IDEA FOUNDATION - Techshristi

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IDEA FOUNDATION
Nr. Hotel Fortune Landmark, Usamanpura,
Ahmedabad-380 013.
Gujarat, India.
In Indian Banking Sector.
requirement for the degree of Master Of Bussiness
Administrator of Sikkim Manipal University, India.
Sikkim Manipal University of Health,
Medical and technological & Technology sciences
Distance education wing, Syndicate House,Manipal.
For more Project Report visit www.techshristi.com
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(STUDENT DECLRATION)
submitted in partial fulfilment of the requirement for the
degree of Master Of Bussiness Administrator of Sikkim Manipal
University, India, is my original work and not submitted for the
award of any other degree, diploma, fellowship, or any other
similar or another similar title or prizes.
I also declare that this project includes my own findings & done
on my own efforts.
Date: Registration No:520942435
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CHAPTER NO
a)ORIGIN 8
b)STRUCTURE 10
c)VISION 12
d)MISSION 13
f)GLOBAL ECONOMY 41
g)INDIAN ECONOMY 52
h)BANKING SECTOR 61
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PREFACE
October is one of the peculiarly dangerous months to speculate in
stocks. The others are July, January, September, April, November, May, March,
June, December, August and February!
The market is weird. Every time one guy sells, another one buys, and
they both think they're smart.
A market analyst is an expert who will know tomorrow why the things
he predicted yesterday didn't happen today!
The above-mentioned quotes are not only interesting but relate to the
realities an investor faces at the time of making investments; lack of knowledge of
the stock market, the various so-called analyst or broker and the investment
opportunities and periodicity. Fundamental analysis is a self-assessment tool that
helps an investor while making any investment. Generally fundamental analysis
considers the long-term perspective on the contrary to the technical analysis that
takes a short-term view while investing in stocks.
Banking is a booming sector and is rocking Indian economy. Demand
for Banking service is ever rising and so does the value of the stocks of banking
companies. Indian banking sector is growing very speedly in today‘s growing
Indian economy. The fundamental analysis of the banking stocks has been
represented in our report stating the example about the factuality of how the
analysis is done.
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ACKNOWLEDGEMENT As such being novice to the stock market it was very difficult to
understand the working of the stock market first.I am very much thankful to
Sharekhan Stock Broking Ltd. that provided us the platform to have a deep view
into the working of stock market. Our sincere thanks to Mr. Munaf Kadri (area sales
manager) for granting me permission and guiding our efforts in the right direction.
It had been our privilege working with him, as it was not merely training but a
wholesome package of corporate experience where i was allowed to look into the
daily activities performed by the Sharekhan Ahmedabad main Branch. Besides that i
am also thankful to the other staff member of Sharekhan, Mr. Darshit B Vyas in
order to guide us as to how the market operates.
I wholehearted thanks to our professor Mr.Amit for his support and
guidance during the period of the summer training. A free choice of selection of any
topic helped us get a better idea where exactly we want to land for our career. Stock
market is place of our interest and i would definitely like to carve our future in it.
Finally, my sincere thanks to all the people who have directly or indirectly
helped us in shooting down the problems faced during this period.
Thank you,
Jay Bhojwani.
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GENERAL INFORMATION
SECURITEIS PVT. LTD.
PH NO : 1800 - 22 7500 , 3970 75 00
E-MAIL: [email protected]
BRANCH OFFICES: 172 BRANCHES
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SHAREKHAN ORIGINS
Sharekhan is an equities focused organization tracing its lineage to
SSKI(Shripal Sevantilal Kantilal Ishwarlal), a veteran equities solutions company
with over 8 decades of experience in the Indian stock markets.
Sharekhan is 80 years old company which is started online in the year 2000 &
it is the first company who started online in 1984 they ventured into institutional
broking& corporate finance.
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• Multi-channel access to clients
• Depository Services
• Best research team in the world
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More About Sharekhan
SSKI named its online division as SHARE KHAN and it is into retail
Broking
The business of the company overhauled 6 years ago on February 8, 2000.
It acts as a discount brokerage house to a full service investment solutions
provider
It has a 4000 member strong team.
It has specialized research product for the small investors and day traders
Largest chain of share shops which is 1288 share shop in 400 city , 1400+
Franchisees & over 172 Branches across India.
It has $25m/trades every day.
Leading player today with 20% market share
Over 65% online clients
The site was also launched on February 8, 2000 and named it as
www.sharekhan.com
The SpeedTrade account of share khan is the next generation technology
product launched on April 17, 2002
Trade Tiger was launched on October 28, 2002 for trading in Derivatives
It offers its customers with the trade execution facilities on the NSE, for
cash as well as derivatives, depository services
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VISION
To empower the investor with quality advice and superior service to help him take
better investment decisions. We believe that our growth depends on client
satisfaction.
SHAREKHAN.COM
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MISSION
To provide the best customer service and product innovation tuned to diverse
needs of clientele
human values.
Efficiency and effectiveness built on ethical practices.
CORE VALUE
Providing quality service effectively and efficiently
Smile, it enhances your face value is a service quality stressed on
periodic customer service Audits
Maximization of stakeholder value
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COMPANY
1,050,000 customers & still growing.
3000+ smart employess.
Second in the race of having numbers of accounts.
Maintain the growth rate from last 8 years.
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2. Web based applet – fast trade for investors.
3. Trade tiger exe for active traders.
Dail & Trade.
1. 1800-22-7500
2. 1800-22-7050
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Segmented Customer As Per His Profile
1. Those who investing first time in the sock market :- Fisrt Step.
2. Those who transact occasionally :- Classic.
3. Those who trade actively in the market :- Trade tiger.
4. Those HNIS looking for personalised & exclusive investment
& portfolio management services (PMS).
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SWOT Analysis
During this training at Sharekhan, we had come to know the Strengths –
Weaknesses – Opportunities – Threats for the company and it is very useful for a
company to analyze them. Therefore, the SWOT analysis is presented here and the
suggestions for maintaining strengths and removing weaknesses are explained.
Strengths:
On-line Trading products.
The best investment advice correct up to 70-90 % through dedicated
research and reports.
Wide product range to enable the clients to choose the best alternative.
One of the best DPs in India.
A positive image in the existing clients.
Weaknesses:
Less awareness in the market.
Time consuming process for account opening, resolving the problems of the
customers, etc.
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Service quality is not maintained accordingly how they are promoted.
Opportunities:
Large primary market to sit as a book runner for the other companies just like
Kotak securities ltd. that runs the books of share holdings for many
companies
Slope of stock market towards delivery based transactions.
Large potential market for delivery and intra-day transactions.
Open interest of the people to enter in stock market for investing.
Attract the customers who are dissatisfied with other brokers & DPs.
An indirect opportunity generated by the market from its bullishness.
Threats:
Increasing competition against other brokers & DPs.
Poor marketing activities for making the company known among the
customers.
A threat of loosing clients for any kind of weakness of the company.
Indirect threat from instable stock market, i.e., low/no profit of Sharekhan‘s
clients would lead them to go for other broker/DP.
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Investment advice on :-
1. Equities.
2. Derivaties.
3. Commodities.
A high qualified team comprising of 25 analysts for fundamental, technical,
and derivatives.Providing value guides to all customers , to aware customer about
the various updates in the most traded companies and market.
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Fundamental Research
One of the widest and best research coverage on mid - caps / small caps.
Bottom up stock selection approach.
Research available on Thomson Reuters.
12 member team covering 75+ stocks across sectors comprising a mix of
large-cap, mid cap and small cap stocks.
Ability to identify emerging business at nascent stage.
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FOR 2008 – INDIA BY THOMSON REUTERS AND
STARMINE.
their special monthly economy review magazine SHAREKHAN VALUE GUIDE
to all the customer. In which they give stock idea , stock update , different
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viewpoint, trader‘s techniques, commodities corner, premier ideas, report of
company, etc.
Sharekhan also given another special feature to all their customer that is
GO TO MEETING in which customer have to register their client id for go to
meeting and customer can enjoy the demo of sharekhan software for trading as
much as time they want.
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Customer care no.:-39707500, 60660141-152.
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ONLINE TRADE FACILITY
Online trading makes hassle free transaction experience with the help of
classic, fast trade and trade tiger.Customer can easily apply for IPO with in few
minutes without any form filling and without going any center , can withdraw his
amount in few moments, customer can mutual fund rate, NAV, etc.
Customer will receive contract bill on same day of trading done and also
receive sms on their mobile number after the market close for day.customer does
not have to store paper of contrat bill because bill are received on their e-mail id.
