3754PERFORMANCE-EVALUATION-OF-SELECTED-BANKS-USING-ECONOMIC-VALUE-ADDED.pdf

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ELK Asia Pacific Journals – Special Issue

ISBN: 978-81-930411-0-9

PERFORMANCE EVALUATION OF SELECTED BANKS USING ECONOMIC VALUE ADDED

Dr. Shivappa,

Associate Professor, Kousali Institute ofManagement Studies, Karnatak University

Dharwad.

Mrs. Jyoti N Talreja,

Assistant ProfessorDept. of MBA, GogteInstitute of Technology,Belgaum

ABSTRACT

Keywords : EconimicValue Added, Banking, Shareholders Wealth, Beta, Cost of capital

Introduction:Banking Sector in India has seen a

tremendous growth since its inception,

introduction of Liberalization,

globalization and Privatization LPG in

1990s has significantly changed the

structure of banking sector. This sector

plays a crucial role in the economic

development of the country and is an

important part of Indian Financial system.

EVA concept was developed by Stern

Stewart and Co. in the 1990’s in U.S. Since

then many companies have used this

technique to measure their financial

performance. Economic value Added uses

the residual income approach to measure

performance. EVA is calculated by

deducting total cost of capital (Debt +

Equity) known as capital charge from the

Net operating profit after tax. Traditional

techniques dependent on the net profit

which considers only cost of debt or borrowings. Therefore EVA is considered

superior to Traditional techniques EVAenables the stakeholders to get a true picture

about the organizations performance.

Review of Literature: The literature

relating to EVA begins with the publication

of the book “The Quest for Value by

Stewart (1991)”, in this book the author

highlights the significance of EVA as the

basis of performance measurement of a

company and its management. In his

empirical research Stewart examined the

informational content of EVA, by testing

613 American companies comparing two

periods, namely 1984 – 85 and 1987 – 88. He

found a strong correlation between EVA

and MVA. His ideas were further supported

by O’Byrne (1996), Grant (1996), Dodd

and Chen (1996), Peterson and Peterson

(1996), Biddle et al. (1997) and many more

R.SATISH AND Dr.S.S.RAO (2010): havestudied on “PERFORMANCE

Every business requires to win stakeholders confidence by presenting their reports in the most

sophisticated manner. The measurement tools like cash flow statements analysis, fund flow statements

analysis, ratio analysis, common size statements Return on Investment (ROI), Return on Net worth

(RONW), Return on Capital employed (ROCE), Earning per share (EPS) are the most popular

traditional used techniques to measure the performance. In the recent years many modern techniques

have also gained popularity like Balanced score card, value added statements, Economic value Added

(EVA) Cash value Added, Shareholders Value Added etc. Out of the modern techniques available

Economic value added has gained popularity to measure performance from shareholders point of view.

Through this paper an attempt is made to calculate EVA for two banks selected each one from public

and private sector The main objectives of this paper are To determine the value added by the banks to

shareholders wealth using Economic Value added and To calculate Beta and analyse the Risk of SBI

and ICICI


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ISBN: 978-81-930411-0-9

MEASUREMENT OF BANKS: AN

APPLICATION OF ECONOMIC VALUE

ADDED & BALANCED SCORECARD”

this paper focuses on awareness of EVA as

a performance measurement technique in

Indian banks. In this comparison the

researcher emphasizes on BSC as a better

technique as CAMEL entirely ignores

qualitative measures of performance, in

section D the researcher concentrates on

EVA as a performance measurement tool

and in this section the researcher used

primary data to analyze the awareness

about EVA among the Indian banks, heused 39 banks listed on BSE as sample. The

respondents selected were General

Managers and assistant managers and

almost 23% of the respondents assigned

highest rank to EVA as a performance

indicator in banking system.

G Soral and Shurveer S Bhanawat (2009)

have worked on “Shareholder Value

Creation in the Indian Banking Industry:

An EVA Analysis” sample of 14 publicsector banks and 12 private sector banks

was selected by the authors to measure bank

performance on the basis of EVA. The

analysis was done for 4 years and equity

approach was been followed to calculate

EVA. After finding the EVA the authors

found out the correlation between EVA and

other financial figures. The authors

conclude that in Public sector SBI has

contributed highest EVA they also

conclude that EVA has significantcorrelation with Operating profit

Roji George(2005): has conducted research

on “Computation of EVA in Indian Banks”

the research concluded that banks add valueto the shareholders wealth and do not

destroy them and a positive relationship

was found between EVA, NPA and

employee productivity. The study reveals

that public sector banks perform better than

private sector banks for the selected periodin spite of high cost of capital. The

researcher suggests that public sector banks

can use EVA as their USP while reaching

the capital market.

