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ECONOMICS VALUE ADDITION

BY

PUBLIC AND PRIVATE SECTOR BANKS

IN INDIA

In partial fulfillment of requirement of two year fulltime Post Graduate Diploma in Management (2008-

2010)

of

Lal Bahadur Shastri Institute of Management

SUBMITTED TO:

Prof. Harish Handa

SUBMITTED BY:

Parveen Singh Gulia

Section-C (67/08F)


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PREFACE:

This report explains the concept of Economic Value Added that is

gaining popularity in India, found by the Stern & Stewart co. which can be

used by bankers to measure the financial performance of their bank.

The report studies Indian banks profile to demonstrate a direct

correlation between the investment in stakeholder relationships and corporate

performance. Many Indian banking seems to have destroyed shareholders

wealth over a period of time and only a few have positively contributed to their

wealth. With the help of EVA (Economic Value Added) which tell what the

institution is doing with investors hard earned money, the report examines an

appropriate way of evaluating banks performance and also finds out which

Indian banks have been able to create (or destroy) shareholders wealth since

2006-2007 to 2008-2009.

The overriding message of this report is that banks must always strive

to maximize shareholders value without which their stocks can never befancied by the market. This analysis helps us to dig below the surface

numbers to tell us more about the underlying business and whether there is a

prima facie case for using EVA as one of the range of performance

measurement tools.


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ACKNOWLEDGEMENT:

On the eve of completion and submission of grand project I would like

to express my deep sense of gratitude to Lal Bahadur Shastri Institute of

Management for providing us Platform of management studies.

I am immensely thankful to my guide Prof. Harish Handa for providing

me great insight into the project and for sparing his valuable time with me.

Without his co-operation it was impossible to reach up to this stage. We also

thankful to Faculty members for their moral support during the project.


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LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,

DELHI

Sector-3, R. K. Puram, Delhi

Dated

CERTIFICATE

Certified that _______________ has successfully completed Project

Study entitled ________________________________________

under my guidance. It is his / her original work, and is fit for evaluation

in partial fulfillment for the requirement of the Two Year (Full-Time)

Post Graduate Diploma in Management.

(Name of the Student (Name of

the Guide

with Signature) with

Signature)


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DECLARATION:

Me, Parveen Singh Gulia, the student of PGDM(Finance) declare that

the project titled "A Study On Economic Value Addition By Public and Private

Sector Banks" has been prepared based on the detailed literature review and

the sources benevolent to the study as shown in the bibliography, remarks,

analysis and interpretation in this project to prove the concept true as per law.

Date: Signature:

Place: Signature:


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TABLE OF CONTENTS:

Chapter 1: Project-An Introduction

1.1 Executive Summary

1.2 Introduction to Project

Chapter 2: Research Design

2.1 Research Objectives

2.2 Research Methodology

Chapter 3: Overview of Banking Industry

3.1 Overview of SBI, BOB, ICICI Bank and HDFC Bank

Chapter 4: Introduction to Economic Value Added

4.1 What is EVA?

4.2 Benefit of EVA for Banks

4.3 Limitation of traditional methods

4.4 Performance Measurement

4.5 EVA a superior performance measure

Chapter 5: Data Analysis and Interpretation

5.1 Net Operating Profit After Tax

5.2 Return On Invested Capital

5.3 Cost of Capital

5.4 Capital Charge

5.5 EconomicValue Added

Chapter-6: Conclusion and Findings

Bibliography

Annexures


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CHAPTER-1

PROJECT-AN

INTRODUCTION


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1.1 Executive Summary

A banks management creates value when it takes decisions that

provide benefits, in excess of costs. These benefits may come to banks in the

near or distant future depending on the strategies involved in decision making

process. The bankers of todays world therefore must be sensitive to two

fundamental drivers that drive shareholders wealth.

First, there must be an unrelenting focus to ensure that funds mobilized

by the banks (whether through depositors, equity or debt issues) generate

returns in excess of the cost of capital (or can reasonably be expected to do

so) with an eye toward returning non productive capital back to providers of

the capital or shareholders. Second, bankers should constantly seek to invest

in technology that increases their reach and also be open to strategic

alliances, mergers & acquisitions and restructuring.

The purpose of report is to examine an appropriate way of evaluating

banks performance and also see which Indian banks have been able tocreate (or destroy) shareholders wealth since 2005-2006.

To fulfill the purpose of creating shareholders value, firstly NOPAT has

to be calculated, our analysis shows that the public sector banks lead the

private banks when NOPAT is emphasized where SBI was in the front spot for

each year respectively as it is the leading bank of India

The Cost of Capital useful for identification of Capital charge for public

sector banks gave a clear indication of effectiveness in 2007-08 but had a

failure in each of the respective years of 2006-07 and 2005-06 where private

sector banks have the higher cost of capital.

The another factor is capital charge sustaining the impact that Private

Banks have a greater focus than public sector banks in each year

respectively. As being a private bank, they have to increase their image inmarket by giving higher return to their shareholders.


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The next area covered under the study was the calculation of EVA in

percentage terms. The EVA in percentage terms was higher for private banks

because the amount of invested capital is low compared to public sector

banks but in 2005-06, Public sector banks had a bit more effectivenesscompared to private banks due to higher NOPAT compared to private sector

banks.

The EVA in rupees terms was followed after the calculation of EVA in

Percentage terms and it was found to be higher for public sector banks

compared to private sector banks in each of the years due to their invested

capital gives higher return to public sector banks so as to generate a

consistent amount of NOPAT.

All the Banks under our analysis have been found economic value

creator for its shareholders throughout 3 years.

Finally, we met with a successful completion of our Grand Project

Report emphasizing the various concerns of EVA which did help us to

entertain a variety of interpretations and categories of business etiquettes and

compliances.


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1.2 Introduction to Project

Indian Banking has seen many changes in the last decade like

imposition of prudential standards, greater competition among banks,

entry of new private banks, etc. This paradigm shift in the Indian

banking sector can be seen in terms of two dimensions: One relates to

operational aspect especially performance and risk-management

system and the second dimension relates to structural and external

environment or exogenous aspects. Is evaluating Indian banks

performance a rather straight forward issue? The answer is no. One

might say that like a corporate, even banks can be judged from the

behavior of their stock prices. However, as bank stocks have not been

very active on exchanges, barring few on few occasions, should we

conclude that Indian banks have by and large failed to add values to

their shareholders wealth. The answer is once again no as one needs

to evaluate private and public sector banks in a more dynamic manner

than just looking at their stock prices, non-performing assets (NPAs),

C/D ratios and others. Some may also argue that the general slowdown

in lending by banks and their eternal problem of recovery of non

performing assets (NPAs) has led to the sufferings of Indian banks.

Many Indian banks are discovering that the key to their long-term

growth does not lie in products and services alone but in assets that can

never be replicated, that is, their unique relationship with customers,

employees, suppliers and distributors, investors and the communities

they serve. One of the most fateful errors bankers usually commit

relates to their belief that merely reducing NPAs and thereby

maximizing profit would solve the problem of banking industry. Not

only is this belief still held by most of the bankers in India - and therefore


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professionally unacquainted by the changing profile of their shareholders and

the capital market- it is held by virtually large number of myopic captains of

the industry. That things are not going as well as they ought to be going for

such banks could be due to economic recession, poor demand for credit,

rising manpower costs, political uncertainty, inefficient ways of doing

business. Or is it something else?

In order to help management understand their own economics and

arrive at value creating investment decision that adequately satisfies the two

sensitive factors mentioned earlier, bankers must understand the concept and

relevance of Economic Value Added (EVA)., a period based measure of

value creation. EVA provides a unique insight into value creation and links

theory of finance with the competitive strategy framework as enumerated by

Michael Porter. EVA is also a quantifiable driver of value creation for the stock

markets. Large number of International banks (such as Citibank, Deutsche

Bank, Barclays, ABN AMRO) use value based frameworks such as EVA to

run their banking operations. Although EVA an a yardstick in India may be at

an evolving stage, banks like HDFC Bank, ICICI Bank etc. have gradually

started adapting such measure to cater to the increasingly discerning investor

base.

A banks management creates value when it takes decisions that

provide benefits, in excess of costs. These benefits may come to banks in the

near or distant future depending on the strategies involved in decision making

process. The bankers of todays world therefore must be sensitive to two

fundamental drivers that drive shareholders wealth.

First, there must be an unrelenting focus to ensure that funds mobilized by the

banks (whether through depositors, equity or debt issues) generate returns in

excess of the cost of capital (or can reasonably be expected to do so) with an


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eye toward returning non productive capital back to providers of the capital or

shareholders. Second, bankers should constantly seek to invest in technology

that increases their reach and also be open to strategic alliances, mergers &

acquisitions and restructuring.

In the same context it is worth considering that the capital mobilized by

banks earns a satisfactory return. While it is true that substantial amount of

value creation for a bank or corporate takes place from less than half of the

capital employed, it proves that the entity can unlock huge amount of capital

employed for adding to the value for the shareholders. The second point

mentioned earlier, a necessary corollary to the first point, emphasizes on theimportance of investing in value creating projects and strategies.

It implies criticality of the fact that bankers must remain sensitive to all

such balance sheet items that add value either through mergers or

acquisitions or simply through restructuring, re-capitalization or any other

method such as sell-off of unproductive assets. Further, banks management

must be able to differentiate between projects and strategies. While projects

are generally viewed financially from NPV or IRR point of view, they may not

really convey the fact that whether value is being added to the shareholders.