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Sharekhan also started opening NRI trading account.From now on , being
away from home, doesn‘t mean your investment plans have to suffer. With
sharekhan, NRI can avail of multiple hassle free opportunities to invest in the Indian
equity market via secondary market, mutual fund and IPO‘s, NFO‘s and PMS. NRI
can invest online or avail of our advisory services.
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INTRODUCTION
Investors always look for a better way to select securities. There are two
types of data analysis techniques that are avaliable to assist investors to make better
investment decision fundamental analysis and technical analysis.
the value of a security by studying the financial data of the security.It studies the
issuer‘s income and expenses, its assests and liabilites, its management, and its
position in the industry, in short, focusing on the basics of the buisness, to arrive
at the fair value of a security.
Technical analysis is a method that is used to evalute the worth of a securities
by analyzing the statistics that are generated by market activity, such as past prices
and volume. Techinal analysis do not attempt to measure a security‘s intrinsic value,
as is done by the fundamental analyst, but instead use charts and other tools to
identify patterns that can suggest future activity.
Technical analysts‘ exclusive use of historical price and volume data
separates them from fundamental analysts. This unit throws light on techinal
analysis‘.
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Fundamental Analysis
Fundamental analysis is the method of analyzing companies based on
factors that affect their intrinsic value. As with the analysis of fixed income
securities, equities may be analyzed on an expected future cash flow, or benefit, to
the shareholder basis. When reading the financial papers one often encounters the
term "intrinsic value". This concept is what is considered to be the corner stone of
fundamental analysis.
How does an investor determine if a stock is undervalued, overvalued,
or trading at fair market value? With fundamental analysis, applying the concept of
intrinsic value may do this. If all the information regarding a corporation's future
anticipated growth, sales figures, cost of operations, and industry structure, among
other things, are available and examined, then the resulting analysis is said to
provide the intrinsic value of the stock.
There is two sides to this method: the qualitative and quantitative. There
are two sides to this method: the quantitative and the qualitative. The quantitative
side involves looking at factors that can be measured numerically, such as the
company's assets, liabilities, cash flow, revenue and price-to-earnings ratio. The
limitation of quantitative analysis, however, is that it does not capture the company's
aspects or risks immeasurable by a number - things like the value of an executive or
the risks a company faces with legal issues. The analysis of these things is the other
side of fundamental analysis: the qualitative side or non-number side. Although
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relatively more difficult to analyze, the qualitative factors are an important part of a
company.
Since a number does not measure them, they more represent an either
negative or positive force affecting the company. But some of these qualitative
factors will have more of an effect, and determining the extent of these effects is
what is so challenging. To start, identify a set of qualitative factors and then decide
which of these factors add value to the company, and which of these factors
decrease value. Then determine their relative importance. The qualities you analyze
can be categorized as having a positive effect, negative effect or minimal effect. The
best way to incorporate qualitative analysis into your evaluation of a company is to
do it once you have done the quantitative analysis.
The conclusion you come to on the qualitative analysis into better
prespective. If when looking at the company numbers you saw good reason to buy
the company, but then found many negative qualities, you may want to think twice
about buying. Negative qualities might include potential litigations, poor R and D
prospects or a board full of insiders. The conclusion of your qualitative analysis
either reconfirmor raise questions about the conclusion of your quantitative
analysis. Fundamental analysis is not as simple as looking at numbers and
computing ratio; it is also important to look at influences and qualities that do not
have a number value.
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Using Dividend Discount Model:
When using the dividend discount model, the type of industry involved
and the dividend policy of the industry is important in choosing which of the
dividend discount models to employ. As mentioned earlier, the intrinsic value of a
share is the future value of all dividend cash flows discounted at the appropriate
discount factor. For those familiar with the calculation of yield in fixed income
analysis, the concepts are similar.
For constant dividend: P=D t /k
e
the investment.
This method is useful for analyzing preferred shares where the dividend is
fixed. However, the constant dividend model is limited in that it does not allow for
future growth in the dividend payments for growth industries. As a result the
constant growth dividend model may be more useful in examining a firm.
For constant dividend growth: P=D t /(k
e -g)
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• g = constant
dividend growthrate
The constant dividend growth model is useful for mature industries, where
the dividend growth is likely to be steady. Most mature blue chip stocks may be
analyzed quickly with the constant dividend growth model. This model has its
limitations when considering a firm, which is in its growth phase and will move into
a mature phase at some time in the future. A two-stage growth dividend model may
be utilized in such situations. This model allows for adjustment to the assumptions
of timing and magnitude of the growth of the firm.
For the two stage growth model;
P= n
dividend
growth rate for mature period
The two-stage model allows for greater flexibility in the testing of
scenarios for the investor looking at a firm in its infancy or in a new
industry.
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They focus on earnings, growth, and value in the market.
Earnings per Share – EPS
Projected Earning Growth – PEG
Price to Sales – P/S
Price to Book – P/B
Return on Equity
No single number from this list is a magic bullet that will give you a buy
or sell recommendation by itself, however as you begin developing a picture of
what you want in a stock, these numbers will become benchmarks to measure the
worth of potential investments.
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Fundamental analysis is good for long-term investments based on long-term
trends, very long-term. The ability to identify and predict long-term economic,
demographic, technological or consumer trends can benefit patient investors who
pick the right industry groups or companies.
Value Spotting
Sound fundamental analysis will help identify companies that represent a
good value. Some of the most legendary investors think long-term and value.
Graham and Dodd, Warren Buffet and John Neff are seen as the champions of value
investing. Fundamental analysis can help uncover companies with valuable assets, a
strong balance sheet, stable earnings, and staying power.
Business Acumen
One of the most obvious, but less tangible, rewards of fundamental
analysis is the development of a thorough understanding of the business.
After such painstaking research and analysis, an investor will be familiar
with the key revenue and profit drivers behind a company. Earnings and
earnings expectations can be potent drivers of equity prices. Even some
technicians will agree to that. A good understanding can help investors
avoid companies that are prone to shortfalls and identify those that
continue to deliver. In addition to understanding the business,
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fundamental analysis allows investors to develop an understanding of the
key value drivers and companies within an industry. Its industry group
heavily influences a stock‘s price. By studying these groups, investors
can better position themselves to identify opportunities that are high-risk
(tech), low-risk (utilities), growth oriented (computer), value driven (oil),
non-cyclical (consumer staples), cyclical (transportation) or income-
oriented (high yield).
Knowing Who's Who
Stocks move as a group. By understanding a company's business, investors can
better position themselves to categorize stocks within their relevant industry group.
Business can change rapidly and with it the revenue mix of a company. This
happened to many of the pure Internet retailers, which were not really Internet
companies, but plain retailers. Knowing a company's business and being able to
place it in a group can make a huge difference in relative valuations.
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Fundamental analysis may offer excellent insights, but it can be
extraordinarily time-consuming. Time-consuming models often produce valuations
that are contradictory to the current price prevailing on Wall Street. When this
happens, the analyst basically claims that the whole street has got it wrong. This is
not to say that there are not misunderstood companies out there, but it is quite brash
to imply that the market price, and hence Wall Street, is wrong.
Industry/Company Specific
Valuation techniques vary depending on the industry group and specifics of
each company. For this reason, a different technique and model is required for
different industries and different companies. This can get quite time-consuming,
which can limit the amount of research that can be performed. A subscription-based
model may work great for an Internet Service Provider (ISP), but is not likely to be
the best model to value an oil company.
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Subjectivity
Fair value is based on assumptions. Any changes to growth or multiplier
assumptions can greatly alter the ultimate valuation. Fundamental analysts are
generally aware of this and use sensitivity analysis to present a base-case valuation,
a best-case valuation and a worst-case valuation. However, even on a worst-
case valuation, most models are almost always bullish, the only question
is how much so.
Analyst Bias
The majority of the information that goes into the analysis comes from the
company itself. Companies employ investor relations‘ managers specifically to
handle the analyst community and release information. As Mark Twain said, "there
are lies, damn lies, and statistics." When it comes to massaging the data or spinning
the announcement, CFOs and investor relation‘s managers are professionals. Only
buy-side analysts tend to venture past the company statistics. Buy-side analysts
work for mutual funds and money managers. They read the reports written by the
sell-side analysts who work for the big brokers (Angel, Merrill Lynch, India Bulls,
Karvy, Motilal Oswal, Marwadi to name a few). These brokers are also involved in
underwriting and investment banking for the companies. Even though there are
restrictions in place to prevent a conflict of interest, brokers have an ongoing
relationship with the company under analysis. When reading these reports, it is
important to take into consideration any biases a sell-side analyst may have. The
buy-side analyst, on the other hand, is analyzing the company purely from an
investment standpoint for a portfolio manager. If there is a relationship with the
company, it is usually on different terms. In some cases this may be as a large
shareholder.