Samuel C. Weaver (2001): the author has

worked on “Measuring Economic Value

Added: A survey of the practices of EVA

proponents” A survey was conducted by the

author by selecting 29 respondents who

were clients of Stern Stewart and Company

The survey demonstrates that the

calculation of EVA varies widely from

company to company. The author

concludes that EVA is primarilyimplemented to enhance financial

performance metrics and EVA proponents

perceive a link between EVA and

shareholders returns.

Research Methodology:

Objectives of the study

To study Economic Value Added

and its applications in Indian Banks

To determine the value added by the

banks to shareholders wealth usingEconomic Value added

To calculate Beta and analyse theRisk of selected banks

To calculate the Return on capital

employed by the selected banks

To compare the value added by public sector banks and private

sector banks using the selected

banks

Sample size: The study is conducted by

selecting two leading banks in India one

each from Public Sector and Private Sector

namely State Bank of India and ICICI Bank

Collection of Data: Secondary data is used

for the study. The data is collected from the

annual reports of the banks, Publications by

RBI and stock prices of the banks are

collected from stock market websites like

yahoo finance, money control and NSE


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Tools for Analysis:

Various financial tools are used for

different analysis like Capital Asset pricing

Model is used to calculate the cost of

Equity, regression technique using excel is

used to calculate the Beta values for the

selected banks, ratios and Graphical

representation is used to analyse and

interpret the data

Duration of Study:The study is conducted for a period of two

years i.e., 2012-13 and 2013-14

Results and Discussions:

Net Operating Profit is considered instead

of Net profit to find the Economic value

added

Net Operating Profit = Income- Operating

Expenses

Net Operating Profit after Tax is used

instead of Net Profit to get a true Picture of

the value created

NOPAT= Operating Profit – Tax

NOPAT (Net operating profit after Tax)Banks SBI ICICI

Year

2012-13 (Rs. In Cr) 2013-14 (Rs. In Cr)

2012-13 (Rs.

In Cr)

2013-14 (Rs.

In Cr)

Total Income 135,691.94 154,903.72 22212 26903

Operating expenses 29,284.42 35,725.85 9013 10309

Operating Profit 106,407.52 119,177.87 13,199.00 16,594.00

Taxes 5846 5283 3072 4158

NOPAT 100,561.52 113,894.87 10,127.00 12,436.00

Invested Capital is calculated by adding

Equity Capital, Reserves and Surplus and

Borrowings

Invested Capital

Bank/

Years

2012-13(Rs. In

Cores)

2013-14(Rs. In

Cores)

SBI 328756.22 371130.25

ICICI

Bank 212042.96 227965.80

Return on Invested Capital: is calculated by

dividing Net Operating Profit after Tax

with the total capital Invested

Return on Invested Capital

Bank/Year

s

2012-13

(%)

2013-14

(%)

SBI 35% 27%

ICICI

Bank 4.78% 5.46%

BETA (β) Beta can be defined as the risk co-efficient

higher the Beta higher is the RisK. It is used

to calculate Cost of Equity. Beta is the

systematic risk which is calculated using

the following formula. Calculations of Beta

are done using Excel the calculation is

shown in the annexure

nΣxy - (Σx) (Σy) ÷ nΣx2 - (Σx)2


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Beta (β)

Bank/Years 2012-13 2013-14

SBI 0.98 2.37ICICI 1.54 2.78

Market Return (Rm)Market return is calculated using 2 years

Market Monthly return of NIFTY,

calculations are done using excel,

calculations are shown in the annexure

Market Return (Rm)

Bank/Year

s

2012-13

(%)

2013-14

(%)

SBI 8.15% 17.72%

ICICI 8.15% 17.72%

Cost of Equity (Ke):

It determines the expected rate of return for

the investors it is calculated by using

Capital Asset Pricing Model CAPM by

taking inputs such as Beta risk factor, Rm

Market Return, Rf Risk Free Rate (364 days

treasury bill rate is taken for each year)

Cost of Equity (Ke): SBI ICICI Bank

Years

2012-13

(%)

2013-14

(%) Years

2012-13

(%)

2013-14

(%)

Risk free rate of

return Rf 7.79% 8.96%

Risk free rate of

return Rf 7.79% 8.96%

Market Return Rm 8.15% 17.72% Market Return Rm 8.15% 17.72%

Beta 0.98 2.37 Beta 1.54 2.78

Ke 8.14% 29.72% Ke 8.34% 33.31%

Cost of Debt (Kd)Cost of debt is calculated by: Interest/ Borrowings*100

Cost of Debt (Kd)

SBI ICICI Bank

Years

2012-13 (Rs. In

Cr)

2013-14 (Rs. In

Cr) Years

2012-13

(Rs. In

Cr)

2013-14

(Rs. In

Cr)

Interest

expenses 7861.25 9182.93

Interest

expenses

10701.7

7

11291.5

9

Borrowings 203723.20 223759.71 Borrowings

145341.

49

154759.