For example, what distinguishes HDFC Bank, the new futuristic bank

from other savvy banks is its position in the new e-economy. The anywhere-

anytime bank is not averse of accepting the fact that customer is the king

and the bank has to tailor its products as per his requirements even if the

new product has a negative NPV as its alternative strategy of doing nothing

may only destroy value for HDFC Bank. Having established a massive base of

customers and holding extensive information about them, banks such as ICICI


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Bank and HDFC Bank have already made major head start. They are now all

set to leverage these assets. As we all know the Internet has already started

radically affecting fundamental structures of even Indian banks, not only in

retail operations, but in many other areas including private banking. Thebankers in the new millennium therefore must attempt to make investment in

strategies and not merely remain confined to borrowing and lending. They

should now play a role of financial service providers for increasing their

shareholders value.


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CHAPTER-2

RESEARCH DESIGN


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2.1 Research Objectives

This report aims to study the selected banks performance evaluation

and to demonstrate a direct correlation between the investment in stakeholder

relationships and corporate performance. EVA (Economic Value Added) tells

what the institution is doing with investors hard earned money. If we look at the

Indian banking industry, many of them seem to be destroying shareholders

wealth and only a few have positively contributed to wealth for its shareholders.

The purpose of report is to examine an appropriate way of evaluating

banks performance and also see which Indian banks have been able to create

(or destroy) shareholders wealth since 2005-2006. The overriding message of

this report is that banks must always strive to maximize shareholders value

without which their stocks can never be fancied by the market. Banks which

shrug off this as a trivial matter, they do so only at their own peril.

To study the shareholders value (in terms of Economic Value Added) of

selected banks during the last three years. I.e. since 2005-06 to 2007-08.

To learn about the business policies and practices of increasing the

value of organization.

To learn EVA and its applications to increase the shareholders wealth.

To measure a banks historical success in creating values

To study the determining factors which affects the future performance of

banks stock

To examine the excess returns in future and its impact on the value of

the banks.


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2.2 Research Methodology

RATIONALE OF THE STUDY

Being Finance Management Students, we have four decisive fields i.e.

Manufacturing, Financial Services, Stock Markets and Banks where we find

opportunity to prepare our grand project.

We have prepared our comparative report on Banking. We have used

EVA tool to measure the economic value of the public and private sector banks

i.e. SBI, BOB, ICICI Bank and HDFC. To acquire the knowledge of Banking

Sector and how their shares perform we have prepared our report on Banks.

By gaining the knowledge of EVA a measure of economic soundness, we can

use it in every fields of finance.

METHODS OF COLLECTION OF DATA

The study is mainly based on secondary data, all the data of four Indian

public and private sector banks i.e. SBI, BOB, ICICI Bank and HDFC Bank that

are listed on the National Stock Exchange are collected from respective annual

reports, publications of RBI and from the various websites.

TOOLS AND TECHNIQUES OF ANALYSIS

The data from the reports have been analyzed by using various tools

and techniques with a view to evaluate the performance of the banks. We have

calculated following indicators for conducting overall analysis on 4 banks

financial performance between 2005-06 to 2008-09


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Net Operating profit after (Net Profit + Provisions and contingencies + Interest onTaxes (NOPAT) Borrowings) less (Taxes)

Incremental NOPAT NOPAT (t) NOPAT (t-1)

Invested capital Total equity & Reserves + Total borrowings

Incremental Invested capital Invested capital (t) Invested Capital (t-1)

Return on invested capitalNOPAT / Invested capital

(ROIC)

Beta ( ) nxy - (x) (y) nx2

- (x)2

Cost of Equity (Ke) Rf + ( Rm - Rf )

Cost of Debt (Kd) (Interest Expense - Interest on Deposit) / Total Borrowings

Weighted Average Cost ofWeighted cost of Equity + Weighted cost of Debt

capital (WACC)

Economic Value Added (EVA(ROIC WACC)

in %)

Economic Value Added (EVANOPAT - (WACC Invested Capital)

in Rs.)

Incremental EVA EVA (t)- EVA (t-1)

LIMITATION OF THE STUDY

The analysis was purely based on the secondary data. So, any error inthe secondary data might also affect the study undertaken.

With regard to the estimation of EVA for banks, one important

difference between financial institution and other firms is the role of debt. For

non banking firms debt forms an integral part of financing operations and

therefore interest expense/income is excluded from NOPAT calculations so

that returns are unlevered. Debt (including deposits) does off course help

finance a banks assets but financial institutions are different at least in two


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Deposits are value generating in themselves, or can be, since they

usually represent funding a below market costs (that is it would be incorrect to

calculate the value of whole enterprise and arrive at the value of the equity

simply by excluding the liabilities). A banks debt funding is effectively the rawmaterial which is intermediated (manufactured) into high yielding assets.

Interest expense, on this view is the equivalent of the cost of goods sold.

The above has two consequences.

I. Interest expense on deposit is included in NOPAT and, because of this,

II. When calculating the cost of capital we define capital as equity & reserves

and borrowings.


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CHAPTER-3

OVERVIEW OF BANKING

INDUSTRY

3.1 Overview of Banking

The major participants of the Indian financial system are the commercial


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market intermediaries such as the stock brokers and money-lenders. The

commercial banks and certain variants of NBFCs are among the oldest of the

market participants. The FIs, on the other hand, are relatively new entities in

the financial market place.

Bank of Hindustan, set up in 1870, was the earliest Indian Bank.

Banking in India on modern lines started with the establishment of three

presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta,

Bank of Bombay and Bank of Madras. In 1921, all presidency banks were

amalgamated to form the Imperial Bank of India. Imperial bank carried out

limited central banking functions also prior to establishment of RBI. It engaged

in all types of commercial banking business except dealing in foreign

exchange.

Reserve Bank of India Act was passed in 1934 & Reserve Bank of India

(RBI) was constituted as an apex bank without major government ownership.

Banking Regulations Act was passed in 1949. This regulation brought Reserve

Bank of India under government control. Under the act, RBI got wide ranging

powers for supervision & control of banks. The Act also vested licensing

powers & the authority to conduct inspections in RBI.

In 1955, RBI acquired control of the Imperial Bank of India, which was

renamed as State Bank of India. In 1959, SBI took over control of eight privatebanks floated in the erstwhile princely states, making them as its 100%

subsidiaries.RBI was empowered in 1960, to force compulsory merger of weak

banks with the strong ones. The total number of banks was thus reduced from

566 in 1951 to 85 in 1969. In July 1969, government nationalised 14 banks

having deposits of Rs.50 crores & above. In 1980, government acquired 6

more banks with deposits of more than Rs.200crores.Nationalisation of banks

was to make them play the role of catalytic agents for economic growth.The

Narsimham Committee report suggested wide ranging reforms for the banking

sector in 1992 to introduce internationally accepted banking practices.

State Bank of India

The State Bank of India, the countrys oldest Bank and a premier in

terms of balance sheet size, number of branches, market capitalization and

profits is today going through a momentous phase of Change and

Transformation the two hundred year old Public sector behemoth is today

stirring out of its Public Sector legacy and moving with an agility to give the


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Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile

Banking, Point of Sale Merchant Acquisition, Advisory Services, structured

products etc each one of these initiatives having a huge potential for growth.

The Bank is forging ahead with cutting edge technology and innovative

new banking models, to expand its Rural Banking base, looking at the vast

untapped potential in the hinterland and proposes to cover 100,000 villages in

the next two years.

It is also focusing at the top end of the market, on whole sale banking

capabilities to provide Indias growing mid / large Corporate with a complete

array of products and services. It is consolidating its global treasury operationsand entering into structured products and derivative instruments. Today, the

Bank is the largest provider of infrastructure debt and the largest arranger of

external commercial borrowings in the country. It is the only bank to feature in

the Fortune 500 list.

The Bank is changing outdated front and back end processes to modern

customer friendly processes to help improve the total customer experience.

With about 8500 of its own 10000 branches and another 5100 branches of its

Associate Banks already networked, today it offers the largest banking network

to the Indian customer. The Bank is also in the process of providing complete

payment solution to its clientele with its over 8500 ATMs, and other electronic

channels such as Internet banking, debit cards, mobile banking, etc.


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Bank of Baroda

Bank of Baroda, a leading banking institution in India, has a wide range

of products for almost every user segment. The Bank has classified its range of

products into six lines of business (Personal, Business, Corporate,

International, Treasury and Rural).

The bank has had a web presence for some time however to tap the

potential of the online medium remained a daunting task. The Bank also faced

several issues regarding management of database that was being generated

through use of the website.

Moreover the ability of the online medium to be used as a marketing

vehicle was a territory never visited. The look & feel lacked human touch and

the six lines of business were lost between excessive irrelevant information.

The website failed to educate the users about the Banks impressive

international presence and new age products such as credit cards, debit cards,

fund transfers, etc.