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When market valuations extend beyond historical norms, there is
pressure to adjust growth and multiplier assumptions to compensate.
It used to be that free cash flow or earnings were used with a
multiplier to arrive at a fair value. In 1999, the S&P 500 typically sold for
28 times free cash flow. However, because so many companies were and
are losing money, it has become popular to value a business as a multiple of its
revenues. This would seem to be OK, except that the multiple was higher than the
PE of many stocks! Some companies were considered bargains at 30 times
revenues.
Conclusions
Fundamental analysis can be valuable, but it should be approached with caution. If
you are reading research written by a sell-side analyst, it is important to be familiar
with the analyst behind the report. We all have personal biases, and every analyst
has some sort of bias. There is nothing wrong with this, and the research can still be
of great value. Learn what the ratings mean and the track record of an analyst before
jumping off the deep end. Corporate statements and press releases offer good
information, but they should be read with a healthy degree of skepticism to separate
the facts from the spin. Press releases don't happen by accident, they are an
important PR tool for companies. Investors should become skilled readers to weed
out the important information and ignore the hype.
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EPS
The EPS is arrived by dividing the net profit by the expanded equity. The expansion
in equity may be due to various reasons, which are indicated by putting the
following marks after the price: Rights, Bonus. Conversion, Public issue, Foreign
issue, Miscellaneous issues, Cum-bonus, Ex-bonus, Cum-rights and Ex-rights.
P/E Ratio
The P/E ratio reflects the price currently being paid by the market for each rupee of
currently reported EPS. It measures investors‘ expectations and market appraisal of
the performance of the firm.
P/E ratio =MARKET PRICE OF SHARE/EPS
Book Value
The book value per share is arrived at by dividing the sum of equity and reserves
(excluding revaluation reserves) by the number of equity shares.
Dividend Yield
It is closely related to EPS. While the EPS is based on book value per share, the
yield is expressed in terms of the market value per share. The dividend yield is
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calculated by dividing the cash dividends per share (DPS) by the market value per
share, (not price actually paid by investors).
Dividend yield = Dividend per share * 100/Market price per share.
Return on Equity
It reflects the rate of return, which a firm is able to generate on
equity.
*Equity refers to equity share capital and reserves & surplus.
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MACRO ECONOMY
GLOBAL ECONOMY
economies and underdeveloped economy.
Economic growth is the increase of per capita gross domestic product
(GDP) or other measures of aggregate income, typically reported as the annual rate
of change in real GDP. Economic growth is primarily driven by improvements in
productivity, which involves producing more goods and services with the same
inputs of labour, capital, energy and materials. Economists draw a distinction
between short-term economic stabilization and long-term economic growth. The
topic of economic growth is primarily concerned with the long run. The short-run
variation of economic growth is termed the business cycle.
The long-run path of economic growth is one of the central questions of
economics; despite some problems of measurement, an increase in GDP of a
country greater than population growth is generally taken as an increase in the
standard of living of its inhabitants. Over long periods of time, even small rates of
annual growth can have large effects through compounding (see exponential
growth). A growth rate of 2.5% per annum will lead to a doubling of GDP within 29
years, whilst a growth rate of 8% per annum (experienced by some Four Asian
Tigers) will lead to a doubling of GDP within 10 years. This exponential
characteristic can exacerbate differences across nations.
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In order to compare per capita income among countries, the statistics may
be quoted in a single currency, based on either prevailing exchange rates or
purchasing power parity. To compensate for changes in the value of money
(inflation or deflation) the GDP or GNP is usually given in "real" or inflation
adjusted, terms rather than the actual money figure compiled in a given year, which
is called the nominal or current figure.
Economic activity in most developing countries has, or is close to
having, recovered. Supported by a resurgence in international and domestic
financial flows and higher commodity prices, most of the spare capacity in
developing countries that was created by the crisis has been reabsorbed, and
developing countries have regained trend growth rates close to those observed in the
pre-crisis period.
In contrast, the recovery in many high-income countries (and several
economies in developing Europe and Central Asia) has not been strong enough to
make major inroads into high unemployment and spare capacity. Prospects in these
economies, many of which were at the center of the financial boom and bust,
continue to be weighed down by banking-sector restructuring, high consumer debt
and a right-sizing of economic sectors that grew unsustainably large during the
boom period.
The robust recovery in developing countries is all the more remarkable
because it mainly reflects an expansion of their internal markets. Developing
countries are not just leading the recovery. Increasingly they are an important
source of stability, with many of the risks to global growth centered in high-income
countries and reflecting as yet unresolved imbalances generated by the boom period.
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Very low policy-induced interest rates in high-income countries plus
better growth prospects in developing countries prompted a strong recovery in
capital flows, mainly to middle-income countries. Overall net private capital flows
to developing countries expanded 44 percent in 2010, but remain well below record
2007 levels. For most countries, the increase in flows was beneficial, helping to
finance growth enhancing investment.
Capital inflows into some middle-income countries have placed undue
and potentially damaging upward pressure on currencies. Many of these flows are
short-lived, volatile and sometimes speculative in nature. Left unchecked, such
flows can lead to abrupt real appreciations and depreciations that are out of line
with underlying fundamentals, and can do lasting damage to economies. The
biggest increases were in short-term debt flows, equities and bonds, notably
corporate bonds. Long-term bank lending also posted large percentage increases,
but from a very low base. Foreign direct investment (FDI) rose a relatively modest
16 percent given earlier large declines.
Low-income countries experienced modest declines in capital flows in
2009 and modest increases in 2010, partly reflecting their reliance on relatively
stable FDI. However, many low-income countries did benefit from stronger
remittance inflows, a recovery in tourism and higher commodity prices. South-
South flows are increasingly important for low-income countries.
Global growth is expected to weaken somewhat in 2011, before picking
up in 2012 (Table 1). Real GDP is estimated to have expanded by 3.9 percent in
2010, once again led by strong domestic demand in developing countries.
Restructuring and right-sizing in the banking and construction sectors, combined
with necessary fiscal and household consolidation, will continue to drag on growth
in many high-income economies and developing Europe and Central Asian
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countries. At the same time, growth is projected to slow in other developing
countries due to emerging capacity constraints. Overall global GDP is expected to
grow 3.3 percent in 2011, before picking up to 3.6 percent in 2012 as the drag on
activity from restructuring in high-income countries eases somewhat.
Strong growth of domestic demand in developing-country will continue
to lead the world economy. Developing countries domestic demand is playing a
major role in the recovery, representing 46 percent of global growth in 2010. GDP
in low- and middle-income countries expanded 7 percent during 2010 (5.2 percent
excluding India and China) and is projected to increase 6.0 and 6.1 percent in 2011
and 2012. As such it will continue to outstrip growth in the high-income countries
(2.8, 2.4 and 2.7 percent in 2010, 2011 and 2012).
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List of countries by Human Development Index
This is a list of all countries by Human Development Index as included in
a United Nations Development Program's Human Development Report released on
4 November 2010, compiled on the basis of estimates for 2010. It covers 168 UN
member states (out of 192) and Hong Kong, China. 24 UN member states are not
included due to lack of data. The average HDI of regions of the World and groups
of countries are also included for comparison.
