INFINEETI Research Magazine | Annual Issue 2011
INFINEETI Research Magazine | Annual Issue 2011
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INFINEETI Research Magazine | Annual Issue 2011
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INFINEETI Research Magazine | Annual Issue 2011
INFINEETI Research Magazine | Annual Issue 2011
A Framewor k for I nd i an Commerci al Banks Per for mance R an k in g an d St u d y of Cor relati on of I nvestor Percepti on wi th Per for mance R an k in g B y S anjeev k umar V, S enthi l Kumar Subramani an. ( The authors are stud ent of PGD IM,NITIE. The ar ti cle i s t h e win n in g e nt r y o f Nati onal R esearch Paper Competi ti on organi zed by INI F I N E E TI ) Abstrac t :
the P/BV (Price/Book value)
simultaneously followed by
I n d i a n e co n o my h a s p rovi d e d
of those stocks. The ranking
increased demand for bank ing
tremendous growth oppor-
m o d e l i s b a s e d o n An a l y t i c a l
sector stocks thereby giving
t u n i t i e s fo r a l l t h e i n d u s t r i e s
h i e ra rc h i c a l p ro ce s s m e t h o d.
rise to increased market
over the last two decades.
We h a v e u s e d q u a n t i t a t i v e
prices of banking shares,
S c h e d u l e d co m m e rc i a l b a n k s
p a ra m e te r s i n A H P m e t h o d to
i n c re a s e d e a r n i n g s a n d t o t a l
in India have used the plat-
ra n k t h e b a n k s
market turnover which is highest among all sectors
form provided by the economy
10
and have grown at a faster
I ntrod uc ti on :
stocks. According to the latest
than many sectors. Banking
Over the last two decades,
mar ket conditions, Aggregate
stocks have ideally become
Indian banks have capital-
b a n k ing stocks have a we ig ht
one of the best choices for
ized on the growth of the
o f 3 0 p e r c e n t a p p r ox i m a t e l y
investors. The returns of
Indian economy and grown
in the total market cap of
banking stocks were one of
at a faster pace than many
Bombay stock exchange. Thus,
the highest in the market in
other industries. Economic
b a n k ing stocks a re one of the
last decade (CAGR of 27%).
growth gave raise to growth
most traded and most watched
Though banking universe
of capital markets which the
i n t h e ma r ke t. Nationa l stock
in India is highly regulated,
banks used for capitalizing
e xc h a n g e h a s c r e a t e d a s e c -
t h e re we re s i gn i f i c a nt d i f fe r-
their growth. The banking
torial Index as “BANK NIFT Y�
ences exist in their under-
sector has made tremen-
which comprises of all the
lying operations and hence
dous success in the recent
l i s te d ba nk` s stocks.
their per for mance. This paper
p a s t a s m a ny o f t h e co m m e r-
a i m s a t p e r fo r m a n ce ra n k i n g
cial banks that approached
Indian Bank ing universe is one
of Indian Commercial banks
the capital market through
of the highly regulated and
based on statistical param-
public offers and qualified
stable in the world. Though
eters (quantitative parame -
institutional placements (QIP)
banking universe in India is
te r s ) fo r e a c h ye a r f ro m 2 0 0 8
to raise their capital base.
h i g h l y re g u l a t e d, t h e re we re
to 2011. Based on the changes
Capital markets showed tre -
significant differences exist
in the ranking, the paper
mendous response when-
in their underlying opera-
t r i e s to s h ow t h e co r re l a t i o n
ever Indian government liq-
tions and hence their finan-
b e t we e n t h e ra n k i n g c h a n g e s
ui d ate d i t s e q ui t y p o s i t i o n i n
cial per formance. The idea
and the market valuation of
the public sec tor banks (PSB).
behind publishing rank ings is
the respec tive stocks through
Th e re - c a p i t a l i z at i o n s u cce s s
to p rov id e a n oppor tu nit y to
the cor responding changes in
of the banks was almost
benchmark once per formance 11
INFINEETI Research Magazine | Annual Issue 2011
with its competitors and peers
profile of the bank, Governance
S ize, Val u atio n and G row t h .
grouped var ious per for mance
c h a n g e d I n d u s I n d b a n k ’s P / ra n k a ba nk from the inve stor
i n t h e s e c tor.
a n d o rg a n i z a t i o n , o p e r a t i o n s,
The R es er ve B ank o f I n d i a h a d
parameters under different
B V va l uat i o n f ro m 2 .2 1 to 3 .2 8 p e r spe c tive.
