S U M M E R T R A I N I N G P R O J E C T

O N

“ E Q U I T Y A N A L Y S I S ”

B a n k s

SUBMITTED TO:

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CONTENTS

• ACKNOWLEDGEMENT

3

• BREIF COMPANY PROFILE

4

• INVESTMENT PORTFOLIO

7

• CHAPTER1: INTRODUCTION

11

INTRODUCTION

12

RATIONALE

13

OBJECTIVES

14

RESEARCH METHODOLOGY AND DESIGN

15

• CHAPTER 2: TECHNICAL ANALYSIS OVERVIEW

16

• CHAPTER 3: FUNDAMENTAL ANALYSIS OVERVIEW

23

2

• CHAPTER 4: BANKING SECTOR

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BANKING IN INDIA

32

CURRENT SCENARIO

33

FUTURE OUTLOOK

34

BANKING STRUCTURE

35

• CHAPTER 4: ANALYSIS

38

ICICI BANK ANALYSIS

39

HDFC BANK ANALYSIS

43

UNION BANK OF INDIA ANALYSIS

48

• FINDINGS & CONCLUSION

54

• BIBLIOGRAPHY

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4

Company Profile

Kotak Life Insurance is a joint venture between Kotak Mahindra Bank Ltd., along

with its affiliates and Old Mutual plc. Kotak Mahindra Old Mutual Life Insurance is

one of the fastest growing insurance companies in India and has shown remarkable

growth since its inception in 2001.

Kotak Mahindra believes in offering its customers a lifetime of value. Established in

1984, the Kotak Mahindra group has long been one of the India’s most reputed financial

organizations. Kotak Mahindra today is one of India’s leading financial institutions

offering complete financial solutions that encompass every sphere of life. The group has

a net worth of over Rs. 3,380 crore, employs around 12,300 people in its various

businesses and has a distribution network of branches, franchisees, representative offices

and satellite offices across 320 cities and towns in India and offices in New York,

London, Dubai, Mauritius and Singapore. The Group services around 2.9 million

customer accounts.

Old Mutual, a company with 160 years experience in life insurance, is the 37th largest

company in the FTSE100 with a market cap of approx. £10 billion and listed on London,

Stockholm and Johannesburg stock exchanges. Its fund under management exceeded

$468 billion as on 31st December, 2006. For customers, this joint venture translates into

a company that combines international expertise with the understanding of the local

market.

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Products

• Kotak Eternal Life Plans

• Kotak Platinum Advantage Plan

• Kotak Headstart Child Plans

• Kotak Sukhi Jeevan Plan

• Kotak Privileged Assurance Plan

• Kotak Term Plan

• Kotak Preferred Term Plan

• Kotak Money Back Plan

• Kotak Child Advantage Plan

• Kotak Endowment Plan

• Kotak Capital Multiplier Plan

• Kotak Retirement Income Plan

• Kotak Retirement Income Plan(Unit-linked)

• Kotak Safe Investment Plan II

• Kotak Flexi Plan

• Kotak Easy Growth Plan

• Kotak Premium Return Plan

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Investment Rationale

Each investment alternative has its own strengths and weaknesses. Some options seek to

achieve superior returns (like equity), but with corresponding higher risk. Other provide

safety (like PPF) but at the expense of liquidity and growth. Other options such as FDs

offer safety and liquidity, but at the cost of return. Mutual funds seek to combine the

advantages of investing in arch of these alternatives while dispensing with the

shortcomings.

Indian stock market is semi-efficient by nature and, is considered as one of the most

respected stock markets, where information is quickly and widely disseminated, thereby

allowing each security’s price to adjust rapidly in an unbiased manner to new

information so that, it reflects the nearest investment value. And mainly after the

introduction of electronic trading system, the information flow has become much faster.

But sometimes, in developing countries like India, sentiments play major role in price

movements, or say, fluctuations, where investors find it difficult to predict the future

with certainty. Some of the events affect economy as a whole, while some events are

sector specific. Even in one particular sector, some companies or major market player

are more sensitive to the event. So, the new investors taking exposure in the market

should be well aware about the maximum potential loss, i.e. Value at risk.