The Human Development Index (HDI) is a comparative measure of life
expectancy, literacy, education and standards of living for countries worldwide. It is
a standard means of measuring well-being, especially child welfare. It is used to
distinguish whether the country is a developed, a developing or an under-developed
country, and also to measure the impact of economic policies on quality of life. The
index was developed in 1990 by Pakistani economist Mahbub ul Haq [3]
and Indian
Countries fall into four broad human development categories, each of
which comprises 42 countries (except for the second category, comprising 43
countries). [4]
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Rank
Country
HDI
New
2010
estimate
12 (14) South
Korea 0.877 0.005
13 (4) Switzerland
Rank
Country
HDI
New
2010
estimate
24 (13) Luxembour
g 0.852 0.002
26 (5) United
Kingdom 0.849 0.002
28 (8) Czech
32 (3) United
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17 (14) Iceland 0.869
19 (3) Denmark
21 (3) Hong
Kong 0.862 0.005
39 Bahrain 0.801 0.003
41 Poland 0.795 0.004
Rank
Country
HDI
New
2010
estimates
48 Latvia 0.769
Rank
Country
HDI
New
2010
estimates
68 (8) Bosnia
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55 (4) Saudi
Arabia 0.752 0.004
59 (5) Trinidad
62 (8) Costa
Rica 0.725 0.002
75 (17) Venezuela 0.696
78 (15) Belize 0.694
85 (14) Tonga 0.677
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Rank
Country
HDI
New
2010
estimate
87 (1) Turkmenista
n 0.669 0.007
88 (1) Dominican
Republic 0.663 0.003
90 (1) El
Salvador 0.659 0.004
92 (7) Thailand 0.654 0.006
93 (3) Gabon 0.648 0.006
94 (2) Suriname 0.646 0.003
95 (2) Bolivia 0.643 0.006
96 (1) Paraguay 0.640 0.006
97 (1) Philippines 0.638 0.003
98 (2) Botswana 0.633 0.006
99 (5) Moldova 0.623 0.003
100 (8) Mongolia 0.622 0.006
Rank
Country
HDI
New
2010
estimate
109 (1) Kyrgyzsta
n 0.598 0.004
117 Equatorial
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123 (1) Solomon
Islands 0.494 0.002
127
São
Rank
Country
HDI
New
2010
estimates
130 Ghana 0.467 0.004
Rank
Country
HDI
New
2010
estimates
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134 Benin 0.435 0.003
143 Uganda 0.422 0.006
147 Djibouti 0.402 0.003
155
158 (1) Sierra
Leone 0.317 0.004
161 (1) Burkina
Faso 0.305 0.002
Page 52
Indian Economy
The Economy of India is the tenth largest in the world by nominal GDP
and the fourth largest by purchasing power parity (PPP). The country's per capita
GDP (PPP) is $3,339 (IMF, 129th) in 2010. Following strong economic reforms
from the post-independence socialist economy, the country's economic growth
progressed at a rapid pace, as free market principles were initiated in 1991 for
international competition and foreign investment.
Overview:-
Social democratic policies governed India's economy from 1947 to 1991.
The economy was characterised by extensive regulation, protectionism, public
ownership, pervasive corruption and slow growth. Since 1991, continuing economic
liberalisation has moved the country towards a market-based economy. A revival of
economic reforms and better economic policy in first decade of the 21st century
accelerated India's economic growth rate. In recent years, Indian cities have
continued to liberalise business regulations. By 2008, India had established itself as
the world's second-fastest growing major economy.
However, as a result of the financial crisis of 2007–2010, coupled with a
poor monsoon, India's gross domestic product (GDP) growth rate significantly
slowed to 6.7% in 2008–09, but subsequently recovered to 7.2% in 2009–10, while
the fiscal deficit rose from 5.9% to a high 6.5% during the same period. India‘s
current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the
previous quarter. The unemployment rate for 2009–2010, according to the state
Page 53
Labour Bureau, was 9.4% nationwide, rising to 10.1% in rural areas, where two-
thirds of the 1.2 billion population live.
India's large service industry accounts for 57.2% of the country's GDP
while the industrial and agricultural sectors contribute 28.6% and 14.6%
respectively. Agriculture is the predominant occupation in India, accounting for
about 52% of employment. The service sector makes up a further 34%, and
industrial sector around 14%. However, statistics from a 2009-10 government
survey, which used a smaller sample size than earlier surveys, suggested that the
share of agriculture in employment had dropped to 45.5%.
Major industries include telecommunications, textiles, chemicals, food
processing, steel, transportation equipment, cement, mining, petroleum, machinery,
information technology-enabled services and pharmaceuticals. The labour force
totals 500 million workers. Major agricultural products include rice, wheat, oilseed,
cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and
fish. In 2009-2010, India's top five trading partners are United Arab Emirates,
China, United States, Saudi Arabia and Germany.
Previously a closed economy, India's trade and business sector has grown
fast. India currently accounts for 1.5% of world trade as of 2007 according to the
World Trade Statistics of the WTO in 2006, which valued India's total merchandise
trade (counting exports and imports) at $294 billion and India's services trade at
$143 billion. Thus, India's global economic engagement in 2006 covering both
merchandise and services trade was of the order of $437 billion, up by a record 72%
from a level of $253 billion in 2004. India's total trade in goods and services has
reached a share of 43% of GDP in 2005–06, up from 16% in 1990–91.
Page 54
Pre-colonial period (up to 1773)
The citizens of the Indus Valley civilisation, a permanent settlement that
flourished between 2800 BC and 1800 BC, practiced agriculture, domesticated
animals, used uniform weights and measures, made tools and weapons, and traded
with other cities. Evidence of well-planned streets, a drainage system and water
supply reveals their knowledge of urban planning, which included the world's first
urban sanitation systems and the existence of a form of municipal government.
Maritime trade was carried out extensively between South India and
southeast and West Asia from early times until around the fourteenth century AD.
Both the Malabar and Coromandel Coasts were the sites of important trading
centres from as early as the first century BC, used for import and export as well as
transit points between the Mediterranean region and southeast Asia. Over time,
traders organised themselves into associations which received state patronage.
However, state patronage for overseas trade came to an end by the thirteenth
century AD, when it was largely taken over by the local Jewish and Muslim
communities, initially on the Malabar and subsequently on the Coromandel coast.
Further north, the Saurashtra and Bengal coasts played an important role in
maritime trade, and the Gangetic plains and the Indus valley housed several centres
of river-borne commerce. Most overland trade was carried out via the Khyber Pass
connecting the Punjab region with Afghanistan and onward to the Middle East and
Central Asia. Although many kingdoms and rulers issued coins, barter was
prevalent. Villages paid a portion of their agricultural produce as revenue to the
rulers, while their craftsmen received a part of the crops at harvest time for their
Page 55
Religion, especially Hinduism and the caste and the joint family systems,
played an influential role in shaping economic activities. The caste system
functioned much like medieval European guilds, ensuring the division of labour,
providing for the training of apprentices and, in some cases, allowing manufacturers
to achieve narrow specialisation. For instance, in certain regions, producing each
variety of cloth was the specialty of a particular sub-caste. Textiles such as muslin,
Calicos, shawls, and agricultural products such as pepper, cinnamon, opium and
indigo were exported to Europe, the Middle East and South East Asia in return for
gold and silver.
Assessment of India's pre-colonial economy is mostly qualitative, owing
to the lack of quantitative information. The Mughal economy functioned on an
elaborate system of coined currency, land revenue and trade. Gold, silver and
copper coins were issued by the royal mints which functioned on the basis of free
coinage. The political stability and uniform revenue policy resulting from a
centralised administration under the Mughals, coupled with a well-developed
internal trade network, ensured that India, before the arrival of the British, was to a
large extent economically unified, despite having a traditional agrarian economy
characterised by a predominance of subsistence agriculture dependent on primitive
technology. After the decline of the Mughals, western, central and parts of south
and north India were integrated and administered by the Maratha Empire. After the
loss at the Third Battle of Panipat, the Maratha Empire disintegrated into several
confederate states, and the resulting political instability and armed conflict severely
affected economic life in several parts of the country, although this was
compensated for to some extent by localised prosperity in the new provincial
kingdoms. By the end of the eighteenth century, the British East India Company
entered the Indian political theatre and established its dominance over other
Page 56
European powers. This marked a determinative shift in India's trade, and a less
powerful impact on the rest of the economy.
Colonial period (1773–1947):-
Company rule in India brought a major change in the taxation and
agricultural policies, which tended to promote commercialisation of agriculture with
a focus on trade, resulting in decreased production of food crops, mass
impoverishment and destitution of farmers, and in the short term, led to numerous
famines. The economic policies of the British Raj caused a severe decline in the
handicrafts and handloom sectors, due to reduced demand and dipping employment.
After the removal of international restrictions by the Charter of 1813, Indian trade
expanded substantially and over the long term showed an upward trend. The result
was a significant transfer of capital from India to England, which, due to the
colonial policies of the British, led to a massive drain of revenue rather than any
systematic effort at modernisation of the domestic economy.
India's colonisation by the British created an institutional environment
that, on paper, guaranteed property rights among the colonisers, encouraged free
trade, and created a single currency with fixed exchange rates, standardised weights
and measures and capital markets. It also established a well-developed system of
railways and telegraphs, a civil service that aimed to be free from political
interference, a common-law and an adversarial legal system. This coincided with
major changes in the world economy – industrialisation, and significant growth in
production and trade. However, at the end of colonial rule, India inherited an
economy that was one of the poorest in the developing world, with industrial
development stalled, agriculture unable to feed a rapidly growing population, a
largely illiterate and unskilled labour force, and extremely inadequate infrastructure.