The rating agencies evalu-
cap it al, f u nding and l iq u idit y,
used six key parameters for
clusters vis. Capital Adequac y,
and Bank of Baroda’s P/BV from
ate va r i o u s co m p a n i e s o n t h e
credit r is k , co ncentratio n r is k ,
rating of Indian commercial
Asset
1 .2 6 to 1 .8 2
basis of different quantita-
equit y r is k , pro f itabil it y, as s et
banks. These are called CAMELS
Ef f i c i e n c y, Ea r n i n g s
tive and qualitative parame -
qualit y, leverage, M ar ket envi -
rating parameters, where C
t e r s. H owe ve r t h e p a r a m e te r s
ronment and risk management.
s t a n d s f o r C a p i t a l A d e q u a c y,
Parameters,
d i f fe r f ro m o n e rat i n g a g e n c y
M o o d y ’s c r e d i t r a t i n g s a r e
A s t a n d s f o r A s s e t Q u a l i t y,
Pa ra m e te r s, O p e rat i o n a l e f f i -
Discussion on possible parameters for per formance rank i ng:
t o a n o t h e r. M a n y a g e n c i e s
opinions on the creditwor-
M stands for Management, E
ciency and Growth param-
Indian banking universe has i n c o m e c o m e s f ro m t h e i r
have ranked Indian Commercial
thiness of the banks. These
stands for Earnings per for-
eters. In this paper we have
u n d e r g o n e m a j o r c h a n g e s lending ac tivities. Parameters
Banks based on different
ratings include long-term obli-
m a n c e, L s t a n d s fo r L i q u i d i t y
used AHP to creating the
p o s t l i b e r a l i z a t i o n , m o r e s o, s uc h a s Ad va nce growth, Ne t
objectives and parameters.
gation ratings, syndicated loan
and S s tands fo r Sys te m s. Th e
ranking model. AHP method
a f t e r t h e e n t r y o f f o r e i g n Interest Margin can be used
Major foreign agencies that
r a t i n g s, b a n k d e p o s i t r a t i n g s,
key parameters under the
( s a a t y, 1 9 8 0 ) i s o n e o f t h e
b a n k s a n d n e w I n d i a n p r i vate t o m e a s u r e t h e i r s t r e n g t h i n
ra n k I ndi a n Commercial b an ks
national scale ratings and
CAMEL rating parameters are
most commonly used methods
b a n k s. H e n ce, fo r m t h e i nve s - i n t e r e s t i n c o m e . T h e r e i s a
are Standard & Poor, Fitch, and
insurance financial strength
c apital to to tal as s e t s, c a p i t a l
for decision making where
to r ’s p o i nt o f vi e w ; ra n k i n g o f n e e d t o fo c u s o n w e l l d i v e r -
M o o d y. I n d i a n a g e n c i e s t h a t
ratings. Moody rates the banks
minus estimated losses to
multiple attributes are used to
banks has to be in different sified other income stream.
ra n k I ndi a n Commercial B an k s
on the basis of capital, asset
to t a l a s s e t s, d e l i n q u e n t l o a n s
m a k e t h e d e c i s i o n . Th e d e c i -
w a y t h a n c u r r e n t l y a v a i l a b l e Earnings from non-fund based
a r e B u s i n e s s Wo r l d , B u s i n e s s
q u a l i t y, e a r n i n g s, l i q u i d i t y,
to total loan, net charge offs
sion mak ing process is divided
rat i n g s m e t h o d o l o gi e s.
Standard, and Business India
m a r k e t l e a d e r s h i p, r i s k m a n -
to average loan, non-earning
into multiple steps and the
Though, for statistical analysis a n t e e s ; L / C s , c a s h m a n a g e -
e tc.
agement, ownership, struc-
assets to total assets, oper-
p ro b l e m i s d e c o m p o s e d i n t o
and per formance rank ing most m e nt, l o gi s t i c s m a n a g e m e nt,
t ure and s o o n. M o o dy fo c u s es
ating expenses minus provi-
hierarchy structure which
agencies use parameters which t a x c o l l e c t i o n a n d o t h e r s e r -
Standard & Poor rate the banks
mo re on s tatis tic al f ac to r s fo r
sions for loan losses and inter-
co n s i s t s o f t h e e l e m e nt s s uc h
a r e c o m m o n . B u t t h e w e i g h t - vices are more permanent and
o n t he ba s i s of eco n o mic r isk ,
ran k in g. The s tatis tic al param -
est expenses to average assets,
a s : t h e g o a l, t h e c r i te r i a ( s ub -
i n g s g i v e n t o t h e p a r a m e t e r s i nvolve le ss a mou nt of cre d it
i n d us tr y r i s k , cor p o rate st ruc -
eters are Capital, Asset quality,
net income before statutor y
c r i te r i a ) a n d t h e a l te r n at i ve s.