Thus a sound overall flow of content to provide the user with reader-

friendly content, centralization of database to eliminate data replication, a

pleasing look and feel of international repute, a human approach, better

functionality of tools and the right exposure to important areas formed the core

objectives of the new proposed website

Bank of Baroda is the sixth largest bank in India. It has total assets in

excess of Rs. 1.78 lakh crores, or Rs. 1,780 bn., a network of over 2800

branches and offices, and about 1000+ ATMs. Bank of Baroda offers a wide

range of banking products and financial services to corporate and retail

customers through a variety of delivery channels and through its specialised

subsidiaries and affiliates in the areas of investment banking, credit cards and

asset management. Maharajah of Baroda Sir Sayajirao Gaekwad III founded

th b k J l 20 1908 i th i l t t f B d i G j t Th b k


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In its international expansion Bank of Baroda followed the Indian

diaspora, and especially that of the Gujaratis. It has significant international

presence with a network of 72 offices in 25 countries, six subsidiaries, and four

representative offices. Among Bank of Baroda's 42 overseas branches are

ones in the worlds major financial centers i.e. New York, London, Dubai, Hong

Kong (which it has upgraded recently), Brussels and Singapore, as well as a

number in other countries. The bank is engaged in retail banking via 17

branches of subsidiaries in Botswana, Guyana, Kenya, Tanzania, and Uganda.

Bank of Baroda also has a joint-venture bank in Zambia with nine branches.


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ICICI Bank

ICICI Bank is India's second-largest bank with total assets of Rs.

3,744.10 billion (US$ 77 billion) at December 31, 2008 and profit after tax

Rs. 30.14 billion for the nine months ended December 31, 2008. The

Bank has a network of 1,416 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, 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. Our UK subsidiary has established branches in Belgium and

Germany.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an

Indian financial institution, and was its wholly-owned subsidiary. ICICI's

shareholding in ICICI Bank was reduced to 46% through a public offering

of shares in India in fiscal 1998, an equity offering in the form of ADRslisted on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of

Madura Limited in an all-stock amalgamation in fiscal 2001, and

secondary market sales by ICICI to institutional investors in fiscal 2001

and fiscal 2002. ICICI was formed in 1955 at the initiative of the World

Bank, the Government of India and representatives of Indian industry.

After consideration of various corporate structuring alternatives in

the context of the emerging competitive scenario in the Indian banking


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Bank would be the optimal strategic alternative for both entities, and

would create the optimal legal structure for the ICICI group's universal

banking strategy. The merger would enhance value for ICICI

shareholders through the merged entity's access to low-cost deposits,

greater opportunities for earning fee-based income and the ability to

participate in the payments system and provide transaction-banking

services. The merger would enhance value for ICICI Bank shareholders

through a large capital base and scale of operations, seamless access to

ICICI's strong corporate relationships built up over five decades, entry

into new business segments, higher market share in various business

segments, particularly fee-based services, and access to the vast talent

pool of ICICI and its subsidiaries. In October 2001, the Boards of

Directors of ICICI and ICICI Bank approved the merger of ICICI and two

of its wholly-owned retail finance subsidiaries, ICICI Personal Financial

Services Limited and ICICI Capital Services Limited, with ICICI Bank.

The merger was approved by shareholders of ICICI and ICICI Bank in

January 2002, by the High Court of Gujarat at Ahmedabad in March

2002, and by the High Court of Judicature at Mumbai and the Reserve

Bank of India in April 2002. Consequent to the merger, the ICICI group's

financing and banking operations, both wholesale and retail, have been

integrated in a single entity.


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HDFC Bank

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 office in Mumbai, India. HDFC Bank commenced operations as a

Scheduled Commercial Bank in January 1995.

HDFC Bank Ltd. is a commercial bank of India, incorporated in August

1994, after the Reserve Bank of India allowed establishing private sector

banks. The Bank was promoted by the Housing Development Finance

Corporation, a premier housing finance company (set up in 1977) of India.

HDFC Bank has 1,500 branches and over 2,890 ATMs, in 530 cities in India,

and all branches of the bank are linked on an online real-time basis. As of

September 30, 2008 the bank had total assets of INR 1006.82 billion.

In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total

branches to more than 1,000. Though, official license was given to Centurion

Bank of Punjab branches, to continue working as HDFC branches, on May 23,

2008.

The financial performance during the fiscal year 2007-08 remained

healthy with total net revenues (net interest income plus other income)increasing by 50.7% to Rs. 7,511.0 crores from Rs.4,984.7 crores in 2006-07.

The revenue growth was driven principally by an increase in net interest

income. Net interest income grew by 50.7% primarily due to increase in the

average Balance sheet size by 39.8% and an increase in net interest margin

from 4.0% to around 4.4%. The key driver in volumes was growth in advances.

Margin expansion was contributed by increase in yields across all products

partially offset by increase in time deposit costs.


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CHAPTER-4

INTRODUCTION TO EVA


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4.1 What is EVA?

EVA is the invention of Stern Stewart & Co., a global consulting firm,

which launched EVA in 1989. EVA is Economic Value Added, a measure of

economic profit. It is calculated as the difference between the Net Operating

Profit After Tax and the opportunity cost of invested Capital. This opportunity

cost is determined by the weighted average cost of Debt and Equity Capital

(WACC) and the amount of Capital employed.

EVA = NOPAT (Net Operating Profit After Tax) Opportunity Cost of

Invested Capital

Opportunity Cost of Invested Capital = Capital Invested X WACC

What separates EVA from other performance metrics such as EPS,

EBITDA, and ROIC is that it measures all of the costs of running a business-

operating and financing. This makes EVA the soundest performance metric,

and the one most closely aligned with the creation of shareholder value. In fact

EVA and Net Present Value arithmetically tie, so companies can be assuredthat increasing EVA is always a good thing for its investors-certainly not the

case with EPS or Free Cash Flow. Many even argue that EVA is a better

decision tool than NPV because it captures the period-by-period value creation

or destruction of a given firm or investment, and makes it easy to audit

performance against management projections.

Given the usefulness of the measure, many companies haveadopted it as part of a comprehensive management and incentive system that

drives their decision processes. They strive to increase their EVA by:

Increasing the NOPAT generated by existing Capital

Reducing the WACC

Investing in new projects where the Return exceeds the WACC

Divesting Capital where the Return is below the WACC


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A banks invested capital multiplied by WACC gives the minimum level

of operating profits the bank should generate to satisfy shareholders. EVA

measures how much net operating profit (adjusted for tax and also called

NOPAT) exceeds the capital charge. Mathematically, EVA can be estimated

focusing both on Management of Capital as well as the Management of Profits.

A banks present value should equal its invested capital plus the present

value of future EVA and if the banks present value is lower, the stock is

undervalued and vice versa. Value of a banks share is also said to equal the

market value of assets and the sum of EVAs of all future periods discounted

back to the present. A bank once it reaches a period when it no longer earns

when it no longer earns a return on its incremental investments greater than its

cost of capital, from this period onward no EVA is added or destroyed from new

investments. While competitive forces are likely to drive returns to WACC for

Indian banks, the emergence of indifference vary from bank to bank and is

determined by several factors such as industry structure, a banks position in

the industry, capital spending for strategic investments etc.

A banks invested capital multiplied by WACC gives the minimum level

of operating profits the bank should generate to satisfy shareholders. EVA

measures how much net operating profit (adjusted for tax and also called

NOPAT) exceeds the capital charge. Mathematically, EVA can be estimated

focusing both on Management of Capital as well as the Management of Profits.


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EVA (As a measure of value creation through Management of

Profits)

EVA (As a measure of value creation through Management of

Capital

EVA = NOPAT (WACC X Total Capital Invested)

The use of this formula will produce either a positive or negative EVA

number. A positive EVA reflects that the company is increasing its value to its

shareholders, whereas a negative EVA reflects that it is diminishing its value to

its shareholders. EVA is based on the principle that since a companys

management employs equity capital to earn a profit, it must pay for the use of

this equity capital. Including a cost for the use of equity capital sets EVA apart

from more popular measures of bank performance, such as return on assets

(ROA), return on equity (ROE) and the efficiency ratio, which do not consider

the cost of equity capital employed. As a result, these measures may suggest a

bank is performing well, when in fact it may be diminishing its value to

shareholders.


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4.2 Benefits of EVA system for Banks

As banks become capital hungry to meet their growth expectations and

simultaneously meeting the regulatory requirements in the Basel-II era, they

would have to remain responsive to the expectations of the market on a risk

adjusted basis to ensure continued supply of financial capital from the

shareholders and human capital from the ultimate stakeholders.

One of the fundamental limitations in the existing business growth

strategies of Indian banks, especially public sector banks, is its virtual, if not

complete, disconnect with riskiness. Profit rich but Risk poor strategies are

doomed for failure in the long-run!

Finalization of business targets should no longer remain a mundane

volume-mix targeting exercise but should built-in inherent risk-return

dimensions. Business strategies that ensure Risk & Return by Choice and not

by Chance are key to ensure continuing success of banks in the emerging

market.

In order to align the performance of individual zones/regions/branches to

the overall corporate expectations in terms of EVA, the vocabulary of risk

management has to percolate down the hierarchy of banks to the individual unit

level. New performance benchmarks in the form of EVA should naturally form

the unifying cord/link in every bank.

EVA can be an important tool that bankers can use to measure and

improve the financial performance of their bank. Since EVA takes the interestof the banks shareholders into consideration, the use of EVA by bank

management may lead to different decisions than if management relied solely

on other measures.

As mentioned earlier an important difference between banks and others

is the role of debt. For other firms debt is a part of the financing operations and

interest expenses are excluded from Net Operating ProfitAfter Taxes (NOPAT)

so that returns are unlevered. A banks debt funding is effectively the raw


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consequence. In our analysis NOPAT for each year was therefore arrived at

after adding interest on RBI loans and other loans to Profit before Depreciation

and Taxes less Cash Taxes. The component of cash taxes represented as if

banks were debt free. In order to calculate cash taxes, tax shield on the interest

paid on RBI loans and others were added back to Tax Provision and tax paid

on other incomes were deducted from tax provision of the year. A tax rate of 30

percent per year was assumed for maintaining consistency over years in our

analysis.

