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INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

Rolta India Ltd. Country India Sector IT

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INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

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INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

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INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

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INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

A Framewor k for I nd i an Commerci al Banks Per for mance R an k in g an d St u d y of Cor relati on of I nvestor Percepti on wi th Per for mance R an k in g B y S anjeev k umar V, S enthi l Kumar Subramani an. ( The authors are stud ent of PGD IM,NITIE. The ar ti cle i s t h e win n in g e nt r y o f Nati onal R esearch Paper Competi ti on organi zed by INI F I N E E TI ) Abstrac t :

the P/BV (Price/Book value)

simultaneously followed by

I n d i a n e co n o my h a s p rovi d e d

of those stocks. The ranking

increased demand for bank ing

tremendous growth oppor-

m o d e l i s b a s e d o n An a l y t i c a l

sector stocks thereby giving

t u n i t i e s fo r a l l t h e i n d u s t r i e s

h i e ra rc h i c a l p ro ce s s m e t h o d.

rise to increased market

over the last two decades.

We h a v e u s e d q u a n t i t a t i v e

prices of banking shares,

S c h e d u l e d co m m e rc i a l b a n k s

p a ra m e te r s i n A H P m e t h o d to

i n c re a s e d e a r n i n g s a n d t o t a l

in India have used the plat-

ra n k t h e b a n k s

market turnover which is highest among all sectors

form provided by the economy

10

and have grown at a faster

I ntrod uc ti on :

stocks. According to the latest

than many sectors. Banking

Over the last two decades,

mar ket conditions, Aggregate

stocks have ideally become

Indian banks have capital-

b a n k ing stocks have a we ig ht

one of the best choices for

ized on the growth of the

o f 3 0 p e r c e n t a p p r ox i m a t e l y

investors. The returns of

Indian economy and grown

in the total market cap of

banking stocks were one of

at a faster pace than many

Bombay stock exchange. Thus,

the highest in the market in

other industries. Economic

b a n k ing stocks a re one of the

last decade (CAGR of 27%).

growth gave raise to growth

most traded and most watched

Though banking universe

of capital markets which the

i n t h e ma r ke t. Nationa l stock

in India is highly regulated,

banks used for capitalizing

e xc h a n g e h a s c r e a t e d a s e c -

t h e re we re s i gn i f i c a nt d i f fe r-

their growth. The banking

torial Index as “BANK NIFT Y�

ences exist in their under-

sector has made tremen-

which comprises of all the

lying operations and hence

dous success in the recent

l i s te d ba nk` s stocks.

their per for mance. This paper

p a s t a s m a ny o f t h e co m m e r-

a i m s a t p e r fo r m a n ce ra n k i n g

cial banks that approached

Indian Bank ing universe is one

of Indian Commercial banks

the capital market through

of the highly regulated and

based on statistical param-

public offers and qualified

stable in the world. Though

eters (quantitative parame -

institutional placements (QIP)

banking universe in India is

te r s ) fo r e a c h ye a r f ro m 2 0 0 8

to raise their capital base.

h i g h l y re g u l a t e d, t h e re we re

to 2011. Based on the changes

Capital markets showed tre -

significant differences exist

in the ranking, the paper

mendous response when-

in their underlying opera-

t r i e s to s h ow t h e co r re l a t i o n

ever Indian government liq-

tions and hence their finan-

b e t we e n t h e ra n k i n g c h a n g e s

ui d ate d i t s e q ui t y p o s i t i o n i n

cial per formance. The idea

and the market valuation of

the public sec tor banks (PSB).

behind publishing rank ings is

the respec tive stocks through

Th e re - c a p i t a l i z at i o n s u cce s s

to p rov id e a n oppor tu nit y to

the cor responding changes in

of the banks was almost

benchmark once per formance 11


INFINEETI Research Magazine | Annual Issue 2011

with its competitors and peers

profile of the bank, Governance

S ize, Val u atio n and G row t h .

grouped var ious per for mance

c h a n g e d I n d u s I n d b a n k ’s P / ra n k a ba nk from the inve stor

i n t h e s e c tor.

a n d o rg a n i z a t i o n , o p e r a t i o n s,

The R es er ve B ank o f I n d i a h a d

parameters under different

B V va l uat i o n f ro m 2 .2 1 to 3 .2 8 p e r spe c tive.