Page 57
The 1872 census revealed that 91.3% of the population of the region
constituting present-day India resided in villages, and urbanisation generally
remained sluggish until the 1920s, due to the lack of industrialisation and absence of
adequate transportation. Subsequently, the policy of discriminating protection
(where certain important industries were given financial protection by the state),
coupled with the Second World War, saw the development and dispersal of
industries, encouraging rural-urban migration, and in particular the large port cities
of Bombay, Calcutta and Madras grew rapidly. Despite this, only one-sixth of
India's population lived in cities by 1951.
The impact of the British rule on India's economy is a controversial topic.
Leaders of the Indian independence movement and left-nationalist economic
historians have blamed colonial rule for the dismal state of India's economy in its
aftermath and argued that financial strength required for industrial development in
Europe was derived from the wealth taken from colonies in Asia and Africa. At the
same time, right-wing historians have countered that India's low economic
performance was due to various sectors being in a state of growth and decline due to
changes brought in by colonialism and a world that was moving towards
industrialisation and economic integration.
Pre-liberalisation period (1947–1991):-
Indian economic policy after independence was influenced by the colonial
experience, which was seen by Indian leaders as exploitative, and by those leaders'
exposure to democratic socialism as well as the progress achieved by the economy
of the Soviet Union. Domestic policy tended towards protectionism, with a strong
emphasis on import substitution industrialisation, economic interventionism, a large
public sector, business regulation, and central planning, while trade and foreign
Page 58
investment policies were relatively liberal. Five-Year Plans of India resembled
central planning in the Soviet Union. Steel, mining, machine tools,
telecommunications, insurance, and power plants, among other industries, were
effectively nationalised in the mid-1950s.
Jawaharlal Nehru, the first prime minister of India, along with the
statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic
policy during the initial years of the country's existence. They expected favorable
outcomes from their strategy, involving the rapid development of heavy industry by
both public and private sectors, and based on direct and indirect state intervention,
rather than the more extreme Soviet-style central command system. The policy of
concentrating simultaneously on capital- and technology-intensive heavy industry
and subsidising manual, low-skill cottage industries was criticised by economist
Milton Friedman, who thought it would waste capital and labour, and retard the
development of small manufacturers. The rate of growth of the Indian economy in
the first three decades after independence was derisively referred to as the Hindu
rate of growth, because of the unfavourable comparison with growth rates in other
Asian countries, especially the East Asian Tigers.
Since 1965, the use of high-yielding varieties of seeds, increased fertilisers
and improved irrigation facilities collectively contributed to the Green Revolution in
India, which improved the condition of agriculture by increasing crop productivity,
improving crop patterns and strengthening forward and backward linkages between
agriculture and industry. However, it has also been criticised as an unsustainable
effort, resulting in the growth of capitalistic farming, ignoring institutional reforms
and widening income disparities.
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Post-liberalisation period (since 1991):-
In the late 1970s, the government led by Morarji Desai eased restrictions
on capacity expansion for incumbent companies, removed price controls, reduced
corporate taxes and promoted the creation of small scale industries in large
numbers. However, the subsequent government policy of Fabian socialism
hampered the benefits of the economy, leading to high fiscal deficits and a
worsening current account. The collapse of the Soviet Union, which was India's
major trading partner, and the Gulf War, which caused a spike in oil prices, resulted
in a major balance-of-payments crisis for India, which found itself facing the
prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from
the International Monetary Fund (IMF), which in return demanded reforms.
In response, Prime Minister Narasimha Rao, along with his finance
minister Manmohan Singh, initiated the economic liberalisation of 1991. The
reforms did away with the Licence Raj, reduced tariffs and interest rates and ended
many public monopolies, allowing automatic approval of foreign direct investment
in many sectors. Since then, the overall thrust of liberalisation has remained the
same, although no government has tried to take on powerful lobbies such as trade
unions and farmers, on contentious issues such as reforming labour laws and
reducing agricultural subsidies. By the turn of the 20th century, India had
progressed towards a free-market economy, with a substantial reduction in state
control of the economy and increased financial liberalisation. This has been
accompanied by increases in life expectancy, literacy rates and food security,
although the beneficiaries have largely been urban residents.
While the credit rating of India was hit by its nuclear weapons tests in
1998, it has since been raised to investment level in 2003 by S&P and Moody's. In
2003, Goldman Sachs predicted that India's GDP in current prices would overtake
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France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035,
making it the third largest economy of the world, behind the US and China. India is
often seen by most economists as a rising economic superpower and is believed to
play a major role in the global economy in the 21st century.
Page 61
The Banking Sector:-
The banking system in India is significantly different from that of other
Asian nations because of the country‘s unique geographic, social, and economic
characteristics. India has a large population and land size, a diverse culture, and
extreme disparities in income, which are marked among its regions. There are high
levels of illiteracy among a large percentage of its population but, at the same time,
the country has a large reservoir of managerial and technologically advanced
talents. Between about 30 and 35 percent of the population resides in metro and
urban cities and the rest is spread in several semi-urban and rural centers. The
country‘s economic policy framework combines socialistic and capitalistic features
with a heavy bias towards public sector investment. India has followed the path of
growth-led exports rather than the exportled growth of other Asian economies,
with emphasis on self-reliance through import substitution.
These features are reflected in the structure, size, and diversity
of the country‘s banking and financial sector. The banking system has
had to serve the goals of economic policies enunciated in successive
fiveyear development plans, particularly concerning equitable income
distribution, balanced regional economic growth, and the reduction and
elimination of private sector monopolies in trade and industry. In order
for the banking industry to serve as an instrument of state policy, it was
subjected to various nationalization schemes in different phases (1955,
1969, and 1980). As a result, banking remained internationally isolated
(few Indian banks had presence abroad in international financial centers)
because of preoccupations with domestic priorities, especially massive
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branch expansion and attracting more people to the system. Moreover,
the sector has been assigned the role of providing support to other
economic sectors such as agriculture, small-scale industries, exports, and
banking activities in the developed commercial centers (i.e., metro,
urban, and a limited number of semi-urban centers).The banking system‘s
international isolation was also due to strict branch licensing controls on
foreign banks already operating in the country as well as entry restrictions
facing new foreign banks. A criterion of reciprocity is required for any Indian bank
to open an office abroad.
These features have left the Indian banking sector with weaknesses and
strengths. A big challenge facing Indian banks is how, under the current ownership
structure, to attain operational efficiency suitable for modern financial
intermediation. On the other hand, it has been relatively easy for the public sector
banks to recapitalize, given the increases in nonperforming assets (NPAs), as their
Governmentdominated ownership structure has reduced the conflicts of interest that
private banks would face.
institutions:
Page 63
(SIDCs)
4. Capital market intermediaries
About 92 percent of the country‘s banking segment is under State
control while the balance comprises private sector and foreign banks. The public
sector commercial banks are divided into three categories.
State bank group (eight banks): This consists of the State Bank of India
(SBI) and Associate Banks of SBI. The Reserve Bank of India (RBI) owns the
majority share of SBI and some Associate Banks of SBI.1 SBI has 13 head offices
governed each by a board of directors under the supervision of a central board. The
boards of directors and their committees hold monthly meetings while the executive
committee of each central board meets every week.
Page 64
Nationalized banks (19 banks): In 1969, the Government arranged the
nationalization of 14 scheduled commercial banks in order to expand the branch
network, followed by six more in 1980. A merger reduced the number from 20 to
19. Nationalized banks are wholly owned by the Government, although some of
them have made public issues. In contrast to the state bank group, nationalized
banks are centrally governed, i.e., by their respective head offices. Thus, there is
only one board for each nationalized bank and meetings are less frequent (generally,
once a month).
The state bank group and nationalized banks are together referred to as the
public sector banks (PSBs). Tables 1 and 2 provide details of public issues and post-
issue shareholdings of these PSBs.
Regional Rural Banks (RRBs): In 1975, thestate bank group and
nationalized banks were requiredto sponsor and set up RRBs in partnership with
individual states to provide low-cost financing
and credit facilities to the rural masses.
Page 65
INDIA
Play For Growth
INTRODUCTION:- State Bank of India (SBI) is the largest Indian banking and financial
services company (by turnover and total assets) with its headquarters in Mumbai,
India. It is state-owned. The bank traces its ancestry to British India, through the
Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it
the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged
into the other two presidency banks, Bank of Calcutta and Bank of Bombay to form
Imperial Bank of India, which in turn became State Bank of India. The government
of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of
India taking a 60% stake, and renamed it the State Bank of India. In 2008, the
government took over the stake held by the Reserve Bank of India.
