since then been the Central Bank of India governing all the
major financial matters of the state. The RBI is responsible for the adequate liquid flow of
currency in the country as well as maintaining requisite reserve in the state treasury.

Functions of RBI:

Monetary Authority:

The RBI is responsible for implementing, formulating and monitoring the monetary policy of
India.

Objective: Keeping this authority in mind the RBI is required to maintain price stability and
ensure adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

The Supreme financial body sets down broad parameters of banking operations within which the
country's banking and financial system operates.

Objective: This reasonably helps in maintaining public confidence in the system. It in turn
protects depositors' interest and provides lucrative banking services to the public.

Manager of Exchange Control:

The RBI is responsible for managing the Foreign Exchange Management Act, 1999.

Objective: It is the nodal agency which facilitates external trade and payment and promotes
orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

17 
 
It is the only supreme body which issues and exchanges or destroys currency and coins not fit for
circulation.

Objective: This facilitates in giving the public adequate quantity of currency notes and coins and
in good quality.

Developmental role

The RBI since its inception performs a wide range of promotional functions to support national
objectives and generate goodwill among the citizens of the country.

Related Functions:

Banker to the Government:

The RBI performs merchant banking function for the central and the state governments and also
acts as their banker. The RBI often advises the Government of the current monetary condition in
the state.

Banker to banks: maintains banking accounts of all scheduled banks. The RBI looks after the
functioning of the state banks and grants them license and even cancels the same on account of
fraud practice.

HDFC Bank:

HDFC Bank was incorporated in August 1994, and, currently has an nationwide network of 1412
Branches and 3275 ATM's in 528 Indian towns and cities.

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered

18 
 
office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank
in January 1995.

HDFC Bank offers a wide range of commercial and transactional banking services and treasury
products to wholesale and retail customers. The bank has three key business segments:

Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian
corporate to small & mid-sized corporates and agri-based businesses. For these customers, the
Bank provides a wide range of commercial and transactional banking services, including
working capital finance, trade services, transactional services, cash management, etc. The bank is
also a leading provider of structured solutions, which combine cash management services with
vendor and distributor finance for facilitating superior supply chain management for its corporate
customers. Based on its superior product delivery / service levels and strong customer
orientation, the Bank has made significant inroads into the banking consortia of a number of
leading Indian corporates including multinationals, companies from the domestic business
houses and prime public sector companies. It is recognised as a leading provider of cash
management and transactional banking solutions to corporate customers, mutual funds, stock
exchange members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of financial
products and banking services, giving the customer a one-stop window for all his/her banking
requirements. The products are backed by world-class service and delivered to customers
through the growing branch network, as well as through alternative delivery channels like
ATMs, Phone Banking, NetBanking and Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the
Investment Advisory Services programs have been designed keeping in mind needs of customers
who seek distinct financial solutions, information and advice on various investment avenues. The
Bank also has a wide array of retail loan products including Auto Loans, Loans against

19 
 
marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider
of Depository Participant (DP) services for retail customers, providing customers the facility to
hold their investments in electronic form.

HDFC Bank was the first bank in India to launch an International Debit Card in association with
VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched
its credit card business in late 2001. By March 2008, the bank had a total card base (debit and
credit cards) of 9.1 million. The Bank is also one of the leading players in the “merchant
acquiring” business with over 61,000 Point-of-sale (POS) terminals for debit / credit cards
acceptance at merchant establishments. The Bank is well positioned as a leader in various net
based B2C opportunities including a wide range of internet banking services for Fixed Deposits,
Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and Derivatives,
Local Currency Money Market & Debt Securities, and Equities. With the liberalization of the
financial markets in India, corporate need more sophisticated risk management information,
advice and product structures. These and fine pricing on various treasury products are provided
through the bank's Treasury team. To comply with statutory reserve requirements, the bank is
required to hold 25% of its deposits in government securities. The Treasury business is
responsible for managing the returns and market risk on this investment portfolio.