The rating agencies evalu-

cap it al, f u nding and l iq u idit y,

used six key parameters for

clusters vis. Capital Adequac y,

and Bank of Baroda’s P/BV from

ate va r i o u s co m p a n i e s o n t h e

credit r is k , co ncentratio n r is k ,

rating of Indian commercial

Asset

1 .2 6 to 1 .8 2

basis of different quantita-

equit y r is k , pro f itabil it y, as s et

banks. These are called CAMELS

Ef f i c i e n c y, Ea r n i n g s

tive and qualitative parame -

qualit y, leverage, M ar ket envi -

rating parameters, where C

t e r s. H owe ve r t h e p a r a m e te r s

ronment and risk management.

s t a n d s f o r C a p i t a l A d e q u a c y,

Parameters,

d i f fe r f ro m o n e rat i n g a g e n c y

M o o d y ’s c r e d i t r a t i n g s a r e

A s t a n d s f o r A s s e t Q u a l i t y,

Pa ra m e te r s, O p e rat i o n a l e f f i -

Discussion on possible parameters for per formance rank i ng:

t o a n o t h e r. M a n y a g e n c i e s

opinions on the creditwor-

M stands for Management, E

ciency and Growth param-

Indian banking universe has i n c o m e c o m e s f ro m t h e i r

have ranked Indian Commercial

thiness of the banks. These

stands for Earnings per for-

eters. In this paper we have

u n d e r g o n e m a j o r c h a n g e s lending ac tivities. Parameters

Banks based on different

ratings include long-term obli-

m a n c e, L s t a n d s fo r L i q u i d i t y

used AHP to creating the

p o s t l i b e r a l i z a t i o n , m o r e s o, s uc h a s Ad va nce growth, Ne t

objectives and parameters.

gation ratings, syndicated loan

and S s tands fo r Sys te m s. Th e

ranking model. AHP method

a f t e r t h e e n t r y o f f o r e i g n Interest Margin can be used

Major foreign agencies that

r a t i n g s, b a n k d e p o s i t r a t i n g s,

key parameters under the

( s a a t y, 1 9 8 0 ) i s o n e o f t h e

b a n k s a n d n e w I n d i a n p r i vate t o m e a s u r e t h e i r s t r e n g t h i n

ra n k I ndi a n Commercial b an ks

national scale ratings and

CAMEL rating parameters are

most commonly used methods

b a n k s. H e n ce, fo r m t h e i nve s - i n t e r e s t i n c o m e . T h e r e i s a

are Standard & Poor, Fitch, and

insurance financial strength

c apital to to tal as s e t s, c a p i t a l

for decision making where

to r ’s p o i nt o f vi e w ; ra n k i n g o f n e e d t o fo c u s o n w e l l d i v e r -

M o o d y. I n d i a n a g e n c i e s t h a t

ratings. Moody rates the banks

minus estimated losses to

multiple attributes are used to

banks has to be in different sified other income stream.

ra n k I ndi a n Commercial B an k s

on the basis of capital, asset

to t a l a s s e t s, d e l i n q u e n t l o a n s

m a k e t h e d e c i s i o n . Th e d e c i -

w a y t h a n c u r r e n t l y a v a i l a b l e Earnings from non-fund based

a r e B u s i n e s s Wo r l d , B u s i n e s s

q u a l i t y, e a r n i n g s, l i q u i d i t y,

to total loan, net charge offs

sion mak ing process is divided

rat i n g s m e t h o d o l o gi e s.

Standard, and Business India

m a r k e t l e a d e r s h i p, r i s k m a n -

to average loan, non-earning

into multiple steps and the

Though, for statistical analysis a n t e e s ; L / C s , c a s h m a n a g e -

e tc.

agement, ownership, struc-

assets to total assets, oper-

p ro b l e m i s d e c o m p o s e d i n t o

and per formance rank ing most m e nt, l o gi s t i c s m a n a g e m e nt,

t ure and s o o n. M o o dy fo c u s es

ating expenses minus provi-

hierarchy structure which

agencies use parameters which t a x c o l l e c t i o n a n d o t h e r s e r -

Standard & Poor rate the banks

mo re on s tatis tic al f ac to r s fo r

sions for loan losses and inter-

co n s i s t s o f t h e e l e m e nt s s uc h

a r e c o m m o n . B u t t h e w e i g h t - vices are more permanent and

o n t he ba s i s of eco n o mic r isk ,

ran k in g. The s tatis tic al param -

est expenses to average assets,

a s : t h e g o a l, t h e c r i te r i a ( s ub -

i n g s g i v e n t o t h e p a r a m e t e r s i nvolve le ss a mou nt of cre d it

i n d us tr y r i s k , cor p o rate st ruc -

eters are Capital, Asset quality,

net income before statutor y

c r i te r i a ) a n d t h e a l te r n at i ve s.