SBI provides a range of banking products through its vast network of branches in
India and overseas, including products aimed at non-resident Indians (NRIs). The
State Bank Group, with over 16,000 branches, has the largest banking branch
network in India. It also has around 130 branches overseas. With an asset base of
$352 billion and $285 billion in deposits, it is a regional banking behemoth and is
one of the largest financial institution in the world. It has a market share among
Indian commercial banks of about 20% in deposits and loans.
The State Bank of India is the 29th most reputed company in the world according to
Forbes. Also SBI is the only bank featured in the coveted "top 10 brands of India"
Page 66
list in an annual survey conducted by Brand Finance and The Economic Times in
2010.
The State Bank of India is the largest of the Big Four banks of India, along with
ICICI Bank, Punjab National Bank and HDFC Bank—its main competitors. and"
GUINNESS BOOK OF WORLD RECORD " that 56 million transactions
happening per day all over the world is definitely an achievement.
HISTORY:-
The roots of the State Bank of India rest in the first decade of 19th century,
when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2
June 1806. The Bank of Bengal was one of three Presidency banks, the other two
being the Bank of Bombay (incorporated on 15 April 1840) and the Bank of Madras
(incorporated on 1 July 1843). All three Presidency banks were incorporated as joint
stock companies and were the result of the royal charters. These three banks
received the exclusive right to issue paper currency in 1861 with the Paper Currency
Act, a right they retained until the formation of the Reserve Bank of India. The
Presidency banks amalgamated on 27 January 1921, and the reorganized banking
entity took as its name: Imperial Bank of India. The Imperial Bank of India
remained a joint stock company.
Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank
of India, which is India's central bank, acquired a controlling interest in the Imperial
Bank of India. On 30 April 1955, the Imperial Bank of India became the State Bank
of India. The government of India recently acquired the Reserve Bank of India's
stake in SBI so as to remove any conflict of interest because the RBI is the country's
banking regulatory authority.
Page 67
In 1959, the government passed the State Bank of India (Subsidiary Banks) Act,
enabling the State Bank of India to take over eight former state-associated banks as
its subsidiaries. On 13 September 2008, the State Bank of Saurashtra, one of its
associate banks, merged with the State Bank of India.
SBI has acquired local banks in rescues. For instance, in 1985, it acquired the Bank
of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its affiliate,
the State Bank of Travancore, already had an extensive network in Kerala.
INTERNATIONAL PRESENCE:-
As of 31 December 2009, the bank had 151 overseas offices spread over 32
countries. It has branches of the parent in Colombo, Dhaka, Frankfurt, Hong Kong,
Tehran, Johannesburg, London, Los Angeles, Male in the Maldives, Muscat, New
York, Osaka, Sydney, and Tokyo. It has offshore banking units in the Bahamas,
Bahrain, and Singapore, and representative offices in Bhutan and Cape Town. It
also has an ADB in Boston, USA.
SBI operates several foreign subsidiaries or affiliates. In 1990, it established an
offshore bank: State Bank of India (Mauritius).
In 1982, the bank established a subsidiary, State Bank of India (California), which
now has nine branches - eight branches in the state of California and one in
Washington, D.C. The 9th branch was opened in Tustin, California on 7th March,
2011. The other seven branches in California are located in Los Angeles, Artesia,
San Jose, Canoga Park, Fresno, San Diego and Bakersfield.
Page 68
The Canadian subsidiary, State Bank of India (Canada) also dates to 1982. It has
seven branches, four in the Toronto area and three in British Columbia.
In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo-
Nigerian Merchant Bank and received permission in 2002 to commence retail
banking. It now has five branches in Nigeria.
In Nepal, SBI owns 50% of Nepal SBI Bank, which has branches throughout the
country. In Moscow, SBI owns 60% of Commercial Bank of India, with Canara
Bank owning the rest. In Indonesia, it owns 76% of PT Bank Indo Monex.
The State Bank of India already has a branch in Shanghai and plans to open one in
Tianjin.
In Kenya, State Bank of India owns 76% of Giro Commercial Bank, which it
acquired for US$8 million in October 2005.
BRANCHES:-
State Bank of India has 131 foreign offices in 32 countries across the globe.
SBI has about 25,000 ATMs (25,000th ATM was inaugurated by the then
Chairman of State Bank Shri O.P.Bhatt on 31st March 2011, the day of his
retirement); and SBI group(including associate banks) has about 45,000
ATMs.
SBI has 26,500 branches, including branches that belong to its associate
banks.
Page 69
Symbol and slogan
The symbol of the State Bank of India is a circle and not key hole and a small
man at the centre of the circle. A circle depicts perfection and the common
man being the centre of the bank's business.
Slogans o With you all the way
o Pure banking nothing else
o The Banker to every Indian
o The Nation banks on us
Page 70
SBI is likely to achieve the highest core operating profit growth among
state-owned banks FY11, with (1) margin expansion of 25bp+, (2) Loan and fee
income growth of 20% +, and (3) high operating leverage. Strong core operating
profit growth provides significant cushion for higher credit costs and growth in
profit despite lower trading gains. SBI is our preferred large-cap bank sector to play
the new growth cycle over FY11-14. We recommended Buy , with a target price of
rs2,925, an upside of 29%.
Margin expansion of 25bp+ in FY11 – best in the sector: Strong loan
growth, high CASA deposit base and reduction in cost of term deposits will help
SBI to expand margins. While yields on loans are close to bottom, deposits re-
pricing is likely to continue through FY11. We have factored in 25bp+ margin
Page 71
improvement in FY11 – the best in the industry. Every 10bp improvement in margin
provides – 90bp increase in RoE and -6% upside to profitability.
Operating leverage to boost RoE: Growth in operating expenses in
FY09-10 should be viewed in context of addition of capacity for the next growth
phase. We believe large investments in CBS/technology, manpower additions,
branch/ATM expansions are now behind. The benefits of investments will be fully
realized in FY11-12, driving strong and profitable growth. We expect RoA to be
intact at 1-1.1% over FY11-14 ; RoE should improve from 15% in FY10 to 18% in
FY12.
platform, strong presence in rural and semi-urban areas, decade-old corporate
relationships, higher linkages to the SME segment, and excess liquidity in balance
sheet, SBI is likely to be a key beneficiary of the expected uptick in loan growth in
the system. We have modeled loan growth of 22% over FY10-12 v/s 20% for
industry and fee income growth in line with loan growth.
Earnings CAGR of 25% over FY10-12, despite factoring in higher
provisions: We expect core operating profit CAGR of 355 over FY10-12 led by
improving margins, strong loan growth and high operating leverage. We have
factored 45% increase in NPA provisions in FY11 and have kept credit cost at an
elevated level of -95bp (v/s 80bp in FY10). We have factored in 70% coverage ratio
(Including technical write offs) in FY11. NPA provisions can provide upside to our
earnings estimates, as RBI has approved the extension of 70% PCR deadline to
September 2011 for SBI.
Page 72
Margin expansion of 25bp+ in FY11 – best in the sector. Strong loan
growth, decline in excess liquidity in the balance sheet, C-D ratio, calibrated deposit
growth, high CASA deposit base ( big advantage in a rising interest rate scenario)
and reduction in cost of term deposits (due to repricing) will help SBI to expand
margins. While yields on loans are close to the bottom, deposit re-pricing is likely to
continue through FY11. We have factorised in 25bp+ margin improvement in
FY11, which is the best in the industry. Every 10bp margin improvement provides
90bp increase in RoE and 6% upside to profitability.
Expect 20%+ loan CAGR over FY10-12. Given the improved economic
scenario, we expect loan growth for the industry at 20%+ in FY11. Being the largest
player in the industry, SBI will be one of the biggest beneficiaries of this growth.
Strong net worth, improved technology platform, and age-old corporate
relationships will help SBI to improve its market share in loans . We expect loan
CAGR of 22% for SBI over FY10-12.
Excess liquidity, sharp fall in yields an lag impact of rise in deposit
cost led to pressure on margins. Over FY05-09, SBI had managed to keep
margins in the range of 2.9-3.3%. However, in FY10, its margins fell to 2.66% .
Excess liquidity in the balance sheet, coupled wit decline in pricing power ( due to
excess liquidity in the system ) and the sharp fall in yield on investment ( due to cut
in benchmark rates and excess liquidity ) had led to a fall in SBI‘s margins in FY10.
Deposit inflows, partly due to SBI‘s aggressive efforts, and subdued loan demand
(sudden and unforeseen) led to massive liquidity on its balance sheet.
Page 73
SIX QUARTRS (RS B)
Column2
Column1
Page 74
0
5
10
15
20
25
30
In 4QFY09, sharp fall in yields and rise in cost
of deposits had led to pressure on margins.