v a r y f r o m a g e n c y t o a g e n c y a n d ma r ke t r isk . O n the othe r
ture, management structure,
Ear n in g s and Liq u idit y.
reser ve transfers to average
A H P i s a m at h e m at i c a l m o d e l
and also depend on the objec- h a n d , fo r e a r n i n g i n t e r e s t
assets and net income after
in which we can assign pr ior i-
t i ve o f t h e ra n k i n g.
a ccou nti ng & fi n an cial rep o r t-
Qualit y,
Financial
Liquidity
Fo r a n i nve s to r, e a r n i n g s a re an important measure of per formance. Bank earnings come from Interest income and other incomes. Interest
services like credit guar-
income and treasur y income
i n g, c re d i t r i s k & r isk man age -
Th e B us ines s I ndia has rank ed
trans fer s to averag e a s s e t s.
ties to the parameters used in
m e n t , l i q u i d i t y, c a p i t a l, e a r n -
the commercial banks on the
I n t h i s p a p e r, we h ave ra n k e d
d e c i s i o n m a k i n g.
i n g s, p ro f i t a b i l i t y, a s s e t c o m -
b a s i s o f Ca p i t a l a d e q u a c y,
the Indian commercial banks
position and asset quality of
Resources Deployed, Asset
from the point of view of an
AHP method is used to rank the
f ro m t h e p a p e r Cr i t i c a l a n a l y - r a t i o s s u c h a s n o n - i n t e r e s t
the ba nks.
quality, Management, Earnings
investor for each year from
d i f fe re nt c l us te r s a n d p a ra m -
s i s o f p a r a m e t e r s o f r a t i n g o f i n come to tota l a sse ts.
qualit y and Liquidit y. Business
2008 to 2011. Based on the
e t e r s w i t h i n e a c h c l u s t e r.
Indian commercial banks by
Fitch rating emphasizes that to
Standard Research Bureau
changes in the ranking, the
Acco rd i n g l y, w i t h t h e a r r i ve d
M uk t a M a n i ( 2 0 1 1 ) .
rate a bank one needs to under-
(BSRB) has ranked the banks
paper tries to show the cor-
weights for parameter and
C AMEL S rat i n g s a re o n e o f t h e aged institutions. Their assets
stand the business profile of
on the basis of five broad indi-
r e l a t i o n b e t we e n t h e r a n k i n g
c l u s te r, t h e y we re m u l t i p l i e d
p ro m i n e nt l y u s e d m e t h o d s to p e r for ma nce d e pe nd s on the
t he ba nk , the r i sks in h erent to
c a t o r s n a m e l y Pro f i t a b i l i t y,
c hang es and the ma r k e t va l u-
to get the weights for each
c h o o s e p a r a m e t e r s f o r a n a - customer credit quality. Banks
the business, the objectives
Safet y, Produc tivit y, Efficienc y
at i o n o f t h e re s p e c t i ve s to c k s
p a ra m e te r. Fro m t h e ra n k i n g s
l y z i n g b a n k s a c r o s s w o r l d . us e the por tion of the ir e a r n-
o f i t s m a n a g e m e n t , t h e e nv i -
a n d G r o w t h . B u s i n e s s Wo r l d
through the corresponding
c h a n g e we h ave fo u n d I n d u s
Th i s rat i n g p rovi d e s a g e n e ra l i n g s a s t h e d e f e n s e a g a i n s t
ronment it operates in and the
(BW ) has divided the ranking
changes in the P/BV of those
I n d B a n k a n d B a n k o f B a ro d a
f r a m e w o r k fo r e v a l u a t i n g t h e t h e n o n p e r f o r m i n g a s s e t s .
most likely future development
parameters of banks into
s to c k s.
