Fundamental-analysis-of-selected-public-and-private-sector-banks-in-india.pdf

Fundamental Analysis of Selected Public and Private Sector Banks in India Amanjot Kaur Sodhi Simran Waraich Abstract

help them to take informed investment decisions.

Fundamental analysis studies the various financial,

With the help of fundamental analysis, investors can

economic and industrial parameters that influence the

track the past performance, recent changes and future

risk-return of securities and helps in investment

prospects of the banking sector. This research paper

decision making. Banking companies have a strong

analyses the fundamentals of selected banking

shareholding foothold in the Indian economy and the

companies using independent financial parameters.

stock markets. Fundamental analysis can help the

32

shareholders by providing relevant information in

Keywords: Profit Margins, Return on Equity, Price

terms of profitability and growth which can, in turn,

Earnings Ratio, Dividend per Share

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

Introduction

challenged to raise the required capital to comply with

The development of any economy depends on the

the Basel III requirements. For long, banks were

development of the financial sector of that economy.

comfortable that competition would only come from

The Banking industry is the key component of the

similar entities and that the Reserve Bank of India was

financial system which provides financial assistance

ensuring the least number of banks entered the

not only to the industrial sector but also to the

market to compete with them. But as it happens in any

agriculture and household sectors. Banks are the

business, technological innovation and the regulator's

credit creators. The Indian Banking industry has

delay in waking up to developments have allowed a

contributed to the economic growth of the country.

new set of companies to play the role of financial

This sector has undergone significant developments

intermediaries with a different name (The Economic

and investments in the recent past. Reserve Bank of

Times).

India is the central bank of the country; it regulates the banking industry in India and ensures monetary

Banks can issue long term bonds, without maintaining

stability in the economy. Banks are segregated into

statutory reserves as per RBI's decision, to raise funds

different groups such as scheduled and unscheduled

for infrastructure and for affordable housing which will

commercial banks, public sector banks, private banks,

enhance their ability to lend money, thereby enabling

foreign banks and cooperative banks. The Banking

them to mitigate the asset-liability mismatch. (Dun &

industry is a valuable contributor to the GDP, works

Bradstreet)

under a regulated environment and has government support. Technological advancements have changed

This paper deals with public sector and private sector

the way banking is done. A wide network of financial

banks in India. Because of increasing competition in

services increases the welfare and productivity in the

the banking sector, private sector and foreign banks

economy. It provides the opportunity to the public to

are trying their best to improve their performance. So

build savings, make investments, avail credit and

there is a need to study the fundamentals and

provides safety against income shocks and

efficiency of public sector banks.

emergencies. Fundamental analysis will examine the key financial However, the Indian Banking industry is facing

ratios of banks and help in identifying the value of

formidable challenges. Increasing competition,

stocks of these banks to identify investment

increasing level of Non-performing Assets (NPAs) and

opportunities.

deteriorating asset quality have become major areas of concern for the entire banking industry, and by

Review of Literature

extension, the Indian economy. The vicious cycle of

Dr. Virender Koundal (2012) concludes that

economic slowdown, corporate earnings slowdown,

commercial banks in India get favourable effects

increase in NPAs, increase in the proportion of

because of the various reforms. Even though the

restructured assets and depressed profitability of the

overall profitability has also improved, the major

Banking sector, has led to a situation where banks,

benefit is taken by the private sector banks and foreign

particularly Public Sector Banks (PSBs), will be severely

banks whereas public sector banks are still lagging

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

33

behind on various financial parameters.

various types of advances. He also examined the differences in various aspects of working results of

Seema Malik (2014) has analyzed the effect of

public sector and private sector banks in comparison

technology on transformation of banking in India and

to foreign banks.

also studied the benefits and challenges of changing banking trends. Technology and financial innovations

Nishit V. Davda (2012) has studied and examined the

have led to tremendous improvement in banking

economic performance and sustainability of six major

services and operations over the past decade. Survival,

banks in the private banking sector - ICICI, HDFC,

growth and profitability of banks depend upon the

AXIS, INDUSIND, ING VYSYA and KOTAK. The study

organizational effectiveness and operational efficiency

attempts to analyze the profitability position of the

in today's competitive scenario where customers'

sample banking companies for a period of 10 years

needs are changing everyday and technology is

from 2002 to 2011. The study reveals that HDFC has

touching new highs.