Page 75
C-D ratio improving QoQ; room for further improvement. On the
back of excess liquidity, SBI‘s C-D ratio plunged from ~73% in 1QFY09 to 65% in
1QFY10. From 1QFY10, the management took corrective action and incremental
loans remained higher than deposits, which led to improvement in C-D ratio to
74%. Despite reducing the proportion of bulk deposits to less than 2% from 11%
FY10, SBI continued to carry excess liquidity of Rs440b as of 4QFY10. However,
0
0.5
1
1.5
2
2.5
3
3.5
Column1
had to superior margins;
however, with excess liquidity,
with rise in cost of deposit led to
margin pressure.
Page 76
in 1QFY11 SBI has become a net borrower from RBI, indicating further
improvement in C-D ratio.
SBI: PROPORTION OF BULK DEPOSITS (% OF TOTAL DEPOSITS)
Calibrated deposit growth and deposit repricing to aid margin improvement: Over
the last few quarters, while retail term deposit in flows have been strong, the
outflow of bulk term deposits has outstripped in flows. As of FY10, blended cost of
term deposits for SBI stood at 8.5%, which is significantly higher than the current
~6.5% average cost of term deposits. For example, during FY09, the bank had
0
2
4
6
8
10
12
14
16
18
Series 1
Series 1
Page 77
mobilized Rs400b worth of deposits at ~10% under special 1000 days deposit
scheme. These deposits have a tenor of 3 years, their re-pricing will lead to decline
in the cost of funds.
SBI : MOVEMENT OF DEPOSIT RATES FOR MATURITYOF 2 TO 3 YEARS.
0
2
4
6
8
10
12
14
16
18
DECLINE, FOLLOWING THE CUT IN
DEPOSITS RATES, WITH LAG OR TWO
QUARTERS ; WE EXPECT FURTHER
Page 78
Lag impact of deposit repricing to continue: Aggressive deposit rate
cuts and slower deposit growth in FY10 has resulted in a decline in the overall cost
of deposits. In 2Q, 3Q and 4QFY10, interest expense growth lagged the deposit
growth on YoY basis, and we expect trend to continue in 1HFY11 as well.
SBI: INTEREST EXPENSE, DEPOSIT GROWTH (%).
-20
-10
0
10
20
30
40
50
DEPOSITS GROWTH (%)
moderating deposit
Page 79
High CASA deposit base – a key strength to support margin
improvement: In rising interest rate scenario, CASA deposits support margin
improvement, as current accounts carry aero interest and the interest and the interest
on saving account is regulated. A strong, sustainable and growing CASA base is
SBI‘s key strength, which helps keep its cost of funds among the lowest in the
industry and gives it a pricing advantage to grow its loans.
CASA RATIO (%) ONE OF THE BEST IN THE INDUSTRY.
0
10
20
30
40
50
60
HDFC SBI AXIS ICICI PNB BOB BOI UBOI CANARA OBC
FY09
FY10
Page 80
SBI‘s CASA deposit grew 23% in FY10 as against 22% in FY09,
demonstrating advancement and marketing efforts are attracting new customers. Its
domestic CASA ratio of 47% (core CASA ratio at 43-44%) is one of the highest in
the industry. SBI‘s saving deposits grew at an impressive CAGR of 26% over
FY07-10, the second-highest in the industry.
CASA DEPOSITS CAGR (FY07-10) – A COMPARATIVE ANALYSIS (%)
SAVINGS DEPOSITS CAGR (FY07-10) – A COMPARATIVE ANALYSIS (%)
0
5
10
15
20
25
30
35
40
45
Column1
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CASA – a structural funding advantage.
Nearly half of SBI‘s CASA deposits come from its rural and semi-urban
branches, where SBI remains the most preferred bank. Branch additions over the
last three years have added to its strength. In the rural an semi-urban segment, SBI‘s
CASA ratio is more than 50%.
CASA will continue to be SBI‘s key strength over the longer term. Around
3/4 th of its CASA deposits are in the form of saving accounts, which are more
0
5
10
15
20
25
30
35
40
45
OBC (15)
STATE – OWNED BANKS; EVEN HIGHER THAN
HDFC BANK AND ICICI BANKS.
Page 82
stable. In a base rate regime, lower cost of funds will enable SBI to remain the most
competitive bank in terms of pricing.
PROPORTION OF CA AND SA DEPOSITS IN OVERALL CASA DEPOSITS (3QFY10)
0
10
20
30
40
50
60
70
80
90
100
SA (%)
CA (%)
SAVINGS DEPOSITS.
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CASA RATIO
30 35 40 45 50
-100 2.59 2.77 2.96 3.15 3.34
-50 2.71 2.93 3.14 3.36 3.57
0 2.84 3.08 3.32 3.57 3.81
50 2.97 3.24 3.51 3.77 4.04
100 3.10 3.39 3.69 3.98 4.28
CHANGE IN INT. RATE BY BP
VARIANCE IN NIM (BP) AT 30% AND 50% CASA RATIO
-100 76 -50 86 0 97 50 107 100 118
KEY ASSUMPITIONS ARE:-
1. Current accounts deposits as a percentage of CASA at 30%.
2. Cost of term deposits at 7%.
3. Yield on loans at 9.5%.
4. Yield on investment at 7%.
5. CRR at 6% and SLR at 25%.
6. Interest earning assets at (100-CRR%).
KEY CONCLUSION:-
All other factors remaining constant, higher CASA ratio leads to higher
margins.
In a rising interest rate scenario, margin expansion is significantly higher for
a with higher CASA ratio.
Page 84
SPREADS.
Historical evidence suggests that in a rising interest rate scenario, loan spreads
improve for banks. We expect RBI to continue its monetary tightening. In the
previous cycle, bond spreads had declined, as banks used high yielding excess SLR
to fund loan growth. Currently, banks hold just 2-3% higher than the required SLR.
An increase in bond yield will help to improve bond spreads.
0
2
4
6
8
10
12
one year G sec (%)
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MEANINGFULLY.
In 4QFY10, NIM improved by 30bp QoQ to 2.96%. Correction of excess
liquidity in the balance sheet led to improvement in margins from 2.3% in 1Q to
2.55% in 2Q, 2.66% in 3Q (adjusted for interest on income tax refunds) and 2.96%
in 4QFY10. While 4QFY10 margins stood at 2.96%, blended margins for FY10
stood at 2.66%.
0
0.5
1
1.5
2
2.5
3
Page 86
SBI: SENSITIVITY OF EPS, ROA AND ROE TO 10BP CHANGE IN MARGINS (FY11).
NIM (%) EPS (RS) ROA (%) ROE (%)
2.68 158 0.87 14.4 2.78 168 0.93 15.3 2.88 179 0.99 16.2 2.98 190 1.05 17.1
3.08 201 1.11 18.0
SBI (28) UBOI (25)
ICICI (19) BOI (9) BOB (5) HDFC (5) AXIS (4) PNB (-2) CANARA (-3)
Series 1
Series 1
INDUSTRY.
Page 87
NIM SENSITIVITY:-
There are upsides to our margin estimates due to the following:
Repricing of deposits that were accepted at higher rates in FY09 is likely to
continue in FY11-12 as well
As the loan cycle gains momentum in a rising interest rate scenario, margin
expansion could be higher than expected.
In a base rate regime, significant undercutting in loans to top-rated corporates
20%+ loan growth over FY 10-12
Given the improved economic scenario, we expect robust loan growth for the
industry. SBI will be a key beneficiary considering its improved technology
platform, strong presence in rural and semi-urban areas, decade-old corporate
relationships, higher linkages to the SME segment, and excess liquidity in the
balance sheet. We have modelled loan CAGR of 22% for SBI over FY10-12 v/s
20% for industry.
Except robust loan growth for the industry
While we except loan growth of 20% in FY11, an economic up cycle usually
throws up significant lending opportunities. For example, in the recent 3G and
BWA auctions, total demand for funds increased in excess of RS1t. in the near
term, long growth will be supported by working capital financing for infrastructure.
Projects, and in the retail category, by auto loans and home loans.
Page 88
0
5
10
15
20
25
30
SERVICES (15) RETAIL LOANS (5)
Series 1
Series 1
THE GROWTH IN FY10 (AS OF FEB 2010)
Page 89
-30 -20 -10 0 10 20 30 40 50
INFRASTRUTIRE (42)
NBFCs (26)
Page 90
STRONG FEE INCOME GROWTH TO CONTINUE.