has made huge progress in
banks. In this paper we have Banks allocate a por tion of
of its business. The parameters
six
their ranking from 2008 to
m o d i f i e d t h e C A M E L r a t i n g s their profits for provisions for
c o n s i d e r e d b y Fi t c h i n c l u d e s
Profitabilit y, Efficienc y, Safet y,
2011. Accordingly, market has
to i d e nt i f y t h e p a ra m e te r s fo r n o n - p e r f o r m i n g a s s e t s . T h i s
broad
groups
namely In this exercise we have 12
bank has to bear credit risk D i f fe re nt p a ra m e te r s u s e d fo r a n d m a r k e t r i s k re s p e c t i ve l y. r a n k i n g a B a n k a r e i d e n t i f i e d This can be measured by using
Banks are one of the most lever-
INFINEETI Research Magazine | Annual Issue 2011
INFINEETI Research Magazine | Annual Issue 2011
p rov i s i o n a l l o c a t i o n d e p e n d s comparing the per formance of
The absolute size of the banks
I n t h i s p a p e r we h a ve l i n k e d
bank ing sector of the Nigerian
m o d e l C A F E LO G S a re d i s -
o n t h e a s s e t q u a l i t y o f t h e i r dif ferent bank s. Thes e param -
may also be included in the
t h e ra n k i n g c h a n g e s w i t h t h e
capital mar ket by E.O.oyatoye
c us se d be low.
b o o k s . Pa r a m e t e r s l i k e G r o s s eters ref l ec t the m anag em ent
ratings as it gives a brand
corresponding changes in
(2010), G.U.ok poko(2010) and
N PA , N e t N PA , a n d Pr o v i s i o n c a p a b i l i t y t o g e n e r a t e m o r e
name and good perception for
the Price/book value (P/Bv)
G.A Adekoya (2010) under-
Capital
c o v e r a g e r a t i o c a n b e u s e d busin es s fo r m the exis ting s et
the inves to r s. Al s o, s i ze o f t h e
w h i c h re p re s e n t s t h e m a r k e t
lines the importance of dif-
Capital adequac y is the cluster
t o m e a s u r e a s s e t q u a l i t y o f up.
bank is impor tant for business
perception about the bank.
ferent criteria ,factors and
to d e te r m i n e t h e c a p a c i t y o f
banks. Here, non-per form-
diversification, broader geo-
Th e re i s a l o t o f l i t e r a t u re i n
alternatives that are essen-
bank to meet liabilities and
ing assets have largely been A n o t h e r m e a s u re t h a t w i l l
graphic al reac h, red uce d co n -
textbooks discussing price
tial investment decision by
r i s k su ch a s cre d it r isk , ope r-
taken in comparison with total impact the investor sentiments
centration risk and economies
m ul t i p l e s. I n t h e p a p e r t i t l e d
applying Analytical hierar-
ational risk, market risk and
a s s e ts or ne t advan ces. O t h er i s t h e g r o w t h p a r a m e t e r s .
o f s c al e.
Valuing Financial ser vices
c h i c a l p ro ce s s (A H P ) . A H P i s
business risk. Capital ade -
firm by Ashwath Damodran
one of the best mathemati-
q ua c y pa ra me te rs ha s ce r ta in
m e as u re s li ke, slipp age
Growth of profits, advances,
Adequacy
–
r a t i o w h i c h m e a s u r e s t h e d e p o s i t s, a n d e nt i re b u s i n e s s
With the opening up of the
(2009) discusses the differ-
c a l te c h n i q u e s i n t h e c a s e o f
influence on Banks expan-
i n c r e a s e i n N PA s c a n a l s o b e p l a y s a n i m p o r t a n t r o l e i n
e c o n o m y, t h e I n d i a n b a n k s
ent methods of valuation of
multi criteria decision mak ing.
sion .CAR parameters would
u s e d. Anothe r way to an alyze invest m ent dec is io n m ak ing.
face competition from foreign
a banking firm. In the paper
In the paper titled analysis
incorporate the risk levels
t h e l o a n b o o k q u a l i t y i s t o Fo r a co m m erc ial bank , m ain-
banks in terms of both business
t i t l e d E q u i t y Va l u a t i o n Us i n g
of the efficiency of banks in
.Reser ve Bank of India gives
check the exposure of the tenance of liquidity is as
and talents. With the grant-
Price Multiples: A Comparative
Montenegro using the AHP
cer tain guidance on minimum
loans viz. sec tors or large cus- i m p o r t a n t a s i t s p r o f i t a b i l -
ing of new banking licenses
Study for BRICKS by Sanjay
by Svetlana Rakocevic and
C A R pa ra me te rs which wou ld
tomer wise. Credit risk concen- it y. Liq u idit y r is k c an be m ea-
by RB I, co m petitio n fo r t a l e nt
S e h g a l a n d A s h e e s h Pa n d e y
Zd e n k a D r a g a s e v i c u s e s A H P
build shareholders confi-
tration is measured by relat- s u r e d f r o m m a t u r i t y m i s -
has become intense. Though
(2010) discuss about the key
method to compare banks
d e nce in the ba nk ing syste m.