performed better in terms of Earning per Share than ICICI, AXIS, KOTAK, INDUSIND BANK and ING VYSYA

Sana Samreen (2014) has analyzed the overall banking

during the last ten years i.e. 2002 to 2011. The study

industry with the help of Porter's five forces model.

also reveals that after KOTAK Bank, HDFC Bank has

The study also concentrated on the various

performed better in terms of Net Profit margin than

developments, challenges and opportunities in the

the remaining banks. On the other hand, among all the

banking industry. The author emphasized upon the

six banks, ICICI has achieved the highest yield in terms

need to act both decisively and quickly to build an

of Return on Assets as compared to the remaining

enabling, rather than a limiting, banking sector in

selected banks.

India. Indian Brand Equity Foundation (2015) has studied Malaya Ranjan Mohapatra, Avizeet Lenka, Subrat

that Indian banks are focusing on adopting an

Kumar Pradhan (2015) have analyzed the operational

integrated approach to risk management. Banks have

efficiency of commercial banks in India and challenges

already embraced the international banking

faced by public sector banks. The parameters

supervision accord of Basel II. According to RBI,

considered for study are labour productivity, branch

majority of the banks already meet with the capital

expansion and profitability ratios. The study concluded

requirements of Basel III, which has a deadline of

that internal management and employee efficiency of

March 31, 2019. Most of the banks have put in place

foreign banks are far better than other sectors of

the framework for asset-liability match, credit and

commercial banks. Public sector banks are lagging

derivatives risk management. As per their report,

behind in various financial parameters.

rising incomes are expected to increase the need for banking services in rural areas which will positively

34

Karan Walia (2012) has examined the impact of

affect the growth of the banking sector. The RBI has

reforms on credit deposit ratio, credit to GDP ratio,

relaxed its branch licensing policy which emphasized

investment in government securities, share of

the need to focus on spreading the reach of banking

business of public sector banks and proportion of

services to the un-banked population of India.

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

Amit Kumar Dwivedi, D. Kumara Charyulu (2011)

Das and Ghose (2006) used non-parametric DEA to

determine the impact of various market and

estimate the efficiency of Indian commercial banks in

regulatory initiatives on efficiency improvements of

the post-reform period, 1992-2002.

Indian banks. They concluded that reform process has shifted the focus, of public sector dominated banking

Omprakash K. Gupta1, Yogesh Doshit and Aneesh

system, from social banking to a more efficient and

Chinubhai (2007) analyzed the performance of the

profit oriented industry. The infusion of private equity

Indian banking sector in two stages. Non-parametric

capital has led to shareholders' challenges and

frontier methodology DEA and TOBIT model have

bureaucratic decision making. The emphasis in

been used to construct productive inputs. The outputs

banking has shifted from traditional banking to

are measured in monetary value and efficiency scores

technology based banking.

have been determined for the period 1999-2003. The study shows that private banks and other nationalized

M. Vassiloglou and D. Giokas (1990) present a

banks follow State Bank of India in terms of efficiency

systematic application of Data Environment Analysis

which is measured in terms of capital adequacy.

(DEA) carried out at the Commercial Bank of Greece in assessing the relative efficiency of bank branches.

R. K. Uppal (2011) examined the efficiency of all the

After a description of the model and the data, the

bank groups in the post- banking sector reforms era for

results of the analysis are discussed, and a note is

the time period between 1999 and 2006. The main

made of certain aspects of the follow-up analysis.

implication of this study is that although public sector banks have improved their financial position, they still

S. S. Rajan, K. L. N. Reddy and V. Pandit (2011) attempt

need to make many changes. On the basis of some

to examine technical efficiency and productivity

important parameters of efficiency, the paper

performance of Indian scheduled commercial banks,

concludes that among the Indian banks, efficiency of

for the period 1979-2008. They model a multiple

new private sector banks is quite high, but foreign

output/multiple input technology production frontier

banks have an edge over new private sector banks.

using semi-parametric estimation methods. Mariappan (2005-06) analyzed that the IT revolution Bhattacharya et. al (1997), in their study, examined

has brought a stunning change in the business

the productivity efficiency of 70 Indian commercial

environment, with the maximum impact on the

banks during 1986 to 1991. Using Data Evolvement

banking and finance sector; as a result, the banking

Analysis (DEA), their study concludes that public

sector sports a new look today.

sector banks have been the most efficient followed by the foreign and the private banks.