05Cost of Debt

(Kd) 3.86% 4.10%

Cost of Debt

(Kd) 7.36% 7.30%

WACC (Weighted Average Cost of

Capital)

Weight of equity and debt in the total

capital invested is calculated to find

weighted average cost of capital


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ISBN: 978-81-930411-0-9

WACC (Weighted Average Cost of Capital)

SBI ICICI Bank

Years

2012-13(Rs. In

Cores)

2013-14(Rs. In

Cores) Years

2012-13(Rs. In

Cores)

2013-14(Rs. In

Cores)

Total

Borrowings

203723.19

69

223759.70

95

Total

Borrowings

145341.49

44

154759.05

39

Total Equity 684.034 746.5731 Total Equity 1153.64 1155.04

Reserves and

surplus 124348.99 146623.96

Reserves and

surplus 65547.83 72051.71

Total capital

invested 328756.22 371130.25

Total capital

invested 212042.96 227965.80

Debt weight 0.62 0.60 Debt weight 0.69 0.68

Equity weight 0.38 0.40 Equity weight 0.31 0.32

Weighted Average Cost of Capital is

calculated using the following formula

WACC= (Ke* weight of equity)+(Kd*

weight of debt)

WACC (%)

Bank/Year

s

2012-13

(%)

2013-14

(%)

SBI 5.49% 14.28%

ICICI 7.67% 15.65%

Capital Charge :Capital Charge is calculated by multiplying

total Capital Invested with WACC

(Invested Capital*WACC)

Capital Charge

Bank/Yea

rs

2012-13

(Rs. In

Cores)

2013-14

(Rs. In

Cores)

SBI 18042.44 52983.22

ICICI

Bank 16267.61 35678.81

Economic Value Added (EVA)

EVA= Net Operating Profit after Tax-

Capital Charge

Economic Value Added (EVA)

SBI ICICI Bank

Years

2012-13

(Rs. In

Cores)

2013-14

(Rs. In

Cores) Years

2012-13

(Rs. In

Cores)

2013-14

(Rs. In

Cores)

NOPAT 100561.52 113894.87 NOPAT 10127 12436

Capital

Charge 18042.44 52983.22

Capital

Charge 16267.61 35678.81

EVA 82519.08 60911.65 EVA -6140.61 -23242.81

Economic Value Added (%age)EVA = Return on Capital Employed – Weighted Average Cost of Capita


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ISBN: 978-81-930411-0-9

Economic Value Added (%)

SBI ICICI Bank

Years

2012-

13

2013-

14 Years

2012-

13

2013-

14

Return on Invested Capital

SBI 35% 27%

Return on Invested

Capital 4.78% 5.46%

WACC 5.49%

14.28

% WACC 7.67%

15.65

%

EVA 29% 13% EVA -3% -10%

Findings

It was observed through the analysisthat State bank of India added value to

the shareholders wealth by generating a

positive Economic Value Added and

meeting its capital charge entirely.

Whereas ICICI bank could not add

value to the shareholders wealth

Return on Capital Employed of SBI is

greater than its cost whereas in case of

ICICI Cost is higher than the Returns

Beta values are calculated to find the

risk co-efficient of the banks it isobserved that beta of both the banks is

high in the year 2013-14. This shows

the banks stocks were very volatile in

this period as compared to the market.

Conclusion:Banking sector in India is growing in leaps

and bounds and is also approaching capital

market for infusion of funds to escalate

further growth in the banking sector. It is

now predominantly significant for bankers

to increase the shareholders wealth and

encourage them for more investment in

banks. To do this the banks have to measure

their performance from shareholders

perspective, bankers will have to follow

wealth maximization as an objective to

indicate that they are adding value to

shareholders wealth and not deteriorating it.

In order to determine this, bankers need toapply the Economic value added measure.

Through this paper an attempt is made to

evaluate bank performance using Economic

Value Added as a Performancemeasurement technique, it is concluded that

EVA can be used to value bank

performance from shareholders point of

view. Shareholders can use EVA values to

decide on their investment decisions in

different banks.

References

[1] R.Satish and Dr.S.S.Rao

“Performance measurement of

banks: an application of EconomicValue Added & Balanced Scorecard

” Journal of Management

Vol.VI.No.1.October 2010.pp. 74 -

101

[2] Roji George “Computation of EVA

in Indian Banks” The IUP Journal

of Bank Management, 32 May 2005

[3]

Samuel C. Weaver “Measuring

EVA A survey of the practices of

EVA proponents” Journal of

applied finance 2001

[4] G Soral and Shurveer S Bhanawat

“Shareholder Value Creation in the

Indian Banking Industry: An EVA

Analysis” The IUP Journal of

Accounting Research & Audit

Practices, Vol. VIII, Nos. 3 & 4,

2009

3754PERFORMANCE-EVALUATION-OF-SELECTED-BANKS-USING-ECONOMIC-VALUE-ADDED.pdf

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