v a r y f r o m a g e n c y t o a g e n c y a n d ma r ke t r isk . O n the othe r

ture, management structure,

Ear n in g s and Liq u idit y.

reser ve transfers to average

A H P i s a m at h e m at i c a l m o d e l

and also depend on the objec- h a n d , fo r e a r n i n g i n t e r e s t

assets and net income after

in which we can assign pr ior i-

t i ve o f t h e ra n k i n g.

a ccou nti ng & fi n an cial rep o r t-

Qualit y,

Financial

Liquidity

Fo r a n i nve s to r, e a r n i n g s a re an important measure of per formance. Bank earnings come from Interest income and other incomes. Interest

services like credit guar-

income and treasur y income

i n g, c re d i t r i s k & r isk man age -

Th e B us ines s I ndia has rank ed

trans fer s to averag e a s s e t s.

ties to the parameters used in

m e n t , l i q u i d i t y, c a p i t a l, e a r n -

the commercial banks on the

I n t h i s p a p e r, we h ave ra n k e d

d e c i s i o n m a k i n g.

i n g s, p ro f i t a b i l i t y, a s s e t c o m -

b a s i s o f Ca p i t a l a d e q u a c y,

the Indian commercial banks

position and asset quality of

Resources Deployed, Asset

from the point of view of an

AHP method is used to rank the

f ro m t h e p a p e r Cr i t i c a l a n a l y - r a t i o s s u c h a s n o n - i n t e r e s t

the ba nks.

quality, Management, Earnings

investor for each year from

d i f fe re nt c l us te r s a n d p a ra m -

s i s o f p a r a m e t e r s o f r a t i n g o f i n come to tota l a sse ts.

qualit y and Liquidit y. Business

2008 to 2011. Based on the

e t e r s w i t h i n e a c h c l u s t e r.

Indian commercial banks by

Fitch rating emphasizes that to

Standard Research Bureau

changes in the ranking, the

Acco rd i n g l y, w i t h t h e a r r i ve d

M uk t a M a n i ( 2 0 1 1 ) .

rate a bank one needs to under-

(BSRB) has ranked the banks

paper tries to show the cor-

weights for parameter and

C AMEL S rat i n g s a re o n e o f t h e aged institutions. Their assets

stand the business profile of

on the basis of five broad indi-

r e l a t i o n b e t we e n t h e r a n k i n g

c l u s te r, t h e y we re m u l t i p l i e d

p ro m i n e nt l y u s e d m e t h o d s to p e r for ma nce d e pe nd s on the

t he ba nk , the r i sks in h erent to

c a t o r s n a m e l y Pro f i t a b i l i t y,

c hang es and the ma r k e t va l u-

to get the weights for each

c h o o s e p a r a m e t e r s f o r a n a - customer credit quality. Banks

the business, the objectives

Safet y, Produc tivit y, Efficienc y

at i o n o f t h e re s p e c t i ve s to c k s

p a ra m e te r. Fro m t h e ra n k i n g s

l y z i n g b a n k s a c r o s s w o r l d . us e the por tion of the ir e a r n-

o f i t s m a n a g e m e n t , t h e e nv i -

a n d G r o w t h . B u s i n e s s Wo r l d

through the corresponding

c h a n g e we h ave fo u n d I n d u s

Th i s rat i n g p rovi d e s a g e n e ra l i n g s a s t h e d e f e n s e a g a i n s t

ronment it operates in and the

(BW ) has divided the ranking

changes in the P/BV of those

I n d B a n k a n d B a n k o f B a ro d a

f r a m e w o r k fo r e v a l u a t i n g t h e t h e n o n p e r f o r m i n g a s s e t s .

most likely future development

parameters of banks into

s to c k s.

has made huge progress in

banks. In this paper we have Banks allocate a por tion of

of its business. The parameters

six

their ranking from 2008 to

m o d i f i e d t h e C A M E L r a t i n g s their profits for provisions for

c o n s i d e r e d b y Fi t c h i n c l u d e s

Profitabilit y, Efficienc y, Safet y,

2011. Accordingly, market has

to i d e nt i f y t h e p a ra m e te r s fo r n o n - p e r f o r m i n g a s s e t s . T h i s

broad

groups

namely In this exercise we have 12

bank has to bear credit risk D i f fe re nt p a ra m e te r s u s e d fo r a n d m a r k e t r i s k re s p e c t i ve l y. r a n k i n g a B a n k a r e i d e n t i f i e d This can be measured by using