Singla (2008) examined the profitability position of the selected sixteen banks from the banker index for a

Sathye (2003), using DEA to estimate efficiency, found

period of six years (2001-06). The study reveals that

that private banks are less efficient than public and

the profitability position was reasonable during the

foreign banks.

period of study when compared with the previous years. Strong capital position and balance sheet place

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

35

banks in a better position.

Research Methodology The present study attempts to evaluate the

P. Hanumantha Rao & Sudhendu Dutta (2014)

performance of selected public and private sector

attempted to study the fundamentals of the banking

banks in India. It examines and compares the various

sector in India. He considered operating profit margin,

aspects of performance of selected public and private

net profit margin, return on equity, earnings per share,

sector banks in India. Secondary data has been used

price earnings ratio, dividend per share and dividend

for the purpose of this study. To analyze the

payout ratio for a period of six years from 2006 to 2012

fundamentals of the top five banks, three in the public

for three major banks.

sector and two in the private sector have been taken as samples. State Bank of India, Bank of Baroda, Punjab

Subbaroo (2007) concluded in his paper that the

National Bank, HDFC and ICICI have been taken as

Indian banking system has undergone a

samples for the purpose of this study. The variables

t ra n s fo r m a t i o n f ro m d o m e s t i c b a n k i n g t o

which are considered for analyzing the profitability are

international banking. Major trends that change the

net profit margin, operating profit margin, return on

banking industry world over are consolidation of

equity, earnings per share, dividend per share, price

p l aye rs t h ro u g h m e rge rs a n d a c q u i s i t i o n s ,

earnings ratio and dividend payout ratio. The variables

globalization of players, development of new

are studied over a period of five years starting from

technology, universal banking and human resource in

2010-11 to 2014-15. The Porter's Five Forces Model

banking, profitability, rural banking and risk

has been used to analyze the banking industry.

management. Stringent prudential capital adequacy norms under Basel I and II, and the free trade

The data has been collected from various sources such

agreements are big challenges before the banking

as Statistical Tables relating to Banks in India, Trends

sector in India. The technological innovations in

and Progress of Banks in India, RBI Monthly Bulletin

banking pose another big challenge.

published by RBI, IBA Bulletins published by IBA, and annual reports of banks. Following were the major

Objectives of the study

sources of data for this study:

Fundamental analysis of public and private sector

1. Statistical Tables Relating to Banks in India for

banks in India has been done with the objective of

various years published by the Reserve Bank of

analyzing the profitability position of the selected

India, Mumbai and moneycontrol.com.

banks which is helpful in taking investment decisions.

2. Performance Highlights of Public Sector Banks, Indian Banks' Association, Mumbai.

Hypotheses of Study

3. Annual Reports of the selected banks.

H0 : There is no significant difference between the

4. Various journals, bulletins, periodicals and

selected variables of selected banks.

newspapers devoted to the subject of banking in

H1 : There is a significant difference between the

India.

selected variables of selected banks. Quantitative Techniques used for the Study A research design is a plan according to which

36

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

observations are made and data is assembled. The present study is analytical in nature. Various statistical

Where

= standard deviation,

= Actual Mean of Series,

techniques have been used in the present study to

X-

= Deviations of the Items from the Mean,

provide analytical results of the data. The following

N = Sample Size

methods have been used to analyze the data: c) ANOVA - Analysis of variance (ANOVA) is a A. Tabular Analysis - On the basis of the data/

technique to test for the significance of the difference

information collected from the various sources,

between more than two sample means and to make

tabulation analysis is used to make the study more

inferences about whether our samples are drawn from

meaningful. The use of tables is made whenever

the populations having the same mean. The “analysis

needed and necessary for clarity of thought, and easy

of variance” procedure or “F-test” is used in such

understanding.

problems where we want to test for the significance of the difference among more than two sample means.

B. Descriptive Analysis – Statistical methods such as

The term one-factor analysis of variance refers to the

mean, standard deviation and one-way ANOVA were

fact that a single variable or factor of interest is

worked out to study the nature and distribution of

controlled and its effect on the elementary units is

different variables. All statistical calculations have

observed. In other words, in one-way classification,

been made by the use of Microsoft Excel and Statistical

the data is classified according to only one criterion.