ICICI Bank:
Industrial Credit and Investment Corporation of India (ICICI) Bank was originally promoted in
1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,744.10 billion. The Bank has
a network of 1,420 branches and about 4,644 ATMs in India and presence in 18 countries. ICICI
Bank offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialized subsidiaries and
affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset
management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada,

20 
 
branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai
International Finance Centre and representative offices in United Arab Emirates, China, South
Africa, Bangladesh, Thailand, Malaysia and Indonesia.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New
York Stock Exchange (NYSE).

ICICI Venture is one of the largest and most successful private equity firms in India with funds
under management in excess of USD 2 billion. ICICI Venture, over the years has built an
enviable portfolio of companies across sectors including pharmaceuticals, Information
Technology, media, manufacturing, logistics, textiles, real estate etc thereby building sustainable
value. ICICI is among the few ones to offer credit in the Indian Private Equity industry. ICICI
Venture is a subsidiary of ICICI Bank, the largest private sector financial services group in India.

ICICI emerges as the major source of foreign currency loans to Indian industry. Besides funding
from the World Bank and other multi-lateral agencies, ICICI was also among the first Indian
companies to raise funds from international markets.

Standard Chartered Bank:

Standard Chartered is a London based international bank with significant operations in Asia,
Africa, the Middle East and Latin America. The Standard Chartered Group was formed in 1969
through a merger of two banks: The Standard Bank of British South Africa founded in 1863, and
the Chartered Bank of India, Australia and China, founded in 1853.

Chartered Bank opened its first overseas branch in India, at Kolkata, on 12 April 1858. During
that time Kolkata was the most important commercial city and was the hub of jute and indigo
trades. With the opening of the Suez Canal in 1869 and the growth of cotton trade, Bombay
replaced Kolkata as the main commercial center. Hence Standard Chartered shifted its main
operations to Bombay. Today the Bank's branches and sub-branches in India are directed and
administered from Bombay with Kolkata remaining an important trading and banking centre.

21 
 
To cater to diverse financial needs, Standard Chartered offers a wide range of state-of-the-art
banking products and services through its network of 80 branches in 31 cities across the country.

Recent alliances and developments

In 2000, Standard Chartered acquired Grindlays Bank from ANZ Bank, increasing its presence
in private banking and further expanding its operations in Bangladesh, India and Pakistan.[5]
Standard Chartered retained Grindlays' private banking operations in London and Luxembourg
and the subsidiary in Jersey, all of which it integrated into its own private bank. This now serves
high net worth customers in Hong Kong, Dubai, and Johannesburg under the name Standard
Chartered Grindlays Offshore Financial Services. In India, Standard Chartered integrated most of
Grindlays' operations, making Standard Chartered the largest foreign bank in the country, despite
Standard Chartered having cut some branches and having reduced the staff from 5500 to 3500
people.

On 15 April 2005, the bank acquired Korea First Bank, beating HSBC in the bid. Since then the
bank has rebranded the branches as SC First Bank.

Standard Chartered completed the integration of its Bangkok branch and Standard Chartered
Nakornthon Bank in October, renaming the new entity Standard Chartered Bank (Thailand).
Standard Chartered also formed strategic alliances with Fleming Family & Partners to expand
private wealth management in Asia and the Middle East, and acquired stakes in ACB Vietnam,
Travelex, American Express Bank in Bangladesh and Bohai Bank in China.

On 9 August 2006 Standard Chartered announced that it had acquired an 81% shareholding in
the Union Bank of Pakistan in a deal ultimately worth $511 million. This deal represented the
first acquisition by a foreign firm of a Pakistani bank and the merged bank, Standard Chartered
Bank (Pakistan), is now Pakistan's sixth largest bank.