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Investment Portfolio of Kotak Life Insurance

8

Investment Portfolio of Aggressive Growth Fund

9

Investment Portfolio of Dynamic Growth Fund

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Investment in Banks

Name Investment % (avg)STATE BANK OF INDIA 5.15

ICICI BANK 4.60HDFC BANK 2.48

UNION BANK OF INDIA 0.95

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CHAPTER- 1

INTRODUCTION

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1.1 INTRODUCTION

Investing, like marriage, isn't something that should be entered into lightly. Investing in

equities gives high returns but they correspondingly have higher risk also. Before we

invest in a company, there are more than a few things we need to know about it.

Securities Analysis

An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks. Other topics include options, mutual fluids and technical analysis.

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments.

Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument.

Main differences between the two types of analysis:

Fundamental analysis Technical analysis

Focuses on what ought to happen in a market

Focuses on what actually happens in a market

Factors involved in price analysis:

1. Supply and demand 2.Seasonal cycles 3.Weather 4. Government policy

Charts are based on market action involving:

1.Price2.Volume3. Open interest (futures only)

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1.2 RATIONALE FOR THE STUDY

In an industry plagued with skepticism and a stock market increasingly difficult to

predict and contend with, if one looks hard enough there may still be a genuine aid for

the Day Trader and Short Term Investor.

The price of a security represents a consensus. It is the price at which one person agrees

to buy and another agrees to sell. The price at which an investor is willing to buy or sell

depends primarily on his expectations. If he expects the security's price to rise, he will

buy it; if the investor expects the price to fall, he will sell it. These simple statements are

the cause of a major challenge in forecasting security prices, because they refer to human

expectations. As we all know firsthand, humans expectations are neither easily

quantifiable nor predictable.

If prices are based on investor expectations, then knowing what a security should sell for

(i.e., fundamental analysis) becomes less important than knowing what other investors

expect it to sell for. That's not to say that knowing what a security should sell for isn't

important--it is. But there is usually a fairly strong consensus of a stock's future earnings

that the average investor cannot disprove

Fundamental analysis and technical analysis can co-exist in peace and complement each

other. Since all the investors in the stock market want to make the maximum profits

possible, they just cannot afford to ignore either fundamental or technical analysis.

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1.3 OBJECTIVES OF THE STUDY

Primary Objective:

To do equity analysis of chosen securities.

Sub-Objectives:

a) To justify the current investment in the chosen securities.b) To understand the movement and performance of stocks.c) To recommend increase/decrease of investment in a particular security.

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1.4 RESEARCH METHODOLOGY & DESIGN

TYPE OF STUDYThe research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this preliminary study forms the basis for the further detailed Descriptive research. In the exploratory study, the various technical indicators that are important for analyzing stock were actually identified and important ones short listed.

SAMPLE DESIGNThe sample of the stocks for the purpose of collecting secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. The stocks are chosen from the Banking Sector.

SAMPLE SIZEThe sample size for the number of stocks is taken as 3 for technical analysis and fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study.

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CHAPTER- 2TECHNICAL ANALYSIS

A CONCEPTUAL OVERVIEW

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TECHNICAL ANALYSIS

Technical analysis can be conditionally divided into some main parts such as:

• Types of charts • Graphical methods • Analytical methods

Technical analysis is concerned with predicting future price trends from historical price and volume data. The underlying axiom of technical analysis is that all fundamentals (including expectations) are factored into the market and are reflected in exchange rates.

A technical analysis is based on three axioms:

• Movement of the market considers everything• Movement of prices is purposeful• History repeats itself

SUPPORT AND RESISTANCE

Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower.

Resistance, on the other hand, is the point at which sellers (bears) take control of prices and prevent them from rising higher. The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations.