Package for Social Science (SPSS) version 20. A brief

The basic procedure is to derive two different

description of all the tools used and the formulae is

estimates of population variance from the data, then

given as under:

calculate a statistic from the ratio of these two estimates ('between groups' and 'within groups'

a) Arithmetic Mean - Mean has been used to find the

variance). The F ratio is the ratio of 'between-groups'

average of various items. The Arithmetic mean has

variance to 'within-groups' variance. A significant F

been obtained by adding together all the observations

value indicates that the population means are

and dividing the total by the number of observations.

probably not equal. Before ANOVA was conducted, it

Suppose X1, X2, X3---------------------Xn are the values of

was ensured that the necessary assumptions were

a variable X, then

met. The two assumptions of concern were population normality and homogeneity of variance.

Where:

= Arithmetic Mean of a variable, ∑X =

summation of the values, N = total no. of observations b) Standard Deviation - Standard deviation measures the absolute dispersion or variability from the mean values. A small standard deviation implies a high degree of uniformity or homogeneity in the distribution or vice versa. The equation for standard deviation is:

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

37

Table 1 - Operating Profit Margin (OPM) SBI

BOB

PNB

HDFC

ICICI

2014-15

11.45

13.62

13.89

18.7

16.7

2013-14

10.92

13.28

16.56

17.28

15.26

2012-13

13.52

16.1

16.73

14.9

13.33

2011-12

17.11

18.31

18.4

15.57

10.16

2010-11

12.9

20.17

21.11

19.5

11.4

Average

13.18

16.296

17.338

17.19

13.37

S.D.

2.178

2.65931

2.37569

1.76027

2.40198

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Throughout the analysis process, significance tests

Data Analysis

were used to decide whether to accept or reject the

Operating Profit Margin (OPM) - The operating profit

hypotheses concerning the sample data that has been

margin is a type of profitability ratio known as a margin

collected. The confidence level was taken as 95% (or

ratio. The information with which to calculate the

5% level of significance).

operating profit margin comes from a company's income. Operating Profit Margin = Operating Income / Sales Revenue Table 2 - One Way ANOVA for OPM

Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

83.92042

4

20.98011

3.187037

0.035317

2.866081

Within Groups

131.659

20

6.58295

Total

215.5794

24

The operating profit margin gives the business owner a

H01: There is no significant difference between the

lot of important information about the firm's

operating profit margin of SBI, BOB, PNB, HDFC and

profitability, particularly with regard to cost control. It

ICICI Bank. As the calculated value 3.187037 is greater

shows how much cash is thrown off after most of the

than the critical value 2.866081402 at 5% level of

expenses are met. Table 1 shows that the average

significance, the null hypothesis is rejected. Hence,

OPM of PNB is the highest among all the five banks,

there is a significant difference between the operating

followed by HDFC and Bank of Baroda. PNB is the most

profit margin of SBI, BOB, PNB, HDFC and ICICI Bank.

efficient in controlling the cost of its operations. From

38

table 1, it can be clearly seen that OPM of Bank of

Net Profit Margin (NPM) - The net profit margin, also

Baroda shows the highest degree of variability (highest

known as net margin, indicates how much net income

standard deviation of 2.65931).

a company makes with total sales achieved. A higher

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

net profit margin means that a company is more

deductions, such as sales allowances. The formula is:

efficient at converting sales into actual profit. The net

Net Profit Margin = (Net profits / Net sales) x 100

sales part of the equation is gross sales minus all sales Table 3 - Net Profit Margin (NPM) SBI

BOB

PNB

HDFC

ICICI

2014-15

8.59

7.17

5.88

21.07

18.24

2013-14

7.03

10.46

6.99

17.28

17.96

2012-13

10.39

11.54

10.29

16.04

17.19

2011-12

9.68

16.87

13.4

15.88

15.75

2010-11

7.58

19.38

16.42

16.18

15.79

Average

8.654

13.084

10.596

17.29

16.986

S.D.