Banks are one of the most lever-


INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

p rov i s i o n a l l o c a t i o n d e p e n d s comparing the per formance of

The absolute size of the banks

I n t h i s p a p e r we h a ve l i n k e d

bank ing sector of the Nigerian

m o d e l C A F E LO G S a re d i s -

o n t h e a s s e t q u a l i t y o f t h e i r dif ferent bank s. Thes e param -

may also be included in the

t h e ra n k i n g c h a n g e s w i t h t h e

capital mar ket by E.O.oyatoye

c us se d be low.

b o o k s . Pa r a m e t e r s l i k e G r o s s eters ref l ec t the m anag em ent

ratings as it gives a brand

corresponding changes in

(2010), G.U.ok poko(2010) and

N PA , N e t N PA , a n d Pr o v i s i o n c a p a b i l i t y t o g e n e r a t e m o r e

name and good perception for

the Price/book value (P/Bv)

G.A Adekoya (2010) under-

Capital

c o v e r a g e r a t i o c a n b e u s e d busin es s fo r m the exis ting s et

the inves to r s. Al s o, s i ze o f t h e

w h i c h re p re s e n t s t h e m a r k e t

lines the importance of dif-

Capital adequac y is the cluster

t o m e a s u r e a s s e t q u a l i t y o f up.

bank is impor tant for business

perception about the bank.

ferent criteria ,factors and

to d e te r m i n e t h e c a p a c i t y o f

banks. Here, non-per form-

diversification, broader geo-

Th e re i s a l o t o f l i t e r a t u re i n

alternatives that are essen-

bank to meet liabilities and

ing assets have largely been A n o t h e r m e a s u re t h a t w i l l

graphic al reac h, red uce d co n -

textbooks discussing price

tial investment decision by

r i s k su ch a s cre d it r isk , ope r-

taken in comparison with total impact the investor sentiments

centration risk and economies

m ul t i p l e s. I n t h e p a p e r t i t l e d

applying Analytical hierar-

ational risk, market risk and

a s s e ts or ne t advan ces. O t h er i s t h e g r o w t h p a r a m e t e r s .

o f s c al e.

Valuing Financial ser vices

c h i c a l p ro ce s s (A H P ) . A H P i s

business risk. Capital ade -

firm by Ashwath Damodran

one of the best mathemati-

q ua c y pa ra me te rs ha s ce r ta in

m e as u re s li ke, slipp age

Growth of profits, advances,

Adequacy

r a t i o w h i c h m e a s u r e s t h e d e p o s i t s, a n d e nt i re b u s i n e s s

With the opening up of the

(2009) discusses the differ-

c a l te c h n i q u e s i n t h e c a s e o f

influence on Banks expan-

i n c r e a s e i n N PA s c a n a l s o b e p l a y s a n i m p o r t a n t r o l e i n

e c o n o m y, t h e I n d i a n b a n k s

ent methods of valuation of

multi criteria decision mak ing.

sion .CAR parameters would

u s e d. Anothe r way to an alyze invest m ent dec is io n m ak ing.

face competition from foreign

a banking firm. In the paper

In the paper titled analysis

incorporate the risk levels

t h e l o a n b o o k q u a l i t y i s t o Fo r a co m m erc ial bank , m ain-

banks in terms of both business

t i t l e d E q u i t y Va l u a t i o n Us i n g

of the efficiency of banks in

.Reser ve Bank of India gives

check the exposure of the tenance of liquidity is as

and talents. With the grant-

Price Multiples: A Comparative

Montenegro using the AHP

cer tain guidance on minimum

loans viz. sec tors or large cus- i m p o r t a n t a s i t s p r o f i t a b i l -

ing of new banking licenses

Study for BRICKS by Sanjay

by Svetlana Rakocevic and

C A R pa ra me te rs which wou ld

tomer wise. Credit risk concen- it y. Liq u idit y r is k c an be m ea-

by RB I, co m petitio n fo r t a l e nt

S e h g a l a n d A s h e e s h Pa n d e y

Zd e n k a D r a g a s e v i c u s e s A H P

build shareholders confi-

tration is measured by relat- s u r e d f r o m m a t u r i t y m i s -

has become intense. Though

(2010) discuss about the key

method to compare banks

d e nce in the ba nk ing syste m.