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Support levels indicate the price where the most of investors believe that prices will move higher. Resistance levels indicate the price at which the most of investors feel prices will move lower.

Role Reversal

When a resistance level is successfully broken through, that level becomes a support level. Similarly, when a support level is successfully broken through, that level becomes a resistance level.

DOW THEORY– TRENDS:

The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of

technical analysis. The Dow theory is a method of interpreting and signaling changes in

the stock market direction based on the monitoring of the Dow Jones Industrial and

Transportation Averages. Dow created the Industrial Average, of top blue chip stocks,

and a second average of top railroad stocks (now the Transport Average). He believed

that the behavior of the averages reflected the hopes and fears of the entire market. The

behavior patterns that he observed apply to markets throughout the world.

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Three Movements

Markets fluctuate in more than one time frame at the same time:

Nothing is more certain than that the market has three well defined movements which fit

into each other.

• The first is the daily variation due to local causes and the balance of buying and

selling at that particular time.

• The secondary movement covers a period ranging from ten days to sixty days,

averaging probably between thirty and forty days.

• The third move is the great swing covering from four to six years.

• Bull markets are broad upward movements of the market that may last several

years, interrupted by secondary reactions. Bear markets are long declines

interrupted by secondary rallies. These movements are referred to as the primary

trend.

• Secondary movements normally retrace from one third to two thirds of the

primary trend since the previous secondary movement.

• Daily fluctuations are important for short-term trading, but are unimportant in

analysis of broad market movements.

Various cycles have subsequently been identified within these broad categories.

Primary Movements have Three Phases

The general conditions in the market:

Bull markets

• Bull markets commence with reviving confidence as business conditions

improve.

• Prices rise as the market responds to improved earnings

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• Rampant speculation dominates the market and price advances are based on

hopes and expectations rather than actual results.

Bear markets

• Bear markets start with abandonment of the hopes and expectations that

sustained inflated prices.

• Prices decline in response to disappointing earnings.

• Distress selling follows as speculators attempt to close out their positions and

securities are sold without regard to their true value.

Trends

Bull Trends

A bull trend is identified by a series of rallies where each rally exceeds the highest point

of the previous rally. The decline, between rallies, ends above the lowest point of the

previous decline.

Successive higher highs and higher lows.

The start of an up trend is signaled when price makes a higher low (trough), followed by

a rally above the previous high (peak):

Start = higher Low + break above previous High.

The end is signaled by a lower high (peak), followed by a decline below the previous

low (trough):

End = lower High + break below previous Low.

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A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and

then retreats below the previous low. The end of a bear trend is identical to the start of a

bull trend.

ELLIOT WAVES THEORY BASICS

TRENDLINES

Breaking through support or resistance levels results in a change of traders’ expectations

(which causes supply/demand lines to shift).

An Uptrend is defined by successively higher low-prices. A rising trend can be thought

of as a rising support level: the bulls are in control and are pushing prices higher. A

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Downtrend is defined by successively lower high-prices. A falling trend can be thought

of as a falling resistance level: the bears are in control and are pushing prices lower.

MOVING AVERAGES

Moving averages are one of the oldest and most popular technical analysis tools. A

moving average is the average price of a financial instrument over a given time.

The moving average represents the consensus of investor’s expectations over the

indicated period of time.

The classic interpretation of a moving average is to use it in observing changes in prices.

Investors typically buy when the price of an instrument rises above its moving average

and sell when the it falls below its moving average.

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CHAPTER- 3

FUNDAMENTAL ANALYSIS

A CONCEPTUAL OVERVIEW

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Fundamental analysis refers to the study of the core underlying elements that influence

the economy of a particular entity. It is a method of study that attempts to predict price

action and market trends by analyzing economic indicators, government policy and

societal factors (to name just a few elements) within a business cycle framework.

I. ECONOMIC ANALYSIS:

POLITICO-ECONOMIC ANALYSIS:

No industry or company can exist in isolation. It may have splendid managers and a

tremendous product. However, its sales and its costs are affected by factors, some of

which are beyond its control - the world economy, price inflation, taxes and a host of

others. It is important, therefore, to have an appreciation of the politico-economic factors

that affect an industry and a company.