1.2539

4.43211

3.92731

1.95301

1.0508

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Table 4 - One Way ANOVA for NPM Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

292.2393

4

73.05983

7.032067

0.001051

2.866081

Within Groups

207.7905

20

10.38952

Total

500.0298

24

From Table 3, it can be seen that HDFC has earned the

Return on Equity (ROE) - Return on equity measures a

highest NPM of Rs 17.29 for every Rs.100 among all

corporation's profitability by revealing how much

the five banks. HDFC is closely followed by ICICI. Bank

profit a company generates with the money

of Baroda has the highest degree of variability in NPM

shareholders have invested. ROE is expressed as a

with a standard deviation of 4.43211.

percentage. Return on Equity = Net Income / Shareholder's Equity

H02: There is no significant difference between the net profit margin of SBI, BOB, PNB, HDFC and ICICI Bank. As the calculated value 7.032067 is greater than the critical value 2.866081 at 5% level of significance, the null hypothesis is rejected. Hence, there is a significant difference between the net profit margin of SBI, BOB, PNB, HDFC and ICICI Bank.

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

39

Table 5 - Return on Equity (ROE) SBI

BOB

PNB

HDFC

ICICI

2014-15

10.62

9.21

8.48

19.37

14.55

2013-14

10.03

13.8

10.17

21.28

14.02

2012-13

15.43

15.68

16.48

20.34

13.1

2011-12

15.72

21.72

21.05

18.69

11.2

2010-11

12.62

24.3

24.45

16.75

9.66

Average

12.884

16.942

16.126

19.286

12.506

S.D.

2.36075

5.4446

6.12528

1.54146

1.82364

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Table 6 - One Way ANOVA for ROE Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

163.0031

4

40.75078

2.078125

0.121779

2.866081

Within Groups

392.188

20

19.6094

Total

555.1911

24

The return on equity of the selected banks is shown in

the null hypothesis is accepted. Hence, there is no

Table 5. It can be clearly seen that HDFC Bank scores

significant difference between the return on equity of

highest in average ROE at 19.286% followed by Bank of

SBI, BOB, PNB, HDFC and ICICI Bank.

Baroda at 16.942% and Punjab National Bank at 16.126%. At the same time, HDFC Bank scores lowest

Earnings per share (EPS) – Earnings per share is the

in terms of ROE variability with a standard deviation of

portion of a company's profit that is allocated to each

1.54146. It can also be noted that ROE of Bank of

outstanding share of common stock, serving as an

Baroda and Punjab National Bank have increased over

indicator of the company's profitability. It is often

the last five years.

considered to be one of the most important variables in determining a stock's value. Higher the EPS, higher

H03: There is no significant difference between the

is the profitability of the company. EPS is calculated as:

return on equity of SBI, BOB, PNB, HDFC and ICICI

EPS = net income / average outstanding common

Bank. As the calculated value 2.078125 is lower than

shares

the critical value 2.866081 at 5% level of significance,

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ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

Table 7 - Earnings per Share (EPS) SBI

BOB

PNB

HDFC

ICICI

2014-15

17.55

15.37

16.51

40.76

19.28

2013-14

145.88

105.75

92.32

35.34

84.95

2012-13

206.2

106.37

134.31

28.27

72.17

2011-12

174.46

121.79

144

22.02

56.09

2010-11

116.07

108.33

139.94

84.4

44.73

Average

132.032

91.522

105.416

42.158

55.444

S.D.

64.5813

38.5245

48.1483

22.051

22.6866

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Table 8 - One Way ANOVA for EPS Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

26899.29

4

6724.823

2.997448

0.043321

2.866081

Within Groups

44870.32

20

2243.516

Total

71769.61

24

Table 7 shows the earnings per share of the selected

As the calculated value 2.997448 is higher than the

banks. It can be seen that SBI tops in terms of EPS with

critical value 2.866081 at 5% level of significance, the

a highest average value of Rs.132.032. HDFC stands

null hypothesis is rejected. Hence, there is a significant

lowest with an average EPS of Rs. 42.158. Also the

difference between the earnings per share of SBI,

degree of variability of EPS is lowest in case of HDFC

BOB, PNB, HDFC and ICICI Bank.

bank with a standard deviation of 22.051. Price Earnings Ratio (P/E Ratio) - The price-toH04: There is no significant difference between the

earnings ratio (P/E) is a valuation method used to

earnings per share of SBI, BOB, PNB, HDFC and ICICI

compare a company's current share price to its per-

Bank.

share earnings. The P/E ratio, is an equity valuation multiple. Price-to-Earnings Ratio (P/E) = Market value per share / Earnings per Share (EPS)

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

41

Table 9 - Price Earnings Ratio (P/E Ratio) SBI

BOB

PNB

HDFC

ICICI

2014-15

11.73

8.96

7.69

26.05

15.06

2013-14

9.41

6.1

7.32

22.73

17.33

2012-13

13.22

6.23

4.93

42.72

12.23

2011-12

8.92

5.92

6.25

24.62

13.44

2010-11

24.01

7.92

8.41

26.73

21.18

Average

13.458

7.026

6.92

28.57

15.848

S.D.