ing a volatile loan categor y to m a t c h o f a s s e t s a n d l i a -

it is challenging to measure

value driver of the compa-

depending on the different

The parameters identified

capital. It should be tried to b i l i t i e s . I t i s m a n a g e d b y

how banks respond to this

nies in the Brazil, Russia, India

quantitative and qualitative

un d e r this clu ste r a re Ca pita l

a s ce r ta i n what wo uld h app en A s s e t L i a b i l i t y M a n a g e m e n t

competition, we believe this

China, Korea and South Africa.

c r i te r i a .

Adequacy Ratio (CAR), Tier-I

to core earnings (and possibly C o m m i t t e e ( A LC O ) t h r o u g h

would be captured in busi-

As p e r t h e re s ul t m o s t o f t h e

to capital) if a bank needed to ALM tec hniq u es.

nes s per em pl oyee a n d p ro f i t

co m p a n i e s i n I n d i a a re u s i n g

wr i te - off s e ve ral o f it s largest

per employee. Non-banking

relative valuation of price with

Cap it al adeq u ac y is an im po r-

f i n a n c i a l i n s t i t u t i o n s a re a l s o

re s p e c t to b o o k va l ue. I n t h e

tant fac tor to judge the bank ’s

gi v i n g co m p e t i t i o n fo r b a n k s

paper titled Relative Valuation

CAFELOGS For mulati on -

t h e ability to meets its risks and

which banks are overcoming

o f U. S . I n s u r a n c e C o m p a n i e s

A s d i s c u s s e d e a r l i e r, i n t h i s

side are I nvestment, advances

t o liabilities. Capital adequacy

by coming out with innova-

(2011) by D oronnissim clear ly

paper we have modified the

, Balances with other banks

i n c re a s e p ro f i t m a rg i n s i s, t o also shows the room for bank ’s

tive f inanc ial pro du c t s. Th e s e

defines the relative valua-

C AMEL rat i n g s to i d e nt i f y t h e

,Balances with Reser ve Bank

reduce the cost of operations. g r o w t h w i t h t h e a v a i l a b l e

k i n d o f q u a n t i t a t i ve p a r a m e -

t i o n m e t h o d fo r f i n a n c i a l s e r-

parameters for rank a bank

o f I n d i a a n d Fi xe d A s s e t s. I n

A major chunk of operating capital. Also, to implement

ter s are no t c aptu re d a s t h e s e

vices firm and Banks across

from the investor perspec-

b a nks the ma jor pa r t is u nd e r

c o s t i n P u b l i c S e c t o r B a n k s B asel II no r m s, bank s need to

would finally contribute to

t h e wo r l d. H e co n c l ud e s t h at

t i ve . Th e re p l a ce m e nt o f M –

assets is under Advances

is the staff cost, also termed have a strong framework for

bottom line which are cap-

market price as a proxy for

Management capabilities with

head. Reser ve Bank of India

e s t a b l i s h m e n t c o s t . C o s t t o credit risk and operational risk

tured in terms of growth rates.

intrinsic value of the firm

operational and financial effi-

has classified asset into cat-

income parameter helps in management. Measures like

Similarly attributes like cus-

which is termed as book value

c i e n c i e s . Tw o o t h e r p a r a m e -

egories like standard assets,

co mpar i ng the o p erat in g co st C AR (Capital adeq u ac y

tomer ser vice, customer sat-

of the firm.

ters namely the growth and

substandard assets, doubt-

incurred with the income gen- r a t i o ) & Ti e r - 1 c a p i t a l t o R i s k

isfac tion, location advantages

m a r k e t s h a re p a r a m e t e r s a re

ful assets and Loss assets.

e r a te d. O t h e r f a c to r s s u c h a s w e i g h t e d a s s e t s c a n b e u s e d

etc. are also not considered

In the paper titled applica-

a d d e d at t h e e n d .Th e

RBI has given cer tain guide -

Bu s i ne s s pe r emp loyee, pro f it t o j u d g i n g t h e c a p i t a l a d e -

as al l o f thes e f inal l y co nt r i b -

tion of analytic hierarchy

modified model can be named

l i n e s for prov isioning of Non-

p e r e m p l o y e e , B u s i n e s s p e r quac y o f bank s.

u te to the pro f itab i l i t y o f t h e

p r o c e s s ( A H P ) t o i nv e s t m e n t

a s C A F E LO G S . T h e c l u s t e r s

per forming loans depend-

branch can also be used for

bank .

portfolio selection in the

which contribute to the new

i n g o n t h e d u r a t i o n o f i t ’s

lo ans. Besides, revenue

increasing another

way

14

Ca pita l a nd d iv id e nd payou t.