II. INDUSTRY ANALYSIS

The importance of industry analysis is now dawning on the Indian investor as never

before.

1. BARRIER TO ENTRY

New entrants increase the capacity in an industry and the inflow of funds. The question

that arises is how easy is it to enter an industry ?

There are some barriers to entry:

a) Economies of scale

b) Product differentiation

c) Capital requirement

d) Government policy

2. THE THREAT OF SUBSTITUTION

New inventions are always taking place and new and better products replace existing

ones. An industry that can be replaced by substitutes or is threatened by substitutes is

normally an industry one must be careful of investing in. An industry where this occurs

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constantly is the packaging industry -bottles replaced by cans, cans replaced by plastic

bottles, and the like. To ward off the threat of substitution, companies often have to

spend large sums of money in advertising and promotion.

3. BARGAINING POWER OF THE BUYERS

In an industry where buyers have control, i.e. in a buyer's market, buyers are constantly

forcing prices down, demanding better services or higher quality and this often erodes

profitability.

4. BARGAINING POWER FOR THE SUPPLIERS

An industry unduly controlled by its suppliers is also under threat.

5. RIVALRY AMONG COMPETITORS

Rivalry among competitors can cause an industry great harm. This occurs mainly by

price cuts, heavy advertising, additional high cost services or offers, and the like.

III. COMPANY ANALYSIS:

At the final stage of fundamental analysis, the investor analyzes the company. This

analysis has two thrusts:

How has the company performed vis-à-vis other similar companies and

How has the company performed in comparison to earlier years

It is imperative that one completes the politico economic analysis and the industry

analysis before a company is analyzed because the company's performance at a period of

time is to an extent a reflection of the economy, the political situation and the industry.

What does one look at when analyzing a company?

The different issues regarding a company that should be examined are:

The Management

The Company

The Annual Report

Ratios

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THE MANAGEMENT:

The single most important factor one should consider when investing in a company and

one often never considered is its management.

In India management can be broadly

divided in two types:

Family Management

Professional Management

THE COMPANY:

An aspect not necessarily examined during an analysis of fundamentals is the company.

A company may have made losses consecutively for two years or more and one may not

wish to touch its shares - yet it may be a good company and worth purchasing into.

There are several factors one should look at.

1. How a company is perceived by its competitors?

One of the key factors to ascertain is how a company is perceived by its competitors. It

is held in high regard. Its management may be known for its maturity, vision,

competence and aggressiveness. The investor must ascertain the reason and then

determine whether

the reason will continue into the foreseeable future.

2. Whether the company is the market leader in its products or in its segment

Another aspect that should be ascertained is whether the company is the market leader in

its products or in its segment. When you invest in market leaders, the risk is less. The

shares of market leaders do not fall as quickly as those of other companies. There is a

magic to their name that would make individuals prefer to buy their products as opposed

to others.

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3. Company Policies

The policy a company follows is also important. What is its plans for growth? What is its

vision? Every company has a life. If it is allowed to live a normal life it will grow upto a

point and then begin to level out and eventually die. It is at the point of leveling out that

it must be given new life. This can give it renewed vigour and a new lease of life.

THE ANNUAL REPORT:

The primary and most important source of information about a company is its Annual

Report. By law, this is prepared every year and distributed to the shareholders. Annual

Reports are usually very well presented. A tremendous amount of data is given about the

performance of a company over a period of time.

The Annual Report is broken down into the following specific parts:

A) The Director's Report,

B) The Auditor's Report,

C) The Financial Statements, and

D) The Schedules and Notes to the Accounts.

A. The Director’s Report

The Director’s Report is a report submitted by the directors of a company to its

shareholders, advising them of the performance of the company under their stewardship.

1. It enunciates the opinion of the directors on the state of the economy and the political

situation vis-à-vis the company.