The economic capital of a bank is defined as the shareholders funds

plus reserves excluded from equity, such as loan losses or contingency reserve

which in economic terms, function as capital. In this fund total long term

borrowings of the bank are added to arrive at the Invested Capital (IC). In our

analysis we have first attempted to critically evaluate banks performance in

generating Return on Invested Capital (ROIC) over years, we have taken two

most critical indicators viz. Return on Invested Capital (ROIC) and Incremental

ROIC.


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4.3 Limitations of Traditional Methods

Most of the accounting based measures such as Price: Earnings, Book

Value, Returns on Equity, Return on Net worth etc. fail to provide a clear

understanding of the major variables that drive value, except to some extent

Returns on Invested Capital. These methods are easily influenced by the smart

and perhaps mischievous management through window dressings. They also

do not incorporate risk or time value of money also and do not help investors

understand the intricate process of value creation. In addition, these traditional

measures use, for most part, historical data to measure current performance.

Ideally, one would like to measure how current decisions will affect the firms

future performance.

Unlike accounting measures, Economic Value Added, raises the issue

highlighted in the Nobel Prize work of Franco Modigliani and Merton Miller: just

as debt holders of a bank expect a specific return, the shareholders of the

bank, expect a certain rate of return for taking risk of investing in the bank.


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4.4 Performance Measurement

Investors measure overall performance of a bank as a whole to decide

whether to invest in the bank or to continue with the bank or to exit from it. In

order to achieve goal congruence, managers compensation is often linked with

the performance of the responsibility centers and also with bank-performance.

Therefore selection of the right measure is critical to the success of a bank. To

measure performance of a bank we need a simple method for correctly

measuring value created / enhanced by it in a given time frame. All the current

metrics trade off between the precision in measuring the value and its cost of

measurement. In other words, each method takes into consideration the degree

of complexities in quantifying the underlying measure. The more complex is the

process, the more is the level of subjectivity and cost in measuring the

performance of the bank.

There is a continuous endeavor to develop a single measure that

captures the overall performance, yet it is easy to calculate. Each metric of

performance claims its superiority over others. Performance of a bank is

usually measured with reference to its past record and the performance of

other banks with comparable risk profile. The various performance metrics

currently in use are based on the returns on investment generated by the

business entity. Therefore to reach a meaningful conclusion, returns generated

by the bank in a particular year should be compared with returns generated by

assets with similar risk profile (cross sectional analysis). Similarly return on

investment for the current period should be compared with returns generated inpast (time series analysis). A bank creates value only if it is able to generate

return higher than its cost of capital. Cost of capital is the weighted average

cost of equity and debt (WACC).

The performance of a bank gets reflected on its valuation by the capital

market. Market valuation reflects investors perception about the current

performance of the bank and also their expectation on its future performance.

They build their expectations on the estimated growth of the bank in terms of

f


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for any metric of performance to be effective, it should be able to not only

capture the current performance, but also should be able to incorporate the

direction and magnitude of future growth. Therefore the robustness of a

measure is borne out by the degree of correlation the particular metric has withrespect to the market valuation.

Metrics of performance have a very important and critical role not only

in evaluating the current performance of a bank but also in achieving high

performance and growth in the future. The metrics of performance have a

variety of users, which include all the stakeholders whose well being depends

on the continued well being of the bank. Principal stakeholders are the equityholders, debt holders, management, and suppliers of material and services,

employees and the end-users of the products and services. Value creation and

maximization depends on the alignment of the various conflicting interests of

these stakeholders towards a common goal. This means maximization of the

bank value without jeopardizing the interests of any of the stakeholders. Any

metric, which measures the bank value without being biased towards any of the

stakeholders or particular class of participants, can be hailed as the true metric

of performance .However it is difficult, if not impossible, to develop such a

metric. Most of the conventional performance measures directly relate to the

current net income of a business entity with equity, total assets, net sales or

similar surrogates of inputs or outputs. Examples of such measures are return

on equity (ROE), return on assets (ROA) and operating profit margin. Each of

these indices measure a different aspect of performance, ROE measures the

performance from the perspective of the equity holders, ROA measures the

asset productivity and operating profit margin reflects the margin realized by

the bank at the market place. The net income figure in itself is dependent on

the operational efficiency, financial leverage and the ability of the entity to

formulate right strategy to earn adequate margin in the market place.

It is important to note that none of these measures truly reflect the

l t i t b th l b t h t b i j ti ith th


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used by accountants in measuring assets, liabilities and income of the bank.

Accounting valuation methods are in variance with the methods that are being

used to value individual projects and banks. The value of an asset or a bank,

which is a collection of assets, is computed by discounting future stream ofcash flows. The net present value (NPV) is the surplus that the investment is

expected to generate over the cost of capital. Measures of periodical

performance of a bank, which is the collection of assets in place, should follow

the same underlying principles. Economic value added (EVA) is a measure that

captures the valuation principles.


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4.5 EVA a Superior Performance Measure

First let us look into the claim of EVA being superior than the

conventional measures such as ROI, ROE and ROA, which are based on the

accounting figures. Most of these measures give us the rate of return earned by

the bank with respect to capital invested in the bank. The most important

limitation of these measures are derived from limitations inherent in the

measurement of accounting profit. As per current accounting practices, while

historical-cost-based accounting measures are being used to carry most of the

assets in the balance sheet, revenue and expenses (other than depreciation)

are recognized in the profit and loss account at their current value. Therefore

accounting rate of returns do not reflect the true return from an investment and

tend to be biased downwards in the 10 initial years and upwards in the latter

years. Similarly as noted by Malkelainen (Esa Malkelainen 1998), distortion

occurs basically due to the historical cost and straight line depreciation

schedule used by most businesses to value their assets. This leads to a bias in

these measures due to the composition of assets of a bank at any given point

in time. By composition he refers to the current nature of the assets, more

current the assets are, the accounting rate of return is closer to the true rate of

return. This distortion will not be significant if there is a continuous stream of

investments in assets i.e. the value of the mix of assets is nearer to the current

value of the assets. But the probability, that at any point of time, a bank should

have such a composition of assets is rare, in most cases either the assets are

old or relatively new. This precludes these accounting measures from being

used to reach any meaningful conclusion regarding the true performance of the

bank.

The other important limitation of accounting measures is that they ignore

the cost of equity and only consider the borrowing cost. As a result it ignores

th i k i h t i th j t d f il t hi hli ht h th th t i


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selecting projects that produce attractive rate of return but destroys bank value

because their cost of capital is higher than the benchmark return established by

the management. On the other hand accounting measures encourage

managers to select projects that will improve the current rate of return and to

ignore projects even if their return is higher than their cost of capital. Selection

of projects with returns higher than the current rate of return does not

automatically increase shareholders wealth. Taking up only those projects,

which provide returns that are higher than the hurdle rate (cost of capital)

results in increasing the wealth of the shareholder. Therefore use of ROE, ROA

or similar accounting measures as the benchmark, might result in selection of

those projects that though provide rate of return higher than the current rate of

return destroys bank-value. Similarly use of these measures result in continuing

with activities that destroys bank value until the rate of return falls below the

benchmark rate of return.

EVA proponents claim that because of these imperfections, theaccounting based measures are not good proxies for value creation.

Managerial compensation based on these measures does not encourage value

enhancement actions by managers. Value enhancement and earnings are two

different things and might be at cross-purposes because short-term

performance might be improved at the cost of long term health of the bank.

Activities involving enhancement of current earnings may be short term in

nature, whereas any value enhancing activities should focus on long term well

being of the bank. Avoidance of discretionary costs improves current

performance while destroying value of the bank.

The question arises whether EVA is an improvement over conventional

measures and serves the purpose of motivating managers to pay attention to

shareholders value even if that results in compromising current performance.

The answer may be negative because all the above limitations are also

associated with EVA. As shown in equation, the calculation of EVA entails the


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incorporation of the cost of equity capital is the virtue of EVA, because it

measures economic surplus, it does not remove the limitations of the

accounting profit that forms the basis for computing EVA. Moreover the virtue

might not be realized in practice since it is not easy to calculate the cost of

equity. Market returns cannot be used as a proxy for cost of equity that

supports assets in place because market discounts the expectations. Similarly

it is difficult to use CAPM in measuring cost of equity because it is difficult to

measure risk-free-rate of return, beta and market premium. Difficulties get

compounded in an economic environment like India, where interest rates

fluctuate frequently, the capital market is volatile and the regulators are yet to

have a complete grip on the capital market to enhance its efficiency. Empirical

studies show that the volatility in the Indian capital markets, like capital markets

in other developing economies, is higher than capital markets in developed

economies. Therefore even if for the sake of argument it can be said that the

potential of EVA as a measure of performance can be realized fully in an

advanced economy, the argument that EVA is a better measure is not tenable

in the Indian context.


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CHAPTER-5

DATA ANALYSIS

ANDINTERPRETATION


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As per the above tables, the following interpretation has been made.

Comparing all the four esteemed Banks for analysis, we can prelude

that State Bank of India leads the race by holding the highest Net Operating

Profit After Tax of 12574 crores in 2008-09 for both Public Sector and Private

Sector Banks whereas ICICI stood second with 10035 crores in 2008-09 in

the overall competition but first when Private Sector Banks were concerned.