On 22 October, 2006 Standard Chartered announced that it has received tenders for more than 51
per cent of the issued share capital of Hsinchu International Bank (“Hsinchu”), established in
1948 in Hsinchu province in Taiwan. Standard Chartered, which had first entered Taiwan in
1985, acquired majority ownership of the bank, Taiwan’s seventh largest private sector bank by

22 
 
loans and deposits as at 30 June, 2006. Standard Chartered merged its existing three branches
with Hsinchu's 83, and then delisted Hsinchu International Bank, changing the bank's name to
Standard Chartered Bank (Taiwan) Limited). Prior to the merger, Hsinchu had suffered extensive
losses on defaulted credit card debt.

In 2007, Standard Chartered opened its Private Banking global headquarters in Singapore.

On 23 August, 2007 Standard Chartered entered into an agreement to buy a 49 percent of an

Indian brokerage firm (UTI Securities) for $36 million in cash from Securities Trading
Corporation of India Ltd., with the option to raise its stake to 75 percent in 2008 and, if both
partners agree, to 100 percent by 2010. UTI Securities offers broking, wealth management and
investment banking services across 60 Indian cities.

On 29 February 2008, Standard Chartered PLC announced it has received all the required
approvals leading to the completion of its acquisition of American Express Bank Ltd (AEB)
from the American Express Company (AXP). The total cash consideration for the acquisition is
US$ 823 million.

In Sri Lanka, in Nov 2008, Standard Chartered Bank became embroiled in a major $500m oil
hedge scandal with allegations of mis-selling complex financial derivatives to the national
petroleum company, amidst claims of various unethical practices employed to woo decision
makers at the company. The Supreme Court of Sri Lanka has temporarily frozen payments under
the oil hedge, which could result in massive losses for Ceylon Petroleum Corporation after the
dramatic drop in global oil prices.

On 15 Nov 2008, Sri Lanka's Supreme Court asked the Central Bank to impound documents
relating to the foreign travel of public officials paid for by the Standard Chartered Bank which a
petitioner said was kept at the bank, but was in danger of being lost.

In March 2009 the Central Bank of Sri Lanka sent a ‘Show Cause’ letter to Standard Chartered
Bank’s Chief Executive Officer in Sri Lanka on the oil hedging issue and allegations relating to
corruption. The letter to CEO Clive Haswell was sent by Central Bank Governor Ajith Nivard
Cabraal. The letter was believed to be related to allegations that the SCB had funded Ceylon

23 
 
Petroleum Corporation (CPC) and other bank officials on foreign trips and other matters in
connection with the hedging deals.

CAMEL Ratios:
The first method used for valuation is CAMEL Ratios in which we calculate certain ratios
like
1) Capital Adequacy Ratio,
2) Assessing Asset Quality,
3) Assessing Earning Performance,
4) Earning Spread Ratio, and
5) Assessing Liquidity.

Capital Adequacy Ratio (CAR): 

Capital Adequacy is a measure of an bank's financial strength, in particular its ability to cushion
operational and abnormal losses. An bank should have adequate capital to support its risk assets
in accordance with the risk-weighted capital ratio framework. It has become recognized that
capital adequacy more appropriately relates to asset structure than to the volume of liabilities.
This is exemplified by central banks' efforts internationally to unify the capital requirements of
commercial banks and to generate worldwide classification formulae such as the one proposed
here. This indicator requires that assets be classified by reference to their demands on the equity
(or capital) structure of the bank.
Capital Adequacy Ratio most importantly tells how the assets of the bank are performing this
ratio gives importance to the assets structure rather than to the liabilities. The CAR indicator is
derived by comparing the ratio of an entity's equity capital to its assets-at-risk.