5.50213

1.20448

1.21507

7.20648

3.16657

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Table 10 - One Way ANOVA for P/E Ratio Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

1570.465

4

392.6161

16.50322

4.00795E-06

2.866081

Within Groups

475.8055

20

23.79027

Total

2046.27

24

From Table 9, it can be seen that HDFC Bank ranks

As the calculated value 16.50322 is higher than the

highest among the selected banks with an average P/E

critical value 2.866081 at 5% level of significance, the

Ratio of 28.57 and Bank of Baroda stands the lowest. At

null hypothesis is rejected. Hence, there is a significant

the same time, Bank of Baroda has the least degree of

difference between the price earnings ratio of SBI,

variability in terms of P/E Ratio with a standard

BOB, PNB, HDFC and ICICI Bank.

deviation of 1.20448 indicating a greater stability. Dividend Per Share (DPS) - Dividend per share (DPS) is H05: There is no significant difference between the

the total dividends paid out over an entire year

price earnings ratio of SBI, BOB, PNB, HDFC and

(including interim dividends but not including special

ICICI Bank.

dividends) divided by the number of outstanding ordinary shares issued. It is the amount of dividends that the shareholders receive on a per-share basis. Dividend per share can be calculated using the formula- DPS = Dividends/ No. of outstanding shares

42

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India

Table 11 - Dividend per Share (DPS) SBI

BOB

PNB

HDFC

ICICI

2014-15

3.5

3.2

3.3

8

5

2013-14

30

21.5

10

6.85

23

2012-13

41.5

21.5

27

5.5

20

2011-12

35

17

22

4.3

16.5

2010-11

30

16.5

22

16.5

14

Average

28

15.94

16.86

8.23

15.7

12.9576

6.71673

8.79309

4.31852

6.16117

S.D.

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Table 12 - One Way ANOVA for DPS Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

1003.658

4

250.9144

2.892865

0.048553

2.866081

Within Groups

1734.712

20

86.7356

Total

2738.37

24

Table 11 shows the dividend per share given by the

Dividend Payout Ratio (D/P Ratio) - The dividend

selected banking companies. It can be seen that SBI

payout ratio measures the percentage of net income

has declared the highest amount of dividend per share

that is distributed to shareholders in the form of

with an average of Rs.28 over the last five years. And

dividends during the year. This ratio shows the portion

with a standard deviation of 12.9576 SBI stands at the

of profits the company decides to keep aside to fund

most stable position in terms of dividend per share.

the operations and the portion of profits that is given to its shareholders. The dividend payout formula is

H06: There is no significant difference between the

calculated by dividing total dividend by the net income

dividend per share of SBI, BOB, PNB, HDFC and ICICI

of the company.

Bank. As the calculated value 2.892865 is higher than the critical value 2.866081 at 5% level of significance,

Dividend Payout Ratio = Dividend per share (DPS) /

the null hypothesis is rejected. Hence, there is a

Earnings per share (EPS)

significant difference between the dividend per share of SBI, BOB, PNB, HDFC and ICICI Bank.

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Fundamental Analysis of Selected Public and Private Sector Banks in India

43

Table 13 - Dividend Payout Ratio (D/P Ratio) SBI

BOB

PNB

HDFC

ICICI

2014-15

19.51

21.42

20.51

19.62

25.93

2013-14

20.56

20.33

10.83

19.38

27.07

2012-13

20.12

23.64

23.51

19.46

27.71

2011-12

20.06

13.86

15.27

19.52

29.41

2010-11

25.84

15.23

15.72

19.55

31.3

Average

21.218

18.896

17.168

19.506

28.284

S.D.

2.33494

3.73452

4.41043

0.08139

1.88195

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Table 14 - One Way ANOVA for D/P Ratio Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

372.2311

4

93.05777

8.779279

0.000292

2.866081

Within Groups

211.9941

20

10.59971

Total

584.2252

24

Table 13 shows the dividend payout ratio of the

significance, the null hypothesis is rejected. Hence,

selected banks. ICICI has the highest D/P ratio of

there is a significant difference between the dividend

28.284 followed by SBI at 21.218. Punjab National

payout ratio of SBI, BOB, PNB, HDFC and ICICI Bank.