HDFC stood third in the race with an overall net operating profit after tax of

2988 crores in 2008-09 keeping BOB at the last stage with an overall net

operating profit after tax of 2468 crores in 2008-09.

Even when years 2007-08 and 2006-07 were taken, same was theresult with State Bank of India holding the top spot in overall context and ICICI

in private sector concerns.


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Incremental NOPAT

The Incremental NOPAT shows the change in the overall NOPAT in the

year 2008-09 when compared to 2007-08.

NOPAT (t) NOPAT (t-1)

3,500

3,0003,139

2,5002,625

2,0002,055

1,500

1,000

854500

490469 4070-406

-500

-1,0002008-09 2007-08

SBI 3,139 -406

BOB 469 407

ICICI 2,625 2,055

HDFC 854 490

We can adjudicate that the NOPAT for SBI gave an increment of 3139

crores in 2008-09 with the comparison of its NOPAT of 2007-08 taking SBI at

the prime stage of competition. But the case was reverse in 2007-08 when the

NOPAT of SBI gave a decrement of -406 crores making it fell to the 4 th slope

in the race.

But the remaining three banks have always shown constant growth in

their performances where ICICI bank lead the 2nd spot in 2008-09 with an

incremental NOPAT of 2625 crores and 1st spot in 2007-08 with an

incremental NOPAT of 2055 crores. BOB and HDFC have too shown an

immense contribution in the incremental value for the firm


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Invested Capital

The invested capital includes Total Equity and Reserves and borrowings

excluding Total Deposits because these are the prime essentials for

undermining the operations of a business unit.

Total equity & Reserves + Total borrowings

120,000 112,468

100,000100,760

80,000

60,000 71,002 75,91961,078

40,00058,285

20,00014,971 15,976 9,248 12,646 8,158

09,793

2008-09 2007-08 2006-07

SBI 100,760 71,002 58,285

BOB 14,971 9,793 12,646

ICICI 112,468 75,919 61,078

HDFC 15,976 9,248 8,158

From the above curriculum, we can proclaim that ICICI Bank has made the

highest Capital Investment each time in comparison with other banks with an

investment of 112468 crores in 2008-09, 75919 crores in 2007-08 and 61078

crores in 2006-07.

Whereas SBI holds the second spot, HDFC holds the third spot and

BOB holding the fourth spot in 2008-09. For 2007-08 and 2006-07, SBI did

hold the second spot again with BOB holding the third spot and HDFC holding

the fourth spot each respective year.


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Incremental Invested Capital

The incremental Invested capital determines the overall change in the

invested capital as compared to the previous year.

Invested capital (t) Invested Capital (t-1)

40,000

35,00036,549

30,00029,758

25,000

20,000

15,00014,841

10,00012,717

5,000 6,7285,178 1,0900 -2,853

-5,0002008-09 2007-08

SBI 29,758 12,717

BOB 5,178 -2,853

ICICI 36,549 14,841

HDFC 6,728 1,090

Forecasting the above analysis, we can sort out that ICICI bank holds

the key position with an incremental capital glance of 36549 crores in 2008-09

and 14841 crores in 2007-08 respectively. SBI stood second each time with

an incremental capital glance of 29758 crores and 12717 crores in 2007-08

and 2007-08 respectively. HDFC holds the third position in 2007-08 and 2007-

08 respectively. But the performance of BOB deteriorated drastically in the

economy when it suffered a decrement of 2853 crores in 2007-08 but covered

marginally and took it capital increment base to 5178 crores in 2008-09.


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5.2 Return on invested capital

The return on invested capital signifies the return that the firm earns on the

capital invested for a given period of time.

NOPAT / Invested capital

2008-09 2007-08 2006-07

Capital Capital Capital

N O P A T Employed N O P A T Employed N O P A T Employed

S B I 12,574 100,760 9,435 71,002 9,841 58,285

B O B 2,468 14,971 1,999 9,793 1,592 12,646

IC ICI 10,035 112,468 7,410 75,919 5,355 61,078

H D F C 2,988 15,976 2,134 9,248 1,644 8,158

ROIC

2008-09 2007-08 2006-07

S B I 0.12 0.13 0.17

B O B 0.16 0.20 0.13

IC ICI 0.09 0.10 0.09

H D F C 0.19 0.23 0.20

0.25

0.20.23

0.190.2 0.2

0.150.16

0.17

0.1 0.120.13 0.13

0.090.1

0.09

0.05

0 2008-09 2007-08 2006-07

SBI 0.12 0.13 0.17

BOB 0.16 0.2 0.13

ICICI 0.09 0.1 0.09

HDFC 0.19 0.23 0.2


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2008-NIFTY (X ) SBI (Y)

B ET AC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE X2 X Y2009 (b)

PRICE (Rs.) (%) PRICE (Rs.) (%)

Mar 3,821.55 970.17

A p r 4,087.90 266.35 6.97 1,075.00 104.83 1 0.8 1 4 8.5 8 75.31

May 4,295.80 207.90 5.09 1,320.60 245.60 2 2.8 5 2 5.8 6 116.19

J u n 4,318.30 22.50 0.52 1,504.36 183.76 13.91 0.27 7.29J u l 4,528.85 210.55 4.88 1,601.03 96.67 6.43 23.77 31.33

A u g 4,464.00 -64.85 -1.43 1,573.57 -27.46 -1.72 2.05 2.46

S ep 5,021.35 557.35 12.49 1,929.55 355.98 22.62 155.89 282.450.91

O ct 5,900.65 879.30 17.51 2,051.76 122.21 6.33 306.64 110.91

N ov 5,762.75 -137.90 -2 .34 2,272.61 220.85 10.76 5.46 -25.16

D ec 6,138.60 375.85 6.52 2,331.77 59.16 2.60 42.54 16.98

Jan 5,137.45 -1,001.15 -16.31 2,134.58 -197.19 -8.46 265.99 137.92

Feb 5,223.50 86.05 1.67 2,059.45 -75.13 -3.52 2.81 -5.90

Mar 4,734.50 -489.00 -9 .36 1,585.40 -474.05 -23.02 87.64 215.49

26.21 59.61 967.50 965.27

2007-

N I F T Y ( X ) S B I (Y )

B E T AC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE X2 X*Y2008 (b)


Mar 3,402.55 927.01

A p r 3,508.10 105.55 3.10 853.17 -73.84 -7.97 9.62 -24.71

May 3,185.30 -322.80 -9.20 823.40 -29.77 -3.49 84.67 32.11

J u n 3,128.20 -57.10 -1.79 709.98 -113.42 -13.77 3.21 24.69

J u l 3,143.20 15.00 0.48 790.47 80.49 11.34 0.23 5.44

A u g 3,413.90 270.70 8.61 908.52 118.05 1 4.9 3 7 4.1 7 128.62

S ep 3,588.40 174.50 5.11 1,003.54 95.02 10.46 26.13 53.461.22

O ct 3,744.10 155.70 4.34 1,068.90 65.36 6.51 18.83 28.26

N ov 3,954.50 210.40 5.62 1,284.90 216.00 2 0.2 1 3 1.5 8 113.56

D ec 3,966.40 11.90 0.30 1,215.19 -69.71 -5.43 0.09 -1.63

Jan 4,082.70 116.30 2.93 1,112.61 -102.58 -8.44 8.60 -24.75

Feb 3,745.30 -337.40 -8.26 1,016.42 -96.19 -8.65 68.30 71.45

Mar 3,821.55 76.25 2.04 970.17 -46.25 -4.55 4.14 -9.26

13.27 11.16 329.57 397.22

2006-N I F T Y ( X ) S B I (Y )

B E T AC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE X2 X*Y2007 (b)


A p r 1,902.50 549.5

May 2,087.55 185.05 9.73 629.93 80.43 14.64 94.61 142.37

J u n 2,220.60 133.05 6.37 652.69 22.76 3.61 40.62 23.03

J u l 2,312.30 91.70 4.13 765.97 113.28 1 7.3 6 1 7.0 5 71.67

A u g 2,384.65 72.35 3.13 762.19 -3.78 -0.49 9.79 -1.54S ep 2,601.40 216.75 9.09 898.01 135.82 1 7.8 2 8 2.6 2 161.97

O ct 2,370.95 -230.45 -8.86 803.15 -94 .86 -10 .56 78.48 93.58 1.10

N ov 2,652.25 281.30 11.86 858.24 55.09 6.86 140.76 81.38

D ec 2,836.55 184.30 6.95 869.25 11.01 1.28 48.29 8.91

Jan 3,001.10 164.55 5.80 848.38 -20.87 -2.40 33.65 -13.93

Feb 3,074.70 73.60 2.45 839.91 -8.47 -1.00 6.01 -2.45

Mar 3,402.55 327.85 10.66 927.01 87.10 10.37 113.70 110.58

61.32 57.48 665.58 675.57


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2008-NIFTY (X ) BOB (Y)

B ET AX2

XYC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE2009 (b )


Mar 3,821.55 204.67

A pr 4,087.90 266.35 6.97 224.61 19.94 9.74 48.58 67.90

May 4,295.80 207.90 5.09 262.39 37.78 16.82 25.86 85.54

Ju n 4,318.30 22.50 0.52 260.09 -2.30 -0.88 0.27 -0.46J u l 4,528.85 210.55 4.88 288.72 28.63 11.01 23.77 53.67