24 
 
 HDFC Bank ICICI Bank Standard Chartered
Bank
2008 2007 2008 2007 2008 2007
Capital
Adequacy
Ratio %:
Total Capital 146,113,30 96,927,00 500,585,00 338,961,90 29,442,00 28,114,00
funds 0,000 0,000 0,000 0,000 0,000 0,000
Risk 1,074,479,9 740,819,2 3,584,566,2 2,899,930,6 188,821,0 185,354,0
weighted 00,000 00,000 00,000 00,000 00,000 00,000
assets and
contingents
Capital 13.60% 13.08% 13.97% 11.69% 15.59% 15.17%
Adequacy
Ratio %

The regulatory requirement in India for minimum capital adequacy ratio is 9%, and we can see
that all the three banks are maintaining capital adequacy ratio well above 9%. This means that
the total capital funds are sufficient to cover the risk weighted assets and contigents.

Assessing Asset Quality: 

Asset quality has direct impact on the financial performance of abank. The quality of assets
particularly, loan assets and investments, would depend largely on the risk management system
of the institution. The value of loan assets would depend on the realizable value of the collateral
while investment assets would depend on the market value.

Loan Loss Provision Ratio:

Indicates provisioning requirements on loan portfolio for the current period.

Loan loss provision ratio = Loan Loss Provision/Average performing assets

25 
 
Loan Loss Provision HDFC Bank ICICI Bank Standard Chartered
Ratio %: Bank
2008 2007 2008 2007 2008 2007

Loan Loss Provision 10,263,700 6,911,500 234,842,42 163,584,98 28,625, 25,190,

,000 ,000 3,000 4,000 313 250
Average Performing 1,217,224, 816,739,6 3,716,210, 3,222,527, 734,452 588,913
Assets 400,000 00,000 031,000 260,000 ,439 ,544
Loan Loss Provision 0.84% 0.85% 6.32% 5.08% 3.90% 4.28%
Ratio %

The loan loss provision ratio is high for ICICI Bank and also for Standard Chartered Bank, but
for HDFC Bank it is very low. This indicates that the average performing assets (including loans
disbursed) of HDFC are reasonably sound and well performing as compared to ICICI and
Standard Chartered. Thus, HDFC needs to keep a low provision for loan losses.

Reserve Ratio:

Indicates the adequacy of reserves in relation to the portfolio. The Loan loss reserve is a reserve
maintained to cover potential loan losses.

Reserve ratio = Loan Loss Reserve/Value of Loans Outstanding

Reserve Ratio (%): HDFC Bank ICICI Bank Standard Chartered

Bank
2008 2007 2008 2007 2008 2007

Loan Loss Reserve 10,263,70 6,911,500 234,842,42 163,584,98 2,862,5 2,519,0

0,000 ,000 3,000 4,000 31 25
Value of Loans 617,895,2 461,400,2 2,103,846, 1,841,192, 29,891, 15,458,
Outstanding 00,000 00,000 259,000 599,000 615 440
Reserve Ratio (%) 1.66% 1.50% 11.16% 8.88% 9.58% 16.30%

The loan loss provision ratio is high for ICICI Bank and also for Standard Chartered Bank, but
for HDFC Bank it is very low. This indicates that the loans disbursed by HDFC are reasonably
less risky as compared to ICICI and Standard Chartered. Thus, HDFC needs to keep a low
provision for loan losses.

26 
 
Assessing Management Quality: 

The performance of the other four CAMEL components will depend on the vision, capability,
agility, professionalism, integrity, and competence of the bank's management. As sound
management is crucial for the success of any institution, management quality is generally
accorded greater weighting in the assessment of the overall CAMEL composite rating.

Cost per unit of money lent:

Indicates efficiency in distributing loans (in monetary terms).

Cost per unit of money lent = Operating costs/Total amount disbursed

Cost per Unit of HDFC Bank ICICI Bank Standard Chartered

Money Lent: Bank
2008 2007 2008 2007 2008 2007

Operating Costs 37,456,20 24,208,00 81,541,8 66,905,5 7,611,00 6,215,00

0,000 0,000 19 64 0,000 0,000
Total Amount 156,495,0 124,555,3 297,504, 497,024, 31,130,0 30,607,0
Disbursed 00,000 00,000 831 907 00,000 00,000
Cost per Unit of 23.93% 19.44% 27.41% 13.46% 24.45% 20.31%
Money Lent

We can see that the cost per unit of money lent for ICICI has increased significantly from
13.46% in 2007 to 27.41% in 2008 while for HDFC, it has increased from 19.44% in 2007 to
23.93% in 2008 and for Standard Chartered, it has increased from 20.31% to 24.45%. Thus we
can say that operating and management efficiency of ICICI has deteriorated in 2008 and it is
better in case of HDFC.