ing a volatile loan categor y to m a t c h o f a s s e t s a n d l i a -
it is challenging to measure
value driver of the compa-
depending on the different
The parameters identified
capital. It should be tried to b i l i t i e s . I t i s m a n a g e d b y
how banks respond to this
nies in the Brazil, Russia, India
quantitative and qualitative
un d e r this clu ste r a re Ca pita l
a s ce r ta i n what wo uld h app en A s s e t L i a b i l i t y M a n a g e m e n t
competition, we believe this
China, Korea and South Africa.
c r i te r i a .
Adequacy Ratio (CAR), Tier-I
to core earnings (and possibly C o m m i t t e e ( A LC O ) t h r o u g h
would be captured in busi-
As p e r t h e re s ul t m o s t o f t h e
to capital) if a bank needed to ALM tec hniq u es.
nes s per em pl oyee a n d p ro f i t
co m p a n i e s i n I n d i a a re u s i n g
wr i te - off s e ve ral o f it s largest
per employee. Non-banking
relative valuation of price with
Cap it al adeq u ac y is an im po r-
f i n a n c i a l i n s t i t u t i o n s a re a l s o
re s p e c t to b o o k va l ue. I n t h e
tant fac tor to judge the bank ’s
gi v i n g co m p e t i t i o n fo r b a n k s
paper titled Relative Valuation
CAFELOGS For mulati on -
t h e ability to meets its risks and
which banks are overcoming
o f U. S . I n s u r a n c e C o m p a n i e s
A s d i s c u s s e d e a r l i e r, i n t h i s
side are I nvestment, advances
t o liabilities. Capital adequacy
by coming out with innova-
(2011) by D oronnissim clear ly
paper we have modified the
, Balances with other banks
i n c re a s e p ro f i t m a rg i n s i s, t o also shows the room for bank ’s
tive f inanc ial pro du c t s. Th e s e
defines the relative valua-
C AMEL rat i n g s to i d e nt i f y t h e
,Balances with Reser ve Bank
reduce the cost of operations. g r o w t h w i t h t h e a v a i l a b l e
k i n d o f q u a n t i t a t i ve p a r a m e -
t i o n m e t h o d fo r f i n a n c i a l s e r-
parameters for rank a bank
o f I n d i a a n d Fi xe d A s s e t s. I n
A major chunk of operating capital. Also, to implement
ter s are no t c aptu re d a s t h e s e
vices firm and Banks across
from the investor perspec-
b a nks the ma jor pa r t is u nd e r
c o s t i n P u b l i c S e c t o r B a n k s B asel II no r m s, bank s need to
would finally contribute to
t h e wo r l d. H e co n c l ud e s t h at
t i ve . Th e re p l a ce m e nt o f M –
assets is under Advances
is the staff cost, also termed have a strong framework for
bottom line which are cap-
market price as a proxy for
Management capabilities with
head. Reser ve Bank of India
e s t a b l i s h m e n t c o s t . C o s t t o credit risk and operational risk
tured in terms of growth rates.
intrinsic value of the firm
operational and financial effi-
has classified asset into cat-
income parameter helps in management. Measures like
Similarly attributes like cus-
which is termed as book value
c i e n c i e s . Tw o o t h e r p a r a m e -
egories like standard assets,
co mpar i ng the o p erat in g co st C AR (Capital adeq u ac y
tomer ser vice, customer sat-
of the firm.
ters namely the growth and
substandard assets, doubt-
incurred with the income gen- r a t i o ) & Ti e r - 1 c a p i t a l t o R i s k
isfac tion, location advantages
m a r k e t s h a re p a r a m e t e r s a re
ful assets and Loss assets.
e r a te d. O t h e r f a c to r s s u c h a s w e i g h t e d a s s e t s c a n b e u s e d
etc. are also not considered
In the paper titled applica-
a d d e d at t h e e n d .Th e
RBI has given cer tain guide -
Bu s i ne s s pe r emp loyee, pro f it t o j u d g i n g t h e c a p i t a l a d e -
as al l o f thes e f inal l y co nt r i b -
tion of analytic hierarchy
modified model can be named
l i n e s for prov isioning of Non-
p e r e m p l o y e e , B u s i n e s s p e r quac y o f bank s.
u te to the pro f itab i l i t y o f t h e
p r o c e s s ( A H P ) t o i nv e s t m e n t
a s C A F E LO G S . T h e c l u s t e r s
per forming loans depend-
branch can also be used for
bank .
portfolio selection in the
which contribute to the new
i n g o n t h e d u r a t i o n o f i t ’s
lo ans. Besides, revenue
increasing another
way
14
Ca pita l a nd d iv id e nd payou t.