A u g 4,464.00 -64.85 -1.43 258.89 -29.83 -10.33 2.05 14.79

S ep 5,021.35 557.35 12.49 317.11 58.22 22.49 155.89 280.781.08

O ct 5,900.65 879.30 17.51 329.14 12.03 3.79 306.64 66.43

N ov 5,762.75 -137.90 -2.34 373.41 44.27 13.45 5.46 -31.43

D ec 6,138.60 375.85 6.52 437.89 64.48 17.27 42.54 112.62

Jan 5,137.45 -1,001.15 -16.31 376.3 -61.59 -14.07 265.99 229.39

Feb 5,223.50 86.05 1.67 348.63 -27.67 -7.35 2.81 -12.32

Mar 4,734.50 -489.00 -9.36 272.84 -75.79 -21.74 87.64 203.51

26.21 40.20 967.50 1,070.44

2007- N I F T Y ( X ) B O B ( Y ) B E T AX2

XYC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE2008 (b)


Mar 3,402.55 210.74

A pr 3,508.10 105.55 3.10 202.56 -8.18 -3.88 9.62 -12.04

May 3,185.30 -322.80 -9.20 215.35 12.79 6.31 84.67 -58.10

Ju n 3,128.20 -57.10 -1.79 186.82 -28.53 -13.25 3.21 23.75

J u l 3,143.20 15.00 0.48 208.59 21.77 11.65 0.23 5.59

A u g 3,413.90 270.70 8.61 235.33 26.74 12.82 74.17 110.40

S ep 3,588.40 174.50 5.11 270.66 35.33 15.01 26.13 76.740.64

O ct 3,744.10 155.70 4.34 261.79 -8.87 -3.28 18.83 -14.22

N ov 3,954.50 210.40 5.62 244.67 -17.12 -6.54 31.58 -36.75

D ec 3,966.40 11.90 0.30 225.2 -19.47 -7.96 0.09 -2.39

Jan 4,082.70 116.30 2.93 234.49 9.29 4.13 8.60 12.10

Feb 3,745.30 -337.40 -8.26 205.73 -28.76 -12.26 68.30 101.36

Mar 3,821.55 76.25 2.04 204.67 -1.06 -0.52 4.14 -1.05

13.27 2.24 329.57 205.38

2006-N I F T Y ( X ) B O B ( Y )

B E T AX2

XYC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE2007 (b)


A pr 1,902.50 155.06

May 2,087.55 185.05 9.73 179.11 24.05 15.51 94.61 150.86

Ju n 2,220.60 133.05 6.37 179.75 0.64 0.36 40.62 2.28

J u l 2,312.30 91.70 4.13 235.42 55.67 30.97 17.05 127.89

A u g 2,384.65 72.35 3.13 223.86 -11.56 -4.91 9.79 -15.36

S ep 2,601.40 216.75 9.09 227.6 3.74 1.67 82.62 15.19

O ct 2,370.95 -230.45 -8.86 200.36 -27.24 -11.97 78.48 106.02 0.93

N ov 2,652.25 281.30 11.86 210.88 10.52 5.25 140.76 62.29

D ec 2,836.55 184.30 6.95 220.34 9.46 4.49 48.29 31.17

Jan 3,001.10 164.55 5.80 228.33 7.99 3.63 33.65 21.04

Feb 3,074.70 73.60 2.45 203.93 -24.40 -10.69 6.01 -26.21

Mar 3,402.55 327.85 10.66 210.74 6.81 3.34 113.70 35.61

61.32 37.65 665.58 510.78


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2008-NIFTY (X ) IC ICI (Y)

B E T AC L O S I N G C H A N G E CHANGE C L O S I N G C H A N G E CHANGE X2 XY2009 (b)


Mar 3,821.55 829.02

A p r 4,087.90 266.35 6.97 841.16 12.14 1.46 48.58 10.21

May 4,295.80 207.90 5.09 892.94 51.78 6.16 25.86 31.31

J u n 4,318.30 22.50 0.52 938.48 45.54 5.10 0.27 2.67J u l 4,528.85 210.55 4.88 910.98 -27.50 -2.93 23.77 -14.29

A u g 4,464.00 -64.85 -1.43 869.28 -41.70 -4.58 2.05 6.55

S ep 5,021.35 557.35 12.49 1,041.37 172.09 19.80 155.89 2 47.171.15

O ct 5,900.65 879.30 17.51 1,242.53 201.16 19.32 306.64 3 38.26

Nov 5,762.75 -137 .90 -2.34 1,154.13 -88.40 -7.11 5.46 16.63

D ec 6,138.60 375.85 6.52 1,213.06 58.93 5.11 42.54 33.30

J a n 5,137.45 -1,001.15 -16.31 1,126.63 -86.43 -7.12 265.99 116.20

Fe b 5,223.50 86.05 1.67 1,058.51 -68.12 -6.05 2.81 -10.13

Mar 4,734.50 -489.00 -9.36 755.34 -303.17 -28.64 87.64 268.13

26.21 0.51 967.50 1,046.01

2007-

N I F T Y ( X ) ICICI (Y)



Mar 3,402.55 562.53

A p r 3,508.10 105.55 3.10 540.66 -21.87 -3.89 9.62 -12.06

May 3,185.30 -322.80 -9.20 544.24 3.58 0.66 84.67 -6.09

J u n 3,128.20 -57.10 -1.79 465.93 -78.31 -14.39 3.21 25.79

J u l 3,143.20 15.00 0.48 538.06 72.13 15.48 0.23 7.42

A u g 3,413.90 270.70 8.61 580.42 42.36 7.87 74.17 67.80

S ep 3,588.40 174.50 5.11 679.65 99.23 17.10 26.13 87.391.14

O ct 3,744.10 155.70 4.34 754.99 75.34 11.09 18.83 48.10

Nov 3,954.50 210.40 5.62 847.58 92.59 12.26 31.58 68.92

D ec 3,966.40 11.90 0.30 866.08 18.50 2.18 0.09 0.66

J a n 4,082.70 116.30 2.93 914.27 48.19 5.56 8.60 16.31

Fe b 3,745.30 -337.40 -8.26 805.85 -108.42 -11.86 68.30 98.00

Mar 3,821.55 76.25 2.04 829.02 23.17 2.88 4.14 5.85

13.27 44.95 329.57 408.09

2006-N I F T Y ( X ) ICICI (Y)



A p r 1,902.50 338.15

May 2,087.55 185.05 9.73 368.31 30.16 8.92 94.61 86.75

J u n 2,220.60 133.05 6.37 399.97 31.66 8.60 40.62 54.79

J u l 2,312.30 91.70 4.13 502.08 102.11 25.53 17.05 105.42A u g 2,384.65 72.35 3.13 460.1 -41.98 -8.36 9.79 -26.16

S ep 2,601.40 216.75 9.09 574.61 114.51 24.89 82.62 226.22

O ct 2,370.95 -230.45 -8.86 476.15 -98.46 -17.14 78.48 151.79 1.22

Nov 2,652.25 281.30 11.86 513.82 37.67 7.91 140.76 93.86

D ec 2,836.55 184.30 6.95 558.71 44.89 8.74 48.29 60.71

J a n 3,001.10 164.55 5.80 581.82 23.11 4.14 33.65 24.00

Fe b 3,074.70 73.60 2.45 587.55 5.73 0.98 6.01 2.42

Mar 3,402.55 327.85 10.66 562.53 -25.02 -4.26 113.70 -45.41

61.32 59.95 665.58 734.39


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2008-NIFTY (X ) H D F C ( Y )



Mar 3,821.55 942.47

A pr 4,087.90 266.35 6.97 1,011.61 69.14 7.34 48.58 51.13

May 4,295.80 207.90 5.09 1,141.27 129.66 12.82 25.86 65.18

J u n 4,318.30 22.50 0.52 1,140.42 -0.85 -0.07 0.27 -0.04J u l 4,528.85 210.55 4.88 1,193.97 53.55 4.70 23.77 22.89

A u g 4,464.00 -64.85 -1.43 1,163.54 -30.43 -2.55 2.05 3.65

S e p 5,021.35 557.35 12.49 1,428.07 264.53 22.73 155.89 283.860.93

Oct 5,900.65 879.30 17.51 1,657.80 229.73 16.09 306.64 281.70

No v 5,762.75 -137.90 -2.34 1,708.52 50.72 3.06 5.46 -7.15

D ec 6,138.60 375.85 6.52 1,707.47 -1.05 -0.06 42.54 -0.40

J a n 5,137.45 -1,001.15 -16.31 1,541.44 -166.03 -9 .72 265.99 158.59

F eb 5,223.50 86.05 1.67 1,440.80 -100.64 -6.53 2.81 -10.94

Mar 4,734.50 -489.00 -9.36 1,312.71 -128.09 -8.89 87.64 83.23

26.21 38.90 967.50 931.70

2007-

N I F T Y ( X ) H D F C ( Y )