2. Explains the performance and the financial results of the company in the period under

review. This is an extremely important part. The results and operations of the various

separate divisions are usually detailed and investors can determine the reasons for their

good or bad performance.

3. The Director’s Report details the company's plans for modernization, expansion and

diversification. Without these, a company will remain static and eventually decline.

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4. Discusses the profit earned in the period under review and the dividend.

Recommended by the directors. This paragraph should normally be read with some

skepticism, as the directors will always argue that the performance was satisfactory. If

adverse economic conditions are usually at fault.

5. Elaborates on the directors' views of the company's prospects in the future.

6. Discusses plans for new acquisition and investments. An investor must intelligently

evaluate the issues raised in a Director’s Report. Industry conditions and the

management's knowledge of the business must be considered.

B. The Auditor's Report

The auditor represents the shareholders and it is his duty to report to the shareholders

and the general public on the stewardship of the company by its directors. Auditors are

required to report whether the financial statements presented do, in fact, present a true

and fair view of the state of the company. Investors must remember that the auditors are

their representatives and that they are required by law to point out if the financial

statements are not true and fair..

C.Financial Statements

The published financial statements of a company in an Annual Report consist of its

Balance Sheet as at the end of the accounting period detailing the financing condition of

the company at that date, and the Profit and Loss Account or Income Statement

summarizing the activities of the company for the accounting period.

BALANCE SHEET

The Balance Sheet details the financial position of a company on a particular date; of the

company's assets (that which the company owns), and liabilities (that which the

company

owes), grouped logically under specific heads. It must however, be noted that the

Balance Sheet details the financial position on a particular day and that the position can

be materially different on the next day or the day after.

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Sources of funds

Shareholders Funds

Share Capital

(i) Private Placement

(ii) Public Issue

iii) Rights issues

RESERVES

i) Capital Reserves

ii) Revenue Reserves

LOAN FUNDS

i) Secured loans:

ii) Unsecured loans

Fixed Assets

INVESTMENTS

STOCK OR INVENTORIES

i) Raw materials

ii) Work in progress

iii) Finished goods

CASH AND BANK BALANCES

LOANS AND ADVANCES

PROFIT AND LOSS ACCOUNT

The Profit and Loss account summarizes the activities of a company during an

accounting period which may be a month, a quarter, six months, a year or longer, and the

result achieved by the company. It details the income earned by the company, its cost

and the resulting profit or loss. It is, in effect, the performance appraisal not only of the

company but also of its management- its competence, foresight and ability to lead.

RATIOS:

Ratios express mathematically the relationship between performance figures and/or

assets/liabilities in a form that can be easily understood and interpreted.

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No single ratio tells the complete story

Ratios can be broken down into four broad categories:

(A) Profit and Loss Ratios

These show the relationship between two items or groups of items in a profit and loss

account or income statement. The more common of these ratios are:

(B) Balance Sheet Ratios

These deal with the relationship in the balance sheet such as :

1. Current assets to current liabilities.

2. Liabilities to net worth.

(C) Balance Sheet and Profit and Loss Account Ratios.

These relate an item on the balance sheet to another in the profit and loss account such

as:

1. Earnings to shareholder's funds.

2. Net income to assets employed.

(D) Financial Statements and Market Ratios

These are normally known as market ratios and are arrived at by relative financial

figures to market prices:

1. Market value to earnings and

2. Book value to market value.

(a) Market value

(b) Earnings

(c) Profitability

The major ratios that are considered:

(i) Market value

(ii) Price- earnings ratio

(iii) Market-to-book ratio

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(iv) Earnings

(v) Earning per share

(vi) Dividend per share

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CHAPTER- 4

BANKING SECTOR

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BANKING IN INDIA

The Indian banking scenario witnessed a significant development in the recent years with

the entry of private banks and their focus on retail banking and convergence of services. The

business models of the leading players are adapting to this impending change as banks widen

the spectrum of savings and loan products they offer. Private Banks are the best positioned to

acquire market share in the emerging scenario: A change is expected to make mergers between

banks and Foreign Institutional Investors possible, which will. Benefit large private bank

group(s).