Bank has a tighter D/P ratio of 17.168. This shows that ICICI is returning more money to its shareholders

Compound Annual Growth Rate (CAGR) - The

whereas Punjab National Bank is retaining its earnings.

Compound Annual Growth Rate (CAGR) is the mean

HDFC stands the most stable in terms of D/P ratio with

annual growth rate of an investment over a specified

least standard deviation of all the other selected

period of time longer than one year. It is a business and

banks.

investing specific term for the geometric progression ratio that provides a constant rate of return over the

H07: There is no significant difference between the

time period. It is particularly useful to compare growth

dividend payout ratio of SBI, BOB, PNB, HDFC and

rates from different data sets such as revenue growth

ICICI Bank. As the calculated value 8.779279 is higher

of companies in the same industry.

than the critical value 2.866081 at 5% level of

CAGR =

44

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Ending Value Beginning Value

1 Number of Years

–1

Fundamental Analysis of Selected Public and Private Sector Banks in India

From Table 15 below, it can be noticed that CAGR in

Baroda. Punjab National Bank has the lowest CAGR in

Operating Profit Margin is highest for ICICI Bank.

Net Profit Margin, Return on Equity and Earnings per

CAGR in P/E Ratio and D/P Ratio is highest for Bank of

Share. CAGR in Dividend per Share is negative for all the banks.

Table 15 - Compound Annual Growth Rate SBI

BOB

PNB

HDFC

ICICI

OPM

-2.36

-7.55

-8.03

-0.83

7.94

NPM

2.53

-18.03

-18.57

5.42

2.93

ROE

-3.39

-17.64

-19.09

2.95

8.54

EPS

-31.47

-32.33

-34.78

-13.55

-15.49

P/E Ratio

-13.35

2.5

-1.77

-0.51

-6.59

DPS

-34.93

-27.97

-31.57

-13.48

-18.61

D/P Ratio

-5.46

7.06

5.46

0.07

-3.69

Source: Authors' compilation from Bank Markets Performance, http://moneycontrol.com

Porter's Five Forces Model

Indian banking industry. The major suppliers of capital

Bargaining Power of Buyer- In the banking industry,

are customer deposits, financial institutes and loans.

customers have a high bargaining power as there are a large number of banks available to provide the same

Competitive Rivalry – The Banking industry is facing a

services and customers can easily switch from one

high competition because of presence of public banks,

bank to another. As the growth of loans is declining,

private banks, foreign banks, co-operative banks and

banks have to attract more and more customers as well

regional rural banks. Further, a rise in mobile

as high profile customers by providing them better

commerce, emergence of cheaper internet access and

facilities at a low cost. The internet has greatly

increasing mobile penetration provided by different

increased the power of the consumer in the banking

service providers has increased the intensity of

industry. It has greatly increased the ease and reduced

competition. Banks must attempt to lure clients away

the cost for consumers to compare the prices of

from competitor banks. They do this by offering lower

opening/holding accounts as well as the rates offered

financing, higher rates, investment services, and

at various banks.

greater conveniences than their rivals. Banks need to provide the best and speedy services to retain and

Bargaining Power Of Supplier - Because of regulatory

expand customers.

standards of RBI, the banking industry has low bargaining power. Banks have to meet numerous

Availability of Substitutes – Plenty of substitutes are

regulatory standards stipulated by RBI. No other

available in the banking industry such as NBFCs,

business has had as much regulatory protection as the

mutual funds, government securities and T-bills. There

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Fundamental Analysis of Selected Public and Private Sector Banks in India

45

is also the threat of payment method substitutes and

3. The research paper studies the performance of

loans are relatively high for the industry. For example,

only five banks. The analysis can be further done

electronics sellers, jewellers, car dealers, and many

on the basis of categorization of the banking

more sellers tend to offer preferred financing on "big

industry into public sector, private sector and

ticket" items to the customers. Often, these non-

foreign banks.

banking companies offer lower interest rates on

4. This study is based on the analysis of secondary

payments than the consumer would otherwise get

data. The result and conclusion of this study might

from a traditional bank loan.

not be accurate due to reliability of the secondary data and limitation on the variables selected and

Threat of new entrants – Threat of new entrants is

the time span considered.