M ethod ology : Ass e t Q u alit y Model

In a bank balance sheet the main heads under the assets

15


INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

non-per forming. Banks have

to t h e f u tu re val u atio n o f the

in the coming years which

t h e g u i d a n c e o f R e s e r v e b a n k o f u n d e r t h i s c l u s t e r a r e m a r k e t s h a r e o f a d v a n c e s, m a r k e t

to allocate suitable amount

banks .The parameters iden-

can be tapped by incremen-

I n d i a . T h e p a r a m e t e r s i d e n t i f i e d s h a re o f d e p o s i t s a n d m a r k e t sha re of bu sine ss.

of provisions according to the

t if ied u nder this c ateg o r y are

tal branches of banks .Reser ve

under this cluster are percentage

non- pe r for min g lo an s in t h at

Return on Equity (ROE), Return

Bank of India has forced Indian

c h a n g e i n to t a l a s s e t s, p e rce nt a g e

y e a r. T h e p a r a m e t e r s i d e n -

o n A s s e t s ( R OA ) , p e r c e n t a g e

co m m erc ial bank s to o p e n 2 5

change in advances, percentage

tified under this cluster are

increase in earnings per share

% o f t h e i r b r a n c h e s i n Ti e r 5

change in investments, percentage

G ro s s N o n - Pe r fo r m i n g As s e t s

(EPS) and percentage increase

and Tier 6 cities (rural ) .Indian

change in deposits and percentage

( G N PA ) , N e t N o n - Pe r f o r m i n g

in b o o k val u e (B V ).

banks have more oppor tunities

c h a n g e i n n e t p ro f i t s.

to explore new technologies in

L o a n ( N N PA ) a n d P r o v i s i o n s

L iq uidit y

Cove ra ge R atio (PCR).

the bank ing s ys tem .Th e p e n -

Liquidity is ability to meet

etratio n o f m o bil e co m m e rce

-

short term and long term

and el ec tro nic co mm e rce c a n

T h e s e a r e Fi n a n c i a l p a r a m e -

obligations without losses.

h e l p t o r e d u c e t h e i r o p e r a t-

te r s whi c h c an h elp t h e b an k

One of the key problems of

ing co s t . Operatin g e f f i c i e n -

to determine the effectiveness

liquidity in banks arises due

c ies deter m ine the l o n g te r m

of its utilization of financial

to As s e t l i a b i l i t i e s m i s m atc h .

profitability of the commer-

resources available with them.

Liquidity can cause a huge

c i a l b a n k s. E f f i c i e nt u s a g e o f

These parameters depends on

shor t term demand for money

the res o u rces w il l re d uce t h e

the economic parameters such

wh ich wo u l d af fec t the ear n-

operational cost and enhance

a s R e po, R e verse rep o,

i n g s o f t h e b a n k . I n o rd e r t o

the bank ing pro f it. Th e m a j o r

Cash reser ve ratio and stat-

meet the short term obliga-

head u nder operat i n g co s t i s

utor y lending ratio. These

tions banks should either raise

the salaries for employees.

parameters depend on the

mo ney tho u g h LA F (Liq u idit y

The parameters identified

(Figure 2: Diagrammatic representation of Analytical

short term and long term

A d j u s t m e n t Fa c i l i t y ) o r C a l l

under this cluster are busi-

H i e ra rc h i c a l p ro ce s s )

strategies of the bank. The

money market .In LAF the

nes s per em pl oyee, o p e rat i n g

parameters identified under

Reser ve Bank of India lends

pro f it per em pl oye e a n d Co s t

this cluster are Net interest

a t 1 p e rc e n t h i g h e r t h a n t h e

to inco m e, Operati n g i n co m e

Analyti cal hi erarchi ca lPro ce ss:

margin (NIM), I nterest I ncome

R epo rate f ixed by them . The

to to tal as s ets.