Nationalization

A significant milestone in Indian Banking happened in the late 1960s when the then Indira

Gandhi government nationalized, on 19th July, 1969, 14 major commercial Indian banks,

followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason for

the nationalization was more control of credit delivery. After this, until the 1990s, the

nationalized banks grew at a leisurely pace of around 4%-also called as the Hindu growth of the

Indian economy.

After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19

nationalized banks in India.

Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation

and gave licenses to a small number of private banks, which came to be known as New

Generation tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. This

move along with the rapid growth in the economy of India, kick started the banking sector in

India, which has seen rapid growth with strong contribution from all the three sectors of banks,

namely, government banks, private banks and foreign banks. However there had been a few

hiccups for these new banks with many either being taken over like Global Trust Bank while

others like Centurion Bank have found the going tough.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms

for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights

which could exceed the present cap of 10%.

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Current scenario

Currently, overall, banking in India is considered as fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private sector

and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets as compared to other banks in

comparable economies in its region. The Reserve Bank of India is an autonomous body, with

minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to

manage volatility without any stated exchange rate and this has mostly been true.

Indian economy is expected to be strong for quite some time especially in its services sector, the

demand for banking services-especially retail banking, mortgages and investment services are

expected to be strong.

Currently, India has 88 scheduled commercial banks (SCBs), 2& public sector banks (that is

with the Government of India holding a stake), 29 private banks (these do not have government

stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.

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FUTURE OUTLOOK

• Total banking assets are expected to double and grow to $915 billion by 2010 - a CAGR

of 15%

• $70 billion additional equity needed for growth plus Basel II compliance

• Mutual Funds: Assets Under Management (AUM) are expected to grow by 15% till

2010

• Retail Finance is expected to grow at an annual rate of 18%, from $27.6 billion in 2003-

04 to $64.2 billion by 2008-09

POTENTIAL

• Demographic profile favours higher retail offtake - 54% of the population is in the 15-35

years age group

• Capital expenditure by the Government and private industry is expected to grow at a

high rate

• Economic growth of about 12% p.a. in nominal terms

• SME lending, a largely untapped market, presents a significant opportunity - SMEs

account for 40% of the industrial output and 35% of direct exports

• Regulatory and technological enablers leading to high growth:

• The Banking system is technologically enabled with RTGS and cheque truncation in

place

• Improved asset management practices - Gross NPAs to Advances ratio reduced from 24-

25% in 1993 to 7-8% in 2006

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BANKING STRUCTURE IN INDIA

The banking institutions in the organized sector, commercial banks are the oldest institutions,

some them having their genesis in the nineteenth century. Initially they were set up in large

numbers, mostly as corporate bodies with shareholding with private individuals. In the sixties of

the 20th century a large number of smaller and weaker banks emerged in the country.

Subsequently there has been a drift towards state ownership and control. Today 27 banks

constitute a strong Public Sector in Indian Commercial Banking.

Commercial Banks operating in India fall under the different sub categories on the basis of their

ownership and control over management.

1. Public Sector Banks: Public Sector Banks emerged in India in three stages. First the

conversion of the then existing Imperial Bank of India into State Bank of India in 1955,

followed by the taking over of the seven associated banks as its subsidiary. Second the

nationalization of 14 major commercial banks in 1969and last the nationalization of 6

more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks.

2. New Private Sector Banks: after the nationalization of the major banks in the private

sector in 1969 and 1980, no new bank could be setup in India for about two decades,

though there was no legal bar to that effect. The Narasimham Committee on financial

sector reforms recommended the establishment of new banks of India. RBI thereafter

issued guidelines for setting up of new private sector banks in India in January 1993.

These guidelines aim at ensuring that new banks are financially viable and

technologically up to date from the start. They have to work in a professional manner,

so as to improve the image of commercial banking system and to win the confidence of the

public.