very low in the banking industry because of RBI

5. This study mainly focuses on selected independent

regulation. Besides, it is difficult to wean customers

variables, which may not completely represent the

away from existing banks, which have already built

financial analysis.

their credibility with them. Indian banking companies are challenged not only in

Conclusion

terms of loan recovery, but also with how to generate

This research paper provides insights on the financial

future business. With loans growth at a decade low,

performance of the selected banking companies. SBI

there is little choice for banks other than chasing the

scores the highest average in terms of Earnings per

retail customer, and laying the foundation to acquire

Share. Also, for SBI the CAGR is negative in all the

more when the economic expansion gathers pace. The

parameters except for Net Profit Margin. Bank of

boom in digital wallet transactions has been triggered

Baroda has positive CAGR in P/E Ratio and D/P Ratio.

by the rise in mobile commerce, emergence of cheaper

PNB has performed the best in Operating Profit

internet access and increasing mobile penetration.

Margin along with a positive CAGR only in D/P Ratio.

Another big challenge for the banking industry is

HDFC bank scores a higher average than others in Net

inadequate capital although the Government of India

Profit Margin, Return on Equity and P/E Ratio, and the

is taking the required steps to face this challenge by

highest CAGR in Net Profit Margin. ICICI Bank has the

infusing more capital.

highest CAGR in Operating Profit Margin and Return on Equity, and stands as the best performer in D/P

Limitations of the Study

Ratio.

1. This research paper studies only the quantitative aspect of the performance of selected banking

The selected public sector banks' Net Profit Margins

companies and does not study the qualitative

(NPMs) dropped after 2013 which has impacted their

aspects of performance like business models,

core profitability significantly. Given the improvement

competitive advantage, management, corporate

in assets, the public sector banks are likely to improve

governance etc.

their NPMs. Return on Equity for public sector banks

2. The study is limited to financial data for a period of 5 years from 2010-11 to 2014-15.

46

ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

dropped significantly after 2013. However, it is likely to improve as going forward, public sector banks' credit

Fundamental Analysis of Selected Public and Private Sector Banks in India

provisioning could decline if they are able to control

regulations and increase in competition from foreign

the NPA generation rate. Also, continuous decline in

banks. The Indian economy is on the brink of a major

G-sec yields and surge in equity markets could offer a

transformation, with several policy initiatives set to be

marginally higher treasury income to banks in the

implemented shortly. Positive business sentiments,

coming years. The past few years have seen a

improved consumer confidence and more controlled

slowdown because of high inflation, depreciation of

inflation are likely to boost the country's economic

the rupee and economic slowdown. However, private

growth. Greater spending on infrastructure, speedy

sector banks have still performed better than PSBs in

implementation of projects and continuation of

terms of growth and profitability. The current year is

reforms are expected to provide further impetus to

expected to be a good year for the entire Indian

growth. The banking sector is laying greater emphasis

Banking Sector. Although a series of challenges like

on providing improved services to their clients and also

deteriorating asset quality in public sector banks,

upgrading their technology infrastructure in order to

accompanying financial inclusion and Basel III

enhance the customer's overall experience as well as

implementation are all lingering issues, the sector is

give banks a competitive edge. The Indian banking

well-cushioned with a stable government focusing on

industry is expected to witness better growth

increasing investment in infrastructure, innovation in

prospects in 2016 due to the Government's measures

technology and bringing in productive regulatory

towards revitalizing the industrial growth in the

policies. Overall, the Indian Banking industry is

country. In addition, RBI's new measures may go a long

expected to consolidate in the current year in the wake

way in helping the restructuring of the domestic

of future economic growth, changes in banking

banking industry.

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http://www.ibef.org/industry/banking-presentation

Amanjot Kaur Sodhi is Assistant Professor at CBS, Chandigarh Group of Colleges, Mohali. She has done M.Com and has teaching experience of 14 years. Her area of specialization is Financial Management, Securities Analysis and Portfolio Management. Simran Waraich is Assistant Professor at CBS, Chandigarh Group of Colleges, Mohali. She is a postgraduate in Commerce, pursuing PhD in Strategic Management. She has 8 years of teaching experience and her area of specialization is Financial Management and Applied Operations Research.

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ISSN: 0971-1023 | NMIMS Management Review Volume XXVIII January-February 2016

Fundamental Analysis of Selected Public and Private Sector Banks in India