Analytical hierarchy process is a procedural approach which

t o To t a l A s s e t s, N o n - i n t e r e s t

parameters identified under

income to total Assets, Net

this cluster are Credit- deposit

G row th

interest income to Interest

r a t i o (C D r a t i o ) , Ad v a n c e s t o

Growth rate determines rel-

m a k i n g p r o b l e m s. A H P Pr o c e s s i n e v a l u a t i n g t h e o v e r a l l

income and Net profits to

to t a l a s s e t , D e p o s i t s t o t o t a l

ative per formance of the

R a n k i n g o f I n d i a n co m m e rcia l ba nks

total as s e ts.

liabilities, Investments to total

bank with others .Growth

AHP technique uses diagrammatic representation in the

asset and Current account

is an impor tant concern for

fo r m o f h i e ra rc hy a s s h ow n i n t h e f i g u re b e l ow to m o d e l

saving s acco u nt (C AS A).

i nv e s t o r s i n a ny b u s i n e s s . I n

M ar ket Share

bank ing s ec to r the grow t h i s

M a r k e t s h a r e o f t h e b a n k i s a n The identified parameters of different cluster in CAFELOGS

benchmarked by the guidance

i m p o r t a nt f a c to r fo r f ut ure grow t h model are conver ted into a questionnaire format. The ques-

.They are the actual returns

O p e r a t i o n a l E f f ic ien c ies -

of GDP growth rate and non

o f t h e b a n k i n c u r r e n t g r o w i n g tionnaire format was sent to capital market investment and

which the banks and share -

Operating cost is one of the

fo o d c r e d i t g r o w t h r a t e p r o -

e c o n o m y. A s p e r t h e l a t e s t 2 0 1 0 b ro k i n g f i r m s i n I n d i a . Th e re sponse s wa s consolid ate d to

holde r s ge t o n t h eir busin ess

impor tant cost head in bank ’s

v ided by the R es er ve B a n k o f

R B I s t a t i s t i c s o n l y 4 4 % o f c u r r e n t arrive at the rank ing of the different parameters .In order to

activities. The parameters

P&L statement .India has a

I n d i a . I nve s to r s wo u l d p re fe r

e a r n i n g p o p ul at i o n i s h avi n g b a n k c a l c ul ate t h e re l at i ve we i g ht of d iffe re nt clu ste rs a nd the ir

under this cluster contributes

huge oppor tunit y for Bank ing

t h e b a n k s w h i c h o u t p e r fo r m

account. The parameters identified p a r a m e te r s, E i g e n Va l u e m e t h o d i s u s e d i n t h i s p a p e r.

Fi n a n c i a l E f f i c i e n c i e s

Ear n i n g s

Commonly known as the return rati o i n a Ba nk s R at io an alysis

involves structuring of multiple options into a system. A H P i s a s t r uc t ure d te c h n i qu e to solve complex d e cisions.

-

16

re a l l i fe s i t uat i o n .

17


INFINEETI Research Magazine | Annual Issue 2011

INFINEETI Research Magazine | Annual Issue 2011

M etho do l o g y to d e te r m i n e P /B ratio fo r I ndia n B a n k i n g s to c k s The c l o s e s to c k p r i ce s o f I ndian co m m erc ia l b a n k s a re co l l ec ted f ro m th e B o m b ay s to c k exc hang e. Th e ave rag es o f c l o s e pr ice s o f t h e s e s to c k s are c aptu re d i n a s n a p s ho t per io d o f o n e ye a r. Th e s nap s ho t per io d d ate ra n g e is f ro m Apr il 1 s t to M a rc h 3 1 s t res pec tivel y. B o ok va l ue i s repo r ted in the a ud i te d f i n a n c ial s tatem ent o f t h e b a n k s. I t is repo r ted o nl y o n ce i n year in the Annu a l R e p o r t. The pair wise comparison was based upon seven point wise

The Pr ice /B o o k va l ue i s

co m pa r i s on. Th e weight age o f each c l u s ter and param eter s in

deter m ined u s ing t h e b e l ow

the cluster is identified a pair wise comparison as shown in

fo r m u l a

A n n e x u re s. T h e c o n s o l i d a t e d we i g h t a g e o f t h e i d e n t i f i e d 3 2 pa rame te r s of C AFELOGS mo del are s how n bel ow tabl e

Pr ice /B o o k val u e = Ave ra g e o f c l o s e pr ices / B o o k va l ue

R esults and D i scussi on

Th e pr i ma r y dat a co llec ted is ran ked acco rding to c harac ter is -

price /book value is given.