 
 

27 
 
Assessing Earning Performance: 
 

The quality and trend of earnings of a bank depend largely on how well the management
manages the assets and liabilities of the bank. A bank must earn reasonable profit to support
asset growth, build up adequate reserves and enhance shareholders' value. Good earnings
performance would inspire the confidence of depositors, investors, creditors, and the public at
large.

Return on Assets (%):

Return on assets = Net income after tax/Average total assets

Return on Assets HDFC Bank ICICI Bank Standard Chartered

(%): Bank
2008 2007 2008 2007 2008 2007

Net Income After 15,901,800 11,414,50 41,577,2 31,102,2 3,511,000 2,989,000

Tax ,000 0,000 79 00 ,000 ,000
Average Total Assets 1,331,766, 912,356,1 3,997,95 3,446,58 435,068,0 329,871,0
000,000 00,000 0,762 1,126 00,000 00,000
Return on Assets (%) 1.19% 1.25% 1.04% 0.90% 0.81% 0.91%

The return on assets is higher for HDFC as compared to ICICI and Standard Chartered.

Return on Equity (%):

Return on equity = Net income after tax/Average total equity funds
Return on HDFC Bank ICICI Bank Standard Chartered Bank
Equity (%):
2008 2007 2008 2007 2008 2007
Net Income 15,901,800, 11,414,500 41,577,2 31,102,2 3,511,000, 2,989,000,
After Tax 000 ,000 79 00 000 000
Average Total 114,972,300 64,331,500 468,202, 246,632, 22,695,000 21,452,000
Equity Funds ,000 ,000 095 644 ,000 ,000
Return on Equity 13.83% 17.74% 8.88% 12.61% 15.47% 13.93%
(%)

28 
 
The return on equity of ICICI has gone down in 2008 (12.61%) as compared to 2007 (8.88%),
for HDFC, it has gone down from 17.74% to 13.83%. But for Standard Chartered, the ROE has
gone up from 13.93% to 15.47%. This indicates that Standard Chartered bank has been very
profitable for its shareholders while ICICI has been least profitable. This can be seen in the
higher share prices of HDFC as compared to ICICI in recent times.

Interest-Spread Ratio (%):

Interest-spread ratio = (Income from loan portfolio/average loan portfolio) - (Interst Expenses
and other financial charges/ average borrowings)

Interest-Spread Ratio HDFC Bank ICICI Bank Standard Chartered

(%): Bank
2008 2007 2008 2007 2008 2007
Income from Loan 118,295,0 79,403,1 307,883,4 219,955,8 16,378,0 16,176,0
Portfolio 00,000 00,000 29,000 76,000 00,000 00,000
Average Loan Portfolio 617,895,2 461,400, 2,103,846 1,841,192 220,761, 189,631,
00,000 200,000 ,259,000 ,599,000 000,000 000,000
Interest Expenses and 48,871,20 31,794,5 234,842,4 163,584,9 8,991,00 9,911,00
Other Financial Charges 0,000 00,000 23,000 84,000 0,000 0,000
Average Borrowings 1,052,474 711,133, 3,100,794 2,817,662 372,617, 273,297,
,600,000 300,000 ,840,000 ,126,000 000,000 000,000
Interest-Spread Ratio 14.50% 12.74% 7.06% 6.14% 5.01% 4.90%
(%):

The interest spread ratio is highest for HDFC as compared to ICICI and Standard Chartered
indicating that HDFC has been utilizing its deposits to disburse profitable loans more efficiently
than ICICI and Standard Chartered.