M ethod ology : Ass e t Q u alit y Model
In a bank balance sheet the main heads under the assets
15
INFINEETI Research Magazine | Annual Issue 2011
INFINEETI Research Magazine | Annual Issue 2011
non-per forming. Banks have
to t h e f u tu re val u atio n o f the
in the coming years which
t h e g u i d a n c e o f R e s e r v e b a n k o f u n d e r t h i s c l u s t e r a r e m a r k e t s h a r e o f a d v a n c e s, m a r k e t
to allocate suitable amount
banks .The parameters iden-
can be tapped by incremen-
I n d i a . T h e p a r a m e t e r s i d e n t i f i e d s h a re o f d e p o s i t s a n d m a r k e t sha re of bu sine ss.
of provisions according to the
t if ied u nder this c ateg o r y are
tal branches of banks .Reser ve
under this cluster are percentage
non- pe r for min g lo an s in t h at
Return on Equity (ROE), Return
Bank of India has forced Indian
c h a n g e i n to t a l a s s e t s, p e rce nt a g e
y e a r. T h e p a r a m e t e r s i d e n -
o n A s s e t s ( R OA ) , p e r c e n t a g e
co m m erc ial bank s to o p e n 2 5
change in advances, percentage
tified under this cluster are
increase in earnings per share
% o f t h e i r b r a n c h e s i n Ti e r 5
change in investments, percentage
G ro s s N o n - Pe r fo r m i n g As s e t s
(EPS) and percentage increase
and Tier 6 cities (rural ) .Indian
change in deposits and percentage
( G N PA ) , N e t N o n - Pe r f o r m i n g
in b o o k val u e (B V ).
banks have more oppor tunities
c h a n g e i n n e t p ro f i t s.
to explore new technologies in
L o a n ( N N PA ) a n d P r o v i s i o n s
L iq uidit y
Cove ra ge R atio (PCR).
–
the bank ing s ys tem .Th e p e n -
Liquidity is ability to meet
etratio n o f m o bil e co m m e rce
-
short term and long term
and el ec tro nic co mm e rce c a n
T h e s e a r e Fi n a n c i a l p a r a m e -
obligations without losses.
h e l p t o r e d u c e t h e i r o p e r a t-
te r s whi c h c an h elp t h e b an k
One of the key problems of
ing co s t . Operatin g e f f i c i e n -
to determine the effectiveness
liquidity in banks arises due
c ies deter m ine the l o n g te r m
of its utilization of financial
to As s e t l i a b i l i t i e s m i s m atc h .
profitability of the commer-
resources available with them.
Liquidity can cause a huge
c i a l b a n k s. E f f i c i e nt u s a g e o f
These parameters depends on
shor t term demand for money
the res o u rces w il l re d uce t h e
the economic parameters such
wh ich wo u l d af fec t the ear n-
operational cost and enhance
a s R e po, R e verse rep o,
i n g s o f t h e b a n k . I n o rd e r t o
the bank ing pro f it. Th e m a j o r
Cash reser ve ratio and stat-
meet the short term obliga-
head u nder operat i n g co s t i s
utor y lending ratio. These
tions banks should either raise
the salaries for employees.
parameters depend on the
mo ney tho u g h LA F (Liq u idit y
The parameters identified
(Figure 2: Diagrammatic representation of Analytical
short term and long term
A d j u s t m e n t Fa c i l i t y ) o r C a l l
under this cluster are busi-
H i e ra rc h i c a l p ro ce s s )
strategies of the bank. The
money market .In LAF the
nes s per em pl oyee, o p e rat i n g
parameters identified under
Reser ve Bank of India lends
pro f it per em pl oye e a n d Co s t
this cluster are Net interest
a t 1 p e rc e n t h i g h e r t h a n t h e
to inco m e, Operati n g i n co m e
Analyti cal hi erarchi ca lPro ce ss:
margin (NIM), I nterest I ncome
R epo rate f ixed by them . The
to to tal as s ets.