Eight private sector banks have been established including banks sector by financially

institutions like IDBI, ICICI, and UTI etc.

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Fig 1: Banking Structure in India

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RESERVE BANK OF INDIA

SCHEDULED BANKS

COMMERCIAL BANKS CO-OPERATIVE BANKS

PUBLIC SECTOR BANKS (27)

PRIVATE BANKS (29)

URBAN CO-OPERATIVE (52)

STATE CO-OPERATIVE (16)SBI AND ASSOCIATES (8)

NATIONALIZED BANKS (19)

OLD BANKS (21)

NEW BANKS (8)

3. Local Area Banks: Such Banks can be established as public limited companies in the

private sector and can be promoted by individuals, companies, trusts and societies. The

minimum paid up capital of such banks would be 5 crores with promoters contribution at

least Rs. 2 crores. They are to be set up in district towns and the area of their operations

would be limited to a maximum of 3 districts. At present, four local area banks are

functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh.

4. Foreign Banks: foreign commercial banks are the branches in India of the joint stock

banks incorporated abroad. There number was 31 as on 31.03.2005.

5. Cooperative Banks: Besides the commercial banks, there exists in India another set of

banking institutions called cooperative credit institutions. These have been made in

existence in India since long. They undertake the business of banking both in urban and

rural areas on the principle of cooperation. They have served a useful role in spreading

the banking habit throughout the country. Yet, there financial position is not sound and a

majority of cooperative banks has yet to achieve financial viability on a sustainable

basis.

The cooperative banks have been set up under various Cooperative Societies Acts

enacted by State Governments. Hence the State Governments regulate these banks. In

1966, need was felt to regulate their activities to ensure their soundness and to protect

the interests of depositors. Consequently, certain provisions of the Banking Regulation

Act1949 were made applicable to the cooperative Banks as well. These Banks have thus

fallen under dual control viz., that of the State Government and tat of the RBI which

exercises control over them so far as their banking Operations are concerned.

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CHAPTER- 4

ANALYSIS

40

Brief Company Profile : ICICI BANK

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest

private sector bank in market capitalization and second largest overall in terms of assets. ICICI

Bank has total assets of about USD 79 Billion (end-Mar 2007), a network of over 950 branches

and offices, about 3500 ATMs, and 24 million customers(as of end July '07). ICICI Bank offers

a wide range of banking products and financial services to corporate and retail customers

through a variety of delivery channels and through its specialised subsidiaries and affiliates in

the areas of investment banking, life and non-life insurance, venture capital and asset

management. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and

Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange of India Limited and

its ADRs are listed on the New York Stock Exchange (NYSE).

Key Executives

Mr. Kundapur Vaman KamathChief Exec. Officer

Smt. Vishakha MulyeChief Financial Officer

Mrs. Chanda KochharExec. Director of Retail Banking Bus., Deputy Managing Director

Ms. Madhabi Puri-BuchHead of Operations

41

Equity ResearchAug 2006

Stock performance ( Rel to Nifty )

ICICI BANK Ltd( Rs 920, P/E: 26.6, BUY )

Price Target: Rs. 1100

India’s largest private sector bank ICICI Bank had hit the market with an offer size of Rs200bn, with half the offering scheduled in the domestic market. This offering is estimated to sustain the company’s growth rate over the next three years after factoring in Basel II impact. Unlocking of subsidiary value is likely to be the biggest driver for the Bank's valuation.

Investment summary

Positive outlook, despite the huge dilutionPositive outlook for the Bank stems from the company’s good market positioning and high pricing power, demonstrated over the past 6 months. While ROE would remain compressed at ~11%, normalized for investments in subsidiaries it stands at a respectable ~15%.

Capital sufficient for the next two-three yearsThe current capital raising would be sufficient for the Bank for the next 2-3 years supporting an asset growth of 22%. Given RBI’s recent guidelines, many banks are likely to tap the capital markets, giving ICICI Bank the early mover advantage.