Earning Spread ratio (%):

Earning spread ratio = (Total Income-Non Operating Income/Average total portfolio) - (Interest
Expenses & Other Financial charges/Average Total Resources)

29 
 
Earning Spread ratio HDFC Bank ICICI Bank Standard Chartered
(%): Bank
2008 2007 2008 2007 2008 2007
Total Income - Non- 118,295,0 79,403,1 307,883,4 219,955,8 19,798,0 19,365,0
Operating Income 00,000 00,000 29,000 76,000 00,000 00,000
Average Total Portfolio 1,220,209 818,768, 3,751,115 3,242,447 290,614, 245,174,
,600,000 500,000 ,531,000 ,660,000 000,000 000,000
Interest Expenses and 48,871,20 31,794,5 234,842,4 163,584,9 8,991,00 9,911,00
Other Financial Charges 0,000 00,000 23,000 84,000 0,000 0,000
Average Total 1,167,446 775,464, 3,568,996 3,064,294 395,312, 294,749,
Resources ,900,000 800,000 ,935,000 ,770,000 000,000 000,000
Earning Spread ratio 5.51% 5.60% 1.63% 1.45% 4.54% 4.54%
(%)

The earning spread ratio for ICICI is very low as compared to HDFC (highest) and Standard
Chartered. This indicates the total operating income is highest for HDFC (5.51%) and very low
for ICICI (1.63%) and for Standard Chartered, it is 4.54%.

Assesing Liquidity: 

A bank must always be liquid to meet depositors' and creditors' demand to maintain public
confidence. There needs to be an effective asset and liability management system to minimize
maturity mismatches between assets and liabilities and to optimize returns. As liquidity has
inverse relationship with profitability, a bank must strike a balance between liquidity and
profitability.

Current and quick ratios are inappropriate for measuring bank liquidity. A loan-to-deposit ratio is
more relevant. However, an bank's liquidity and solvency are directly affected by portfolio
quality. Consequently, financial analysts (investment officers) should carefully analyze the
bank's portfolio quality on the basis of collectability and loan-loss provisioning.

Loan to Deposit Ratio (%):

Loan deposit ratio = Loans/Deposits

30 
 
Loan to Deposit Ratio HDFC Bank ICICI Bank Standard Chartered
(%): Bank
2008 2007 2008 2007 2008 2007
Loans 617,895,2 461,400, 2,103,846 1,841,192 220,761, 189,631,
00,000 200,000 ,259,000 ,599,000 000,000 000,000
Deposits 1,007,686 682,979, 2,444,310 2,305,101 265,917, 205,640,
,000,000 400,000 ,502,000 ,863,000 000,000 000,000
Loan to Deposit Ratio 61.32% 67.56% 86.07% 79.87% 83.02% 92.22%
(%)

The loan to deposit ratio is lowest for HDFC (61.32%) while higher for ICICI (86.07%) and
Standard Chartered (83.02%). This means that liquidity for HDFC is much higher as compared
to ICICI and Standard Chartered. But on the other hand, the earning capability will be higher for
ICICI and Standard Chartered as compared to HDFC.

31 
 
Dividend Discount Model:

Dividend Discount Model is a method which helps in determing the value of the company. In
this method net income is taken into consideration and this method is apt as it tells the present
and future value of the firm. The method also tells whether the value of firm being over-valued
or under-valued. The firm value is over valued when the market price of the share is being more
than computed value and vice-versa.

Here, the value of equity per share can be calculated as follows:

Where,
DPSt = Expected dividend per share in period t
ke = Cost of equity

Value Per Share = value of a firm / No. of Shares

Where g = growth rate of the company

Inputs to this model are:

1. Cost of equity: the cost of equity for a financial service firm has to reflect the portion of
the risk in the equity that cannot be diversified away by the marginal investor in the
stock. This risk is estimated using a beta (in the capital asset pricing model). The cost of
equity can be found out by using regression betas if the regulatory restrictions have
remained unchanged over the period.