Mar 3,402.55 759.94

A pr 3,508.10 105.55 3.10 808.97 49.03 6.45 9.62 20.01

May 3,185.30 -322.80 -9.20 740 .9 2 -68 .0 5 -8.41 84.67 77.40

J u n 3,128.20 -57.10 -1.79 786.21 45.29 6.11 3.21 -10.96

J u l 3,143.20 15.00 0.48 785.27 -0.94 -0.12 0.23 -0.06

A u g 3,413.90 270.70 8.61 841.62 56.35 7.18 74.17 61.80

S e p 3,588.40 174.50 5.11 914.02 72.40 8.60 26.13 43.971.22

Oct 3,744.10 155.70 4.34 992.3 78.28 8.56 18.83 37.16

No v 3,954.50 210.40 5.62 1,108.07 115.77 11.67 31.58 65.56

D ec 3,966.40 11.90 0.30 1,054.88 -53.19 -4.80 0.09 -1.44

J a n 4,082.70 116.30 2.93 1,065.40 10.52 1.00 8.60 2.92

F eb 3,745.30 -337.40 -8.26 923.55 -141.85 -13.31 68.30 110.03

Mar 3,821.55 76.25 2.04 942.47 18.92 2.05 4.14 4.17

13.27 24.97 329.57 410.58

2006-N I F T Y ( X ) H D F C ( Y )



A pr 1,902.50 520.74

May 2,087.55 185.05 9.73 529.58 8.84 1.70 94.61 16.51

J u n 2,220.60 133.05 6.37 624.3 94.72 17.89 40.62 114.00

J u l 2,312.30 91.70 4.13 686.52 62.22 9.97 17.05 41.16A u g 2,384.65 72.35 3.13 628.42 -58.10 -8.46 9.79 -26.48

S e p 2,601.40 216.75 9.09 672.49 44.07 7.01 82.62 63.74

Oct 2,370.95 -230.45 -8.86 595.44 -77.05 -11.46 78.48 101.50 1.03

No v 2,652.25 281.30 11.86 674.21 78.77 13.23 140.76 156.95

D ec 2,836.55 184.30 6.95 695.65 21.44 3.18 48.29 22.10

J a n 3,001.10 164.55 5.80 748.36 52.71 7.58 33.65 43.96

F eb 3,074.70 73.60 2.45 723 .5 3 -24 .8 3 -3.32 6.01 -8.14

Mar 3,402.55 327.85 10.66 759.94 36.41 5.03 113.70 53.66

61.32 42.34 665.58 578.95


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For 2008-09, the Beta for ICICI bank was highest stating its risk

parameters of 1.15, BOB at the second stage with a beta of 1.08, HDFC at the

third spot with a beta of 0.93 and SBI with the least risk concerned beta of

0.91.

For 2007-08, the scenario was bit different. Beta for SBI bank and

HDFC Bank were highest stating their risk parameters of 1.22 for both the

banks respectively, ICICI bank at the second stage with a beta of 1.14 and

BOB at the third spot with a beta of 0.64.

For 2006-07, the Beta for ICICI bank was highest stating its riskparameters of 1.22, SBI at the second stage with a beta of 1.10, HDFC at the

third spot with a beta of 1.03 and BOB with the least risk concerned beta of

0.93.


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Cost of Equity (Ke)

It determines the expected rate of return for the investors. We have

calculated the cost of equity for the following banks using CAPM model andtaking inputs such as Rf (365 days T-bills rate same for each year i.e.

4.55%), Rm (3 years market monthly return of NIFTY) and .

Rf + ( Rm - Rf )

2008-09 Closing PriceC hang e C han ge

R s . (% )

Mar-07 3,821.55

Apr-07 4,087.90 266.35 6.97

May-07 4,295.80 207.90 5.09Jun-07 4,318.30 22.50 0.52

Jul-07 4,528.85 210.55 4.88

Aug-07 4,464.00 -64.85 -1.43

Sep-07 5,021.35 557.35 12.49

Oct-07 5,900.65 879.30 17.51

Nov-07 5,762.75 -137.90 -2.34

Dec-07 6,138.60 375.85 6.52

Jan-08 5,137.45 -1,001.15 -16.31

Feb-08 5,223.50 86.05 1.67

Mar-08 4,734.50 -489.00 -9.36Rm 2.18

K e (S B I)= K e (B O B )= K e (IC IC I)= K e (H D F C )=

6.7 7.11 7.27 6.75

2007-08 Clos ing Pr iceC han g e C h an g e

R s. (% )

Mar-06 3,402.55

Apr-06 3,508.10 105.55 3.10

May-06 3,185.30 -322.80 -9.20

Jun-06 3,128.20 -57.10 -1.79

Jul-06 3,143.20 15.00 0.48Aug-06 3,413.90 270.70 8.61

Sep-06 3,588.40 174.50 5.11

Oct-06 3,744.10 155.70 4.34

Nov-06 3,954.50 210.40 5.62

Dec-06 3,966.40 11.90 0.30

Jan-07 4,082.70 116.30 2.93

Feb-07 3,745.30 -337.40 -8.26

Mar-07 3,821.55 76.25 2.04

Rm 1.11



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8.75 6.75 8.48 8.75

2006-07 Closing PriceC hang e C han ge

R s . (% )

Apr-05 1,902.50

May-05 2,087.55 185.05 9.73

Jun-05 2,220.60 133.05 6.37

Jul-05 2,312.30 91.70 4.13

Aug-05 2,384.65 72.35 3.13

Sep-05 2,601.40 216.75 9.09

Oct-05 2,370.95 -230.45 -8.86

Nov-05 2,652.25 281.30 11.86

Dec-05 2,836.55 184.30 6.95

Jan-06 3,001.10 164.55 5.80

Feb-06 3,074.70 73.60 2.45

Mar-06 3,402.55 327.85 10.66

Rm 5.57


3.42 3.6 3.3 3.49

0.1

0.09

0.08 0.0875 0.0875

0.07 0.0727 0.08480.06 0.0675

0.0711 0.06750.05 0.067

SBI0.04

0.03 0.036 0.0349 BOB

0.02 0.0342 0.033 ICICI0.01

HD FC0

2008-09 2007-08 2006-07

SBI 0.067 0.0875 0.0342

BOB 0.0711 0.0675 0.036ICICI 0.0727 0.0848 0.033

HDFC 0.0675 0.0875 0.0349


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In 2008-09, ICICI offered the highest cost of equity to its equity holders

taking the utmost risk in the firm and likewise gained a return of 7.27% leading

BOB offering 7.11%, HDFC offering 6.75% and SBI with the least cost of

equity of 6.7%.

Whereas in 2007-08, SBI and HDFC were the frontliners offering cost

of equity at around 8.75% each leading ICICI bank offering 8.48% and BOB

with the least offering of 6.75%.

But the scenario was totally different in 2006-07 when BOB offered the

highest cost of equity with 3.6% leading HDFC offering 3.49%, SBI offering

3.42% and ICICI offering the least return of 3.3%.

The Market return of NIFTY in 2006-07 was comparatively very high

therefore the capital gains is high under such cases compared to 2007-08 and

2008-09. The Cost of equity for 2006-07 was therefore very low compared to

2007-08 and 2008-09 offering high cost of equity.


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Cost of Debt (Kd)

It can be defined as the total interest paid divided by the total borrowings by afirm.

(Total Interest Expense - Interest on Deposit) / Total Borrowings)

2008-09 2007-08 2006-07

Interest Paid 4,856 Interest Paid 3,479 Interest Paid 2758

S B I

Borrowings 51,727 Borrowings 39,703 Borrowings 30,641

K d 0.065720419 Kd 0.061344821 K d 0.063

2008-09 2007-08 2006-07

Interest Paid 497 Interest Paid 441 Interest Paid 357.88

B O B

Borrowings 3,927 Borrowings 1,143 Borrowings 4,802.20

K d 0.088645084 Kd 0.269879042 K d 0.052166683

2008-09 2007-08 2006-07

Interest Paid 6,374 Interest Paid 4,711 Interest Paid 3,761

ICICI

Borrowings 65,648 Borrowings 51,256 Borrowings 38,522

K d 0.067965053 K d 0.064334978 K d 0.06833865

2008-09 2007-08 2006-07

Interest Paid 504.39 Interest Paid 484.13 Interest Paid 370.07

H D F C

Borrowings 4,478.86 Borrowings 2,815.39 Borrowings 2,858.48

K d 0.078830997 K d 0.12037089 K d 0.090624738


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0.3

0.25 0.2699

0.2

0.15

0.1 0.0886 0.1204

0.05 0.07880.0906

0.0657 0.0643 0.06830.0613 0.0630.068 0.0522

02008-09 2007-08 2006-07

SBI 0.0657 0.0613 0.063

BOB 0.0886 0.2699 0.0522ICICI 0.068 0.0643 0.0683

HDFC 0.0788 0.1204 0.0906

In 2008-09, BOB offered the highest cost of debt leading HDFC having

7.88% under its belt, ICICI offering 6.8% and SBI offering 6.57%.

In 2007-08, BOB had made a huge outflow of cost of debt offering

26.99% because the total borrowings were very low compared to other

players and on the other hand, it paid nominal interest as others did. HDFC

was on the second spot with 12.04% and ICICI and SBI ruled the third and

fourth spot with 6.43% and 6.13% respectively.

In 2006-07, the scenario totally changed when BOB offered the least

cost of debt of 5.22%. HDFC offered the highest cost of debt of 9.06%, ICICI

following it with 6.83% and SBI on the third spot with 6.3%.


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5.3 Cost of Capital (WACC)

The weighted average cost of capital (WACC) is the minimum rate of return

on capital required to compensate debt and equity investors for bearing risk.