Analytical hierarchy process is a procedural approach which
t o To t a l A s s e t s, N o n - i n t e r e s t
parameters identified under
income to total Assets, Net
this cluster are Credit- deposit
G row th
interest income to Interest
r a t i o (C D r a t i o ) , Ad v a n c e s t o
Growth rate determines rel-
m a k i n g p r o b l e m s. A H P Pr o c e s s i n e v a l u a t i n g t h e o v e r a l l
income and Net profits to
to t a l a s s e t , D e p o s i t s t o t o t a l
ative per formance of the
R a n k i n g o f I n d i a n co m m e rcia l ba nks
total as s e ts.
liabilities, Investments to total
bank with others .Growth
AHP technique uses diagrammatic representation in the
asset and Current account
is an impor tant concern for
fo r m o f h i e ra rc hy a s s h ow n i n t h e f i g u re b e l ow to m o d e l
saving s acco u nt (C AS A).
i nv e s t o r s i n a ny b u s i n e s s . I n
M ar ket Share
bank ing s ec to r the grow t h i s
M a r k e t s h a r e o f t h e b a n k i s a n The identified parameters of different cluster in CAFELOGS
benchmarked by the guidance
i m p o r t a nt f a c to r fo r f ut ure grow t h model are conver ted into a questionnaire format. The ques-
.They are the actual returns
O p e r a t i o n a l E f f ic ien c ies -
of GDP growth rate and non
o f t h e b a n k i n c u r r e n t g r o w i n g tionnaire format was sent to capital market investment and
which the banks and share -
Operating cost is one of the
fo o d c r e d i t g r o w t h r a t e p r o -
e c o n o m y. A s p e r t h e l a t e s t 2 0 1 0 b ro k i n g f i r m s i n I n d i a . Th e re sponse s wa s consolid ate d to
holde r s ge t o n t h eir busin ess
impor tant cost head in bank ’s
v ided by the R es er ve B a n k o f
R B I s t a t i s t i c s o n l y 4 4 % o f c u r r e n t arrive at the rank ing of the different parameters .In order to
activities. The parameters
P&L statement .India has a
I n d i a . I nve s to r s wo u l d p re fe r
e a r n i n g p o p ul at i o n i s h avi n g b a n k c a l c ul ate t h e re l at i ve we i g ht of d iffe re nt clu ste rs a nd the ir
under this cluster contributes
huge oppor tunit y for Bank ing
t h e b a n k s w h i c h o u t p e r fo r m
account. The parameters identified p a r a m e te r s, E i g e n Va l u e m e t h o d i s u s e d i n t h i s p a p e r.
Fi n a n c i a l E f f i c i e n c i e s
Ear n i n g s
–
Commonly known as the return rati o i n a Ba nk s R at io an alysis
involves structuring of multiple options into a system. A H P i s a s t r uc t ure d te c h n i qu e to solve complex d e cisions.
-
16
–
re a l l i fe s i t uat i o n .
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INFINEETI Research Magazine | Annual Issue 2011
INFINEETI Research Magazine | Annual Issue 2011
M etho do l o g y to d e te r m i n e P /B ratio fo r I ndia n B a n k i n g s to c k s The c l o s e s to c k p r i ce s o f I ndian co m m erc ia l b a n k s a re co l l ec ted f ro m th e B o m b ay s to c k exc hang e. Th e ave rag es o f c l o s e pr ice s o f t h e s e s to c k s are c aptu re d i n a s n a p s ho t per io d o f o n e ye a r. Th e s nap s ho t per io d d ate ra n g e is f ro m Apr il 1 s t to M a rc h 3 1 s t res pec tivel y. B o ok va l ue i s repo r ted in the a ud i te d f i n a n c ial s tatem ent o f t h e b a n k s. I t is repo r ted o nl y o n ce i n year in the Annu a l R e p o r t. The pair wise comparison was based upon seven point wise
The Pr ice /B o o k va l ue i s
co m pa r i s on. Th e weight age o f each c l u s ter and param eter s in
deter m ined u s ing t h e b e l ow
the cluster is identified a pair wise comparison as shown in
fo r m u l a
A n n e x u re s. T h e c o n s o l i d a t e d we i g h t a g e o f t h e i d e n t i f i e d 3 2 pa rame te r s of C AFELOGS mo del are s how n bel ow tabl e
Pr ice /B o o k val u e = Ave ra g e o f c l o s e pr ices / B o o k va l ue
R esults and D i scussi on
Th e pr i ma r y dat a co llec ted is ran ked acco rding to c harac ter is -
price /book value is given.