32 
 
 2. Payout Ratios: The expected dividend per share in a future period can be written as the
product of the expected earnings per share in that period and the expected payout ratio.

3. Expected Growth: If dividends are based upon earnings, the expected growth rate that
will determine value is the expected growth rate in earnings.

Notes on following calculations:

1. The betas for the banks are obtained from National Stock Exchange (NSE) except
for Standard Chartered Bank, which is not listed in India. Hence, for Standard
Chartered, the assumption is that the risk it is same as that for the overall banking
sector. Thus the beta for Standard Chartered Bank is assumed to be 1.00.
2. The market risk premium is assumed to be 10% as the GDP of Indian economy is
expected to grow at around 9-10% in the coming years.
3. As the Standard Chartered Bank is not listed in India, the share price is obtained
assuming the bank will be listed in immediate future. Thus, the bank will not give
out dividends till it is in high growth period. The bank will start giving dividends
only when it approaches constant growth stage.
4. In the following calculations it is assumed that the banking sector is in high
growth phase with an expectation of further deregulation by the RBI as is the
trend from 1992. It is also assumed that the high scope of banking in rural sector
will fuel these private sector banks’ growth, who have predominantly been
targeting urban and higher end customers till date.

33 
 
For HDFC Bank:

Year 2009 2008 2007 2006 2005 2004

Dividend per 10 8.5 7 5.5 4.5 3.5
share (Rs.)
Payout ratio 18.90% 18.39% 19.29% 19.70% 19.63% 19.50%
Average payout 19.24%
ratio
Growth in 17.65% 21.43% 27.27% 22.22% 28.57%
dividend per share
Average growth 22.14%

Cost of equity
Risk free rate of return (T-bills rate) 4.60%
Beta for HDFC Bank Ltd. 1.00
Risk premium (Market rate of return) 10%
Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + 14.60%
Beta*10%

Year period Expected Dividend per Cost of Present

growth rate share equity value
2010 1 22% 12.200 14.60% 10.65
2011 2 22% 14.884 14.60% 11.33
2012 3 22% 18.158 14.60% 12.06
2013 4 22% 22.153 14.60% 12.84
2014 5 22% 27.027 14.60% 13.67
2015 6 15% 31.081 14.60% 13.72
2016 7 15% 35.743 14.60% 13.77
2017 8 15% 41.105 14.60% 13.82
2018 9 15% 47.271 14.60% 13.87
2019 10 15% 54.361 14.60% 13.91
2020 11 8% 58.710 14.60% 13.11

For constant growth from 2020 onwards, the present value is = 889.5455165

Present value of equity (Rs.per share) = 1,032.31

34 
 
For ICICI Bank:

Year 2009 2008 2007 2006 2005 2004

Dividend per share (Rs.) 11 11 10 8.5 8.5 7.5
Payout ratio 32.58% 27.93% 28.70% 26.16% 30.85% 28.13%
Average payout ratio 29.06%
Growth in dividend per share 0.00% 10.00% 17.65% 0.00% 13.33%
Average growth 8.20%
Net Profit 37,581, 41,577,2 31,102,2 25,400,7 20,052, 16,371,
300,000 79,000 00,000 47,000 016,000 063,000
Growth in net profit -9.61% 33.68% 22.45% 26.67% 22.48%
Average growth in net profit 19.13%

Cost of equity
Risk free rate of return (T-bills rate) 4.60%
Beta for HDFC Bank Ltd. 1.60
Risk premium (Market rate of return) 10%
Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + 20.60%
Beta*10%

Year period Expected Dividend per Cost of Present

growth rate share equity value
2010 1 18% 11.800 20.60% 9.78
2011 2 18% 13.924 20.60% 9.57
2012 3 18% 16.430 20.60% 9.37
2013 4 18% 19.388 20.60% 9.17
2014 5 18% 22.878 20.60% 8.97
2015 6 12% 25.623 20.60% 8.33
2016 7 12% 28.698 20.60% 7.73
2017 8 12% 32.141 20.60% 7.18
2018 9 12% 35.998 20.60% 6.67
2019 10 12% 40.318 20.60% 6.19
2020 11 8% 43.544 20.60% 5.55