B a n k s a n d t h e o b j e c t i ve o f t h e

In 2008 / 2009 period the

rank ing also differs from agenc y

t i c s of e ac h p arameter. Th e dat a un d er fo u r param eter nam el y

R ank ing and Pr ice/B ook value

mar kets over reac ted because

to agency. Ranking banks per for-

G r o s s N o n - Pe r f o r m i n g A s s e t s ( G N PA ) , N e t N o n - p e r f o r m i n g

of listed scheduled commer-

of the global economic reces-

mance from the investor`s point

cial banks are calculated as per

sion. During that period the

of v ie w is a complex proce ss a s

the above methodologies. The

model has a success rate of 66

i t d e pe nd s on qu a ntitative a nd

ranks assigned to each bank

% re s p e c t i ve l y. I n t h e c a s e o f

qualitative parameters. Also,

is studied over the given time

banking the investors gives

t h e v a l u a t i o n t h e m a r k e t gi ve s

d urat i o n a n d re l at i ve c h a n g e

a higher weightage to the

for a bank stock depends of

i n t h e ra n k s a re n o te d .I t wa s

banking fundamental rather

m u l t i p l e f a c t o r s s u c h a s i nve s -

identified that in approxi-

than economic conditions

tor perception, market liquid-

mately 70 % of the cases when

during valuation of a commer-

i t y, i n t e r e s t r a t e e n v i r o n m e n t

t h e ra n k s o f t h e b a n k m ove d

c i a l b a n k i n g s to c k i n I n d i a .

and countries macroeconomic s c e n a r i o . T h r o u g h t h i s p a p e r,

in either direc tion the Price to b o o k va l ue a l s o m ove d i n t h e

Conclusi on:

the ranking obtained from the

s a m e d i re c t i o n . I n t h e b e l ow

18

we have shown that cha ng e s in

diagram, the success rate of

There are several arguments

C A F É LO G S m o d e l a n d t h e c o r -

the correlation of rank ing and

for per formance ranking of

responding P/BV changes are 19


INFINEETI Research Magazine | Annual Issue 2011

more than 66% cor related. This may be because we have not considered the quantitative parame ter s s u c h as th e pro mo ters b ackgro und, c hang e in m anag em ent, co r po rate g over na n ce o f t h e b a n k , bra nd e q uit y o f t h e b an k an d exceptio nal c as es l ik e State bank gro u p, it ’s g et s up p o r t i n ter ms of business for m gover nment . Fur ther research can be car r ied out by incor porating quant i t at i ve para m e ters, mar ket co n dit io n s and eco no m ic s cenar io s w hic h c an l ead to a m o d e l t h at i s hi ghly cor re lated wit h t h e mar ket se ntim ents

R e fe re n ce s : 1 . S aat y, T.L . ( 1980), Th e An alyt ic H iera rc hy Pro ces s, M c G raw-H il l, N ew Yo r k 2 . F I Cr i te r i a : Ban k R at in g An alysis M etho do l o g y Pro f il e, Standard and Po o r (20 04 ) 3 . M od e li ng ban k credit rat in gs A st ruc tu ral appro ac h to M o o dy ’s (2 00 7) 4 . Analys i s of the ef f icien c y o f B an k s in M o ntenegro u s ing the AHP, Svetl ana R ak o cev i c, Fa c ul t y o f E co n o m i c s U n i ve r s i t y o f M o n te n e g ro Po d g o r i c a , Zd e n k a D r a g a s e v i c, Fa c u l t y o f E c o n o m i c s Uni ve r s i t y of M onten egro Po dgo r ica 5 . B enc hm ar k i ng Per fo r man ce o f Pub lic S ec to r B ank s in I ndia, B hagirathi N ayak and C Na h a k 6 . Pa r a m e t e r s o f R a t i n g o f I n d i a n C o m m e r c i a l B a n k s - A c r i t i c a l A n a l y s i s , D r. M u k t a M a n i , I n t e r n a t i o n a l J o u r n a l o f R e s e a rc h i n Co m m e r c e, I T a n d M a n a g e m e n t , V O LU M E N O : 1 ( 2 0 1 1 ) , I SSUE NO. 2 ( JULY ) 7. AHP based Model for Bank Per formance Evaluation and Rating,Tihomir Hunjak ,Drago Jakovčević, I SA HP 2001, B e r n e, Swit zer lan d, Augus t 2-4 , 2 00 1 20


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