SBI‘s efforts to diversify its fee-based revenue are demonstrated in strong
traction in FY09 and FY10. The management‘s focus on (a) non-fund exposure, (b)
project syndication and underwriting business, (c) government business, and (d)
forex services are delivering results. SBI is leveraging its strength of large balance
sheet size, branch network and net worth to get a higher share of corporate business.
It has also been focusing on non-fund-based business such as LC, BG, FOREX and
underwriting of loans to grow its assets-light income without compromising
spreads. While its fee income as a percentage of assets (1%) is the highest among
state-owned banks, it is lower than private banks (1.4-1.6%), indicating significant
scope for improvement.
FEE INCOME AS A PERCENTAGE OF AVERAGE ASSETS (%): SBI v/s STATE-
OWNED BANKS.
AVERAGE ASSETS IS THE HIGHEST
AMONG STATE-OWNED BANKS.
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OPERATING PROFITS.
Over FY04-09, SBI‘s cost-to-average-assets has declined from 2.4% to
1.9% and cost-to-core-income (NII + fees) has declined from 65% to 55%.
However, on account of strong network (branches and ATM) expansion, higher
recruitments and one-off provisions for wage revision, operating income was under
pressure, cost-to-core-income increased to 61% in FY10. Growth in operating
expenses was higher than balance sheet growth, leading to cost-to-average assets of
2% for FY10 as against 1.86% for FY09.
SBI: BRANCHES ADDITION HAS ACCELERATED IN LAST THREE YEARS.
0
2000
4000
6000
8000
10000
12000
14000
NETWORK ADDED IN THE LAST THREE
YEARS.
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0
2000
4000
6000
8000
10000
12000
14000
16000
18000
ATM
ATM
-6
-4
-2
0
2
4
6
8
SBI (7) BOI (3) BOB (1) PNB (0) CANARA (-5)
ADDITION IN EMPLOYEES
ADDITION IN EMPLOYEES
Page 93
GNPA COMPARATIVE ANALYSIS (FY10, %).
Page 94
STRESS ASSETS PORTFOLIO (FY10, %).
STRESS ON NET WORTH POST TAX AT 38% (COMPAEABLE TO OTHER STATE-
OWNED BANKS).
Page 95
SENSITIVITY OF EPS, RoE TO HIGHER TRADING PROFITS AND LOWER
PROVISIONS (FY11-12).
FY11E EPS assuming 25% increase/decrease in base case provision for NPA and trading profits.
Point A Point B Point C Point D
Trading - 50.0 66.6 83.3 Profits (Rs b) 11.3 192.7 175.4 158.1 15.0 196.6 179.3 162.0 18.8 200.5 183.2 165.9
FY12E EPS assuming 25% increase/decrease in base case provision for NPA and trading profits.
Point A Point B Point C Point D
Trading — 51.3 68.5 85.6 Profits (Rs b) 7.5 241.7 223.9 206.2 10.0 244.3 226.5 208.8 12.5 246.9 229.1 211.4
It shows a increase in earning per share (EPS) from 179.3 to 226.5.
Core operations to drive RoE expansion; expect stock to trade at 1.6x FY12E
BV; BUY.
I expect the quality of SBI‘s RoA to improve, with margin expansion,
higher fees and cost efficiency during the new growth cycle. In FY10, RoA came
under stress as: (1) core operating performance was muted (lower core income
growth and higher opex), and (2) additional hit was taken to improve coverage ratio
and higher NPA provisions were made due to increased slippages.
I expect RoA to be maintained at 1-1.1% over FY10-14, dispite higher NPA
costs and lower trading gains, as core operating performance is likely to remain
strong. RoE should improve from 15% in FY10 to 16% in FY11 and 18% in FY12.
In our view, SBI can deliver RoE of 18% (RoA of 1% and leverage of 18x) on a
sustainable basis. SBI is our most preferred large cap stock to play the new growth
cycle over FY11-14. I recommend buy with a target price of Rs 2,925.
Page 96
NET INTEREST INCOME 2.64 2.48 2.35 2.61 2.61 2.61
NON INTEREST INCOME 1.35 1.51 1.48 1.49 1.43 1.37
FEE INCOME 0.92 0.90 0.96 1.03 1.04 1.02
CORE OPERTAING INCOME 3.56 3.38 3.30 3.65 3.66 3.63
EMPLOYEE COST 1.21 1.16 1.26 1.19 1.13 1.06
OTHER OPERATING EXPENSES 0.75 0.70 0.75 0.79 0.77 0.74
OPERATING EXPENSES 1.96 1.86 2.01 1.98 1.90 1.79
COST TO CORE INCOME RATIO 54.97 54.93 60.99 54.25 51.85 49.34
CORE OPERATING PROFITS 1.60 1.52 1.29 1.67 1.76 1.84
NON INTEREST INCOME (EX FEES) 0.43 0.60 0.53 0.46 0.39 0.35
OPERATING PROFITS 2.03 2.13 1.82 2.12 2.15 2.19
NPA PROVISIONS 0.31 0.29 0.46 0.58 0.50 0.48
OTHER PROVISION 0.10 0.15 -0.02 0.04 0.04 0.04
PROVISIONS 0.41 0.44 0.44 0.62 0.55 0.52
PBT 1.62 1.68 1.38 1.50 1.60 1.66
TAX 0.58 0.60 0.47 0.51 0.55 0.57
ROA 1.04 1.08 0.91 0.99 1.06 1.10
LEVERAGE 16.04 15.76 16.29 16.30 16.94 17.55
ROE 16.75 17.05 14.80 16.18 17.92 19.27
Page 97
Y/E MARCH 2007 2008 2009 2010 2011E 2012E
INTEREST INCOME 372,423 489,503 637,884 709,939 849,006 1,047,695
INTEREST EXPENDED 221,841 319,291 429,153 473,225 549,236 692,504
NET INTEREST INCOME 150,582 170,212 208,731 236,714 299,770 355,192
CHANGE (%) -3.7 13.0 22.6 13.4 26.6 18.5
OTHER INCOME 67,653 86,949 126,908 149,682 170,485 194,629
NET INCOME 218,234 257,162 335,639 386,396 470,255 549,821
CHANGE (%) -5.2 17.8 30.5 15.1 21.7 16.9
OPERATING EXPENSES 118,235 126,086 156,487 203,187 226,693 257,672
OPERATING INCOME 99,999 131,076 179,152 183,209 243,562 292,149
CHANGE (%) -11.5 31.1 36.7 2.3 32.9 19.9
PROVISION&
TAX RATE (%) 40.2 35.5 35.7 34.2 34.0 34.0
PAT 45,413 67,291 91,212 91,661 113,841 143,832
CHANGE (%) 3.1 48.2 35.5 0.5 24.2 26.3
PROPOSED DIVIDEND 7,368 13,577 18,412 19,046 22,221 28,570
PPP 94,321 114,577 153,479 162,041 228,562 282,149
CHANGE (%) -11.9 21.5 34.0 5.6 41.1 23.4
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Y/E MARCH 2007 2008 2009 2010 2011E 2012E
CAPITAL 5,263 6,315 6,349 6,349 6,349 6,349
RESERVES&
NET WORTH 312,985 490,237 579,477 659,492 747,335 857,740
DEPOSITS 4,355,211 5,374,050 7,420,731 8,041,162 9,488,571 11,386,286
CHANGE (%) 14.6 23.4 38.1 8.4 18.0 20.0
CASA DEPOSIT 2,111,345 2,523,639 3,089,778 3,800,397 4,437,897 5,190,639
BORROWINGS 558,728 730,168 840,579 1,030,116 1,153,543 1,294,551
OTHER
LIABILITIES &
PROV.
TOTAL
CURRENT
NET FIXED
OTHER ASSETS 255,332 444,181 377,333 351,128 386,240 424,864
TOTAL ASSETS 5,668,062 7,215,274 9,644,321 10,534,137 12,393,014 14,792,237
ASSUMPTIONS
DEPOSIT
GROWTH
LOANS
INVESTMENT
Page 99
CONCLUSION: FOR ME SHARES OF STATE BANK OF INDIA IS ALWAYS
BUY CALL, WITH GOOD EPS, ROE AND ROA.STRONG BALANCE SHEET & HUGE
PROFIT WITH GROWING BUSINESS.
Page 100
2. WEB SITE:-SHAREKHAN.COM
7. BOOK:-FINANCIAL MANAGEMENT BY I M PANDEY
8. MAGAZINE:-VALUE GUIDE BY SHAREKHAN
9. MAGAZINE:-DETAIL REPORT ON BANKING SECTOR BY MOSL.

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