For constant growth from 2020 onwards, the present value is = 345.5837876

Present value of equity (Rs.per share) = 434.10

35 
 
For Standard Chartered Bank:

Year 2008 2007 2006 2005 2004

Net profit 3,511,000,0 2,989,000,000 2,354,000,00 1,971,000,00 1,479,000,
00 0 0 000
Growth in net profit 17.46% 26.98% 19.43% 33.27%
Average growth in 24.28%
net profit
Total Equity 22,140,000, 20,851,000,00 17,397,000,0 12,333,000,0 8,435,000,
000 0 00 00 000
Return on Equity 15.86% 14.34% 13.53% 15.98% 17.53%
Average ROE 15.45%

Cost of equity
Risk free rate of return (T-bills rate) 4.60%
Beta for Standard Chartered Bank Ltd. 1.00
Risk premium (Market rate of return) 10%
Required rate of return = RFR + Beta*Risk Premium, i.e. 4.6% + 14.60%
Beta*10%

Year period Expected Earnings Dividend Cost of Present

growth rate per share per share equity value
2009 1 25% 2.53 0 14.60% 0.00
2010 2 25% 3.16 0 14.60% 0.00
2011 3 25% 3.95 0 14.60% 0.00
2012 4 20% 4.74 0 14.60% 0.00
2013 5 20% 5.69 0 14.60% 0.00
2014 6 20% 6.83 0 14.60% 0.00
2015 7 15% 7.86 0 14.60% 0.00
2016 8 15% 9.03 0 14.60% 0.00
2017 9 10% 9.94 3.50 14.60% 1.03
2018 10 10% 10.93 3.86 14.60% 0.99
2019 11 8% 11.81 4.16 14.60% 0.93

Divident payout ratio in 2017(1-growth rate/ROE) = 35.27%

Dividend per share in 2017(EPS*payout ratio) = 3.50

For constant growth from 2019 onwards, the present value is = 63.08

Present value of equity ($ per share) = 66.03

36 
 
Conclusion:

1) According to CAMEL ratios, we can see that HDFC Bank has performed the best out
of the three banks from the view of asset quality, management performance and
earning capability. Overall, Standard Chartered Bank is a better performer than ICICI
Bank and the performance of ICICI Bank is lowest of the three banks in the last two
years. Thus, we can say that the equity of HDFC Bank will be highest valued, next is
Standard Chartered Bank and the equity of ICICI is valued lowest.
2) From the dividend discount model, we can see that the value of each share of HDFC
Bank is Rs. 1032.31 which is overvalued as the recent value of share price of HDFC
Bank in NSE is Rs.1411.80. Hence, the shares of HDFC Bank should not be
purchased by investors and they should be sold.
3) Similarly, the share price of ICICI Bank is Rs.434.10 which is also overvalued as
compared to the recent share price of ICICI Bank in NSE, which is Rs.756.15. Hence,
the shares of ICICI Bank should also be sold and not purchased by investors.

References:

• www.hdfcbank.com

37 
 
 • www.icicibank.com
• www.standardchartered.co.in
• www.nseindia.com
• www.adb.org/documents/guidelines/financial/part060302
• www.standardchartered-wealthmanagers.co.in
• www.moneycontrol.com
• www.ibef.org
• www.researchandmarkets.com
• www.lankabusinessonline.com
• http://www.lbo.lk
• http://sundaytimes.lk
• Osama K. Najjar, 2004-2006, Financial Analysis for Bank of Palestine & Jordan Ahli
Bank (CAMEL Analysis)
• Damodaran, Aswath (2006). Damodaran on Valuation. New York: John Wiley & Sons.

38