Weighted cost of Equity + Weighted cost of Debt

Cost Of Equity Cost Of Debt

2007-08 2006-072008-09 2007-08 2006-07 2008-09

S B I 0.0670 0.0875 0.0342 0.0657 0.0613 0.0630

B O B 0.0711 0.0675 0.0360 0.0886 0.2699 0.0522

IC IC I 0.0727 0.0848 0.0330 0.0680 0.0643 0.0683

H D F C 0.0675 0.0875 0.0349 0.0788 0.1204 0.0906

W eight Of Equi ty Weight Of Debt

2007-08 2006-072008-09 2007-08 2006-07 2008-09

S B I 0.49 0.44 0.47 0.51 0.56 0.53

B O B 0.74 0.88 0.62 0.26 0.12 0.38

IC IC I 0.42 0.32 0.37 0.58 0.68 0.63

H D F C 0.72 0.7 0.65 0.28 0.3 0.35

0.1200

0.1000

0.0974

0.0800 0.09180.0757

0.0600 0.0707 0.0728 0.07090.0663

0.0700 0.05520.0400 0.0495

0.05440.0421

0.0200

0.00002008-09 2007-08 2006-07

SBI 0.0663 0.0728 0.0495

BOB 0.0757 0.0918 0.0421

ICICI 0.0700 0.0709 0.0552

HDFC 0.0707 0.0974 0.0544


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In 2008-09, the WACC for BOB was highest of 7.57% because the

proportion of equity for the firm was very high for the bank as against its

proportion of borrowings. HDFC, ICICI and SBI stood firm on second, third

and fourth spot with 7.07%, 7% and 6.63% respectively.

In 2007-08, the weightage of equity was 88% for BOB as against the

weightage of borrowed funds of 12% bringing its WACC to 9.18%. The same

was 7:3 in case of HDFC bank when concerned bringing its WACC to 9.74%

holding the top spot.

In 2006-07, the WACC was low for each bank compared to future yearsas the cost of equity was very low.


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5.4 Capital Charge

Capital charge is the total cost planned with to the bank to pay interest

and dividend for fulfilling the criterias of equity holders and debt-borrowers.

Cost Of Capital x Capital Invested

2008-09

WACC Capital Invested Capital Charge

S B I 0.066337 100,760 6,684B O B 0.07566 14,971 1,133IC ICI 0.069974 112,468 7,870

H D F C 0.070664 15,976 1,129

2007-08

WACC Capital Invested Capital Charge

S B I 0.049464 71,002 3,512B O B 0.09179 9,793 899IC ICI 0.055239 75,919 4,194H D F C 0.054395 9,248 503

2006-07

WACC Capital Invested Capital ChargeS B I 0.034328 58,285 2,001B O B 0.04214 12,646 533IC ICI 0.043724 61,078 2,671H D F C 0.03612 8,158 295


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9,000

8,000 7,870

7,000

6,000 6,684

5,000

4,000 4,1943,000 3,512

2,000 2,671

1,000 2,0011133 1,129 899 503 533 295

02008-09 2007-08 2006-07

SBI 6,684 3,512 2,001

BOB 1133 899 533

ICICI 7,870 4,194 2,671

HDFC 1,129 503 295

ICICI bank provides the highest amount of capital charge to investors in

each year amounting to Rs. 7870 crores in 2008-09, Rs. 4194 crores in 2007-

08 and Rs. 2671 crores in 2006-07 because they had huge amount of capital

investment. SBI gained the second spot providing capital charge of Rs. 6684

crores in 2008-09, 3512 crores in 2007-08 and 2001 crores in 2006-07. BOB

remained third each time leading HDFC each time.


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5.5 Economic Value Added (in %)(EVA - As a measure of Value creation through Management of Profits)

This concern is used by the following sequence:-

ROIC which includes NOPAT divided by capital employed minus

WACC which pertains the addition of weighted cost of equity and weighted

cost of debt.

ROIC WACC

ROIC W A C C

2008-09 2007-08 2006-07 2008-09 2007-08 2006-07

S B I 0.12 0.13 0.17 S B I 0.0663 0.0495 0.0343

B O B 0.16 0.2 0.13 B O B 0.0757 0.0918 0.0421

IC ICI 0.09 0.1 0.09 IC IC I 0.0700 0.0552 0.0437

H D F C 0.19 0.23 0.2 H D F C 0.0707 0.0544 0.0361

0.2000

0.1800

0.1600 0.17560.1639

0.1400

0.1200 0.1357

0.1000 0.11930.1082

0.08000.0843 0.08790.08050.0600

0.0400 0.05370.0448 0.0463

0.02000.0200

0.00002008-09 2007-08 2006-07

SBI 0.0537 0.0805 0.1357

BOB 0.0843 0.1082 0.0879

ICICI 0.0200 0.0448 0.0463

HDFC 0.1193 0.1756 0.1639


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When the question arises so as to create the economic value, HDFC

bank stands firm at the top spot with 11.93% in 2008-09, 17.56% in 2007-08

and 16.39% in 2006-07. BOB too gave consistent performance in 2008-09

and 2007-08 giving the economic value added of 8.43% and 10.82% withsecond spot. SBI was steady on the third spot with 5.37% and 8.05% in 2008-

09 and 2007-08 respectively. But showed excellent performance in 2006-07

holding the second spot with a brilliant EVA of 13.57%. Instead of excellent

capital investment, capital charge and cost of equity, it failed to give better

EVA compared to other sectors.


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Economic Value Added (in Rs.)(EVA - As a measure of value creation through Management of Capital)

This scenario is used by the following consequence:-

NOPAT including net operating profit less tax subtracting capital charge

comprising of cost of capital multiplied by capital employed gives the title at a

substantial exposure.

NOPAT - (WACC x Invested Capital)

NOPAT Capital Charge

2008-09 2007-08 2006-07 2008-09 2007-08 2006-07

S B I 12,574 9,435 9,841 S B I 6,684 3,512 2,001

B O B 2,468 1,999 1,592 B O B 1133 899 533

IC IC I 10,035 7,410 5,355 IC IC I 7,870 4,194 2,671

H D F C 2,988 2,134 1,644 H D F C 1,129 503 295

9,0008,000

7,000 7,840

6,000

5,000 5,890 5,923

4,000

3,0003,216

2,000 2,6842,165 1,859

1,000 1,631 1,3491,335 1,100 1,059

0 2008-09 2007-08 2006-07

SBI 5,890 5,923 7,840

BOB 1,335 1,100 1,059

ICICI 2,165 3,216 2,684

HDFC 1,859 1,631 1,349


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SBI holds higher size of balance sheet and therefore it is consistent

enough to stand firm and provide higher EVA each time revealing Rs. 5890

crores in 2008-09, 5923 crores in 2007-08 and 7840 crores in 2006-07

proving it as the top public sector bank in the nation. Whereas ICICI bankstood at the second place with an EVA of 2165 crores in 2008-09, 3216 crores

in 2007-08 and 2684 crores in 2006-07 followed by HDFC in terms of rupees.

Instead it stood in terms of percentage sequence, but failed to secure the

position due to the poor size of capital. Though BOB stood at the last spot, it

did provide firm amount of Economic value.


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Incremental EVA (in Rs.)

The incremental EVA determines the overall change in the EVA as

compared to the previous year.

EVA (t)- EVA (t-1)

1000

500

235 228 41532

2820

-33-500

-1,051-1000

-1500 -1,917

-2000

-25002008-09 2007-08

SBI -33 -1,917

BOB 235 41

ICICI -1,051 532

HDFC 228 282

While comparing the EVA parameter with that of its previous year, we

proclaimed that SBI lacked the consistency and gave a decrement of -33

crores in 2008-09 somehow covering the huge decrement of -1917 crores as

of 2007-08. But ICICI failed drastically from a superb Incremental EVA of 532

crores in 2007-08 to a poor decrement of -1051 crores in 2008-09 which was

the worst performance by any bank in 2008-09. BOB gave the most consistent

Incremental EVA standing firm in 2008-09 and giving an increment of 235

crores crossing its mark of 41 crores incremental EVA of 2007-08. HDFC too

gave beneficial Increments to its EVA each time with 228 crores in 2008-09

and 282 crores in 2007-08.


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CHAPTER-6

CONCLUSIONS

AND

FINDING


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Conclusion and Findings

Banking industry in India is undergoing a rapid metamorphosis. Their

role of a traditional banker has been replaced with financial services provider

for the clients. Most of the PSU and private sector banks in our country have

already started looking at their portfolio of services offered and what they

should do in the future for remaining competitive in the industry. As public

sector banks are likely to undergo major consolidation, suddenly for many

Indian banks things have changed. The following factors of interpretation

serve the purpose of analyzing the overall concern of proving the study.

NOPAT

2008-09 2007-08 2006-07

PUBLIC BANKS 15,042 11,434 11,433

PRIVATE BANKS 13,023 9,544 6,999

The public sector banks lead the private banks when NOPAT is

emphasized in terms of the analysis where SBI was in the front spot for each

year respectively as it is the leading bank of India.

Capital Charge

2008-09 2007-08 2006-07

PUBLIC BANKS 7,817 4,411 2,534

PRIVATE BANKS 8,999 4,697 2,966

The capital charge factor determines the impact that Private Banks

have a greater focus than public sector banks in each year respectively. As

being a private bank, they have to increase their image in market by giving

higher return to their shareholders.

R O I C

2008-09 2007-08 2006-07

PUBLIC BANKS 0.14 0.165 0.15

PRIVATE BANKS 0.14 0.165 0.145


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ROIC gave an equal importance to both the sectors concerned

including public sector and private sector in 2007-08 and 2006-07

respectively, but 2005-06 predicted that public sector were more effective than

parveen singh gulia 67f 08

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