B a n k s a n d t h e o b j e c t i ve o f t h e
In 2008 / 2009 period the
rank ing also differs from agenc y
t i c s of e ac h p arameter. Th e dat a un d er fo u r param eter nam el y
R ank ing and Pr ice/B ook value
mar kets over reac ted because
to agency. Ranking banks per for-
G r o s s N o n - Pe r f o r m i n g A s s e t s ( G N PA ) , N e t N o n - p e r f o r m i n g
of listed scheduled commer-
of the global economic reces-
mance from the investor`s point
cial banks are calculated as per
sion. During that period the
of v ie w is a complex proce ss a s
the above methodologies. The
model has a success rate of 66
i t d e pe nd s on qu a ntitative a nd
ranks assigned to each bank
% re s p e c t i ve l y. I n t h e c a s e o f
qualitative parameters. Also,
is studied over the given time
banking the investors gives
t h e v a l u a t i o n t h e m a r k e t gi ve s
d urat i o n a n d re l at i ve c h a n g e
a higher weightage to the
for a bank stock depends of
i n t h e ra n k s a re n o te d .I t wa s
banking fundamental rather
m u l t i p l e f a c t o r s s u c h a s i nve s -
identified that in approxi-
than economic conditions
tor perception, market liquid-
mately 70 % of the cases when
during valuation of a commer-
i t y, i n t e r e s t r a t e e n v i r o n m e n t
t h e ra n k s o f t h e b a n k m ove d
c i a l b a n k i n g s to c k i n I n d i a .
and countries macroeconomic s c e n a r i o . T h r o u g h t h i s p a p e r,
in either direc tion the Price to b o o k va l ue a l s o m ove d i n t h e
Conclusi on:
the ranking obtained from the
s a m e d i re c t i o n . I n t h e b e l ow
18
we have shown that cha ng e s in
diagram, the success rate of
There are several arguments
C A F É LO G S m o d e l a n d t h e c o r -
the correlation of rank ing and
for per formance ranking of
responding P/BV changes are 19
INFINEETI Research Magazine | Annual Issue 2011
more than 66% cor related. This may be because we have not considered the quantitative parame ter s s u c h as th e pro mo ters b ackgro und, c hang e in m anag em ent, co r po rate g over na n ce o f t h e b a n k , bra nd e q uit y o f t h e b an k an d exceptio nal c as es l ik e State bank gro u p, it ’s g et s up p o r t i n ter ms of business for m gover nment . Fur ther research can be car r ied out by incor porating quant i t at i ve para m e ters, mar ket co n dit io n s and eco no m ic s cenar io s w hic h c an l ead to a m o d e l t h at i s hi ghly cor re lated wit h t h e mar ket se ntim ents
R e fe re n ce s : 1 . S aat y, T.L . ( 1980), Th e An alyt ic H iera rc hy Pro ces s, M c G raw-H il l, N ew Yo r k 2 . F I Cr i te r i a : Ban k R at in g An alysis M etho do l o g y Pro f il e, Standard and Po o r (20 04 ) 3 . M od e li ng ban k credit rat in gs A st ruc tu ral appro ac h to M o o dy ’s (2 00 7) 4 . Analys i s of the ef f icien c y o f B an k s in M o ntenegro u s ing the AHP, Svetl ana R ak o cev i c, Fa c ul t y o f E co n o m i c s U n i ve r s i t y o f M o n te n e g ro Po d g o r i c a , Zd e n k a D r a g a s e v i c, Fa c u l t y o f E c o n o m i c s Uni ve r s i t y of M onten egro Po dgo r ica 5 . B enc hm ar k i ng Per fo r man ce o f Pub lic S ec to r B ank s in I ndia, B hagirathi N ayak and C Na h a k 6 . Pa r a m e t e r s o f R a t i n g o f I n d i a n C o m m e r c i a l B a n k s - A c r i t i c a l A n a l y s i s , D r. M u k t a M a n i , I n t e r n a t i o n a l J o u r n a l o f R e s e a rc h i n Co m m e r c e, I T a n d M a n a g e m e n t , V O LU M E N O : 1 ( 2 0 1 1 ) , I SSUE NO. 2 ( JULY ) 7. AHP based Model for Bank Per formance Evaluation and Rating,Tihomir Hunjak ,Drago Jakovčević, I SA HP 2001, B e r n e, Swit zer lan d, Augus t 2-4 , 2 00 1 20