FIPB gives approval Financial Services Co ICICI Bank obtained the FIPB (foreign investment promotion board) approval for selling upto 24% stake in its financial services company to foreign investors. The proposed finco (still subject to RBI approval) would be the holding company for its life insurance, general insurance and asset management businesses. Finco approval positive for valuations ICICI bank had earlier proposed sale of 5.9% stake in finco to few investors (subject to approvals) for Rs26.5bn. This values the finco at US$11bn and the 3 businesses at US$15bn. The approval is very positive for valuations and could provide benchmarks for the subsidiaries

42

ISIN Code : INE090A01013

Face Value : 10.00

52 Week Low : 672.30

52 Week Hi : 1069.90

Financials

43

Key riskAsset quality deteriorationRising interest rates and consequently deteriorating asset quality remains the key risk to valuations. Further management's decision to move from mortgage products to other high yield assets could impact asset quality in the medium term.

44

Brief Company Profile : HDFC BANK

HDFC Bank, one of the commercial banks of India, was incorporated in August 1994, after the

Reserve Bank of India allowed setting up of Banks in the private sector. The Bank was promoted

by the Housing Development Finance Corporation Limited, a premier housing finance company

(set up in 1977) of India. Net Profit for the year ended March 31, 2006 was Rs. 1,141 crores.

Currently HDFC Bank has 753 branches, 1,716 ATMs, in 320 cities in India, and all branches of

the bank are linked on an online real-time basis. The bank offers many innovative products &

services to individuals, corporates, trusts, governnments, partnerships, financial institutions,

mutual funds, insurance companies.

Key Executives

Jagdish Capoor Chairman / Chair Person

Aditya Puri ManagingDirector

Keki MistryDirector

Vineet JainDirector

45

Equity ResearchAug 2006

Stock performance ( Rel to Nifty )

HDFC BANK Ltd( Rs 1188, P/E: 33.2, BUY )

Price Target: Rs. 1435

Investment summary

1QFY07 earnings 3-4% higher than estimatedHDFC Bank’s 1QFY07 earnings were about 3-4% higher than estimated, driven principally by stronger non-interest income. While top line (net interest income) was a tad lower, it was owing to a mismatch of balance sheet and revenue growth and the higher funding costs of the previous quarter, which was expected. Asset quality remains steady with gross NPLs at 1.3% of customer assets and net NPLs at 0.4%. Loan growth at 33% was few notches higher as the results reinforce that the bank continues to be on a strong growth trajectory.

Earnings raised by 2-3%; to grow at 30% CAGR through FY09Building in the equity infusion by HDFC Ltd (USD 330 million), margins are likely to be steady, resulting in stronger earnings growth. This assumes high NPL coverage after factoring in an uptick in the NPL cycle. Net NPLs forecast at <0.5% through FY10.

Looking ahead – FY08; earnings growth at 30%A 30% CAGR growth in earnings through FY08-09 on the back of greater visibility on the bank’s ability to generate loan growth of +34-35%. Key earnings drivers are likely to be:

Loan growth of around 35% v/s earlier estimates of 30-31% yoyFee revenues are likely to be higher at +35% yoy (and would show the expected rebound) supported by enhanced customer acquisition especially as the bank has expanded its distribution network very aggressively in the past 6 months.

Strong volume growth with easing margin pressuresLoan growth could be a few notches higher at +34% owing to the enhanced penetration of its products and ongoing buoyancy in its retail (non-auto) business and sustained uptick in the corporate loan growth cycle. Moreover, margins may be steady owing to the equity infusion by HDFC and the share of low cost deposits sustaining at +50% levels v/s 47-48%

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ISIN Code : INE040A01018

Face Value : 10.00

52 Week Low : 801.30

52 Week Hi : 1248.50

assumed earlier.Holding Pattern of HDFC Bank

Description % of Holding

Total Foreign 51.46

Total Institutions 5.59

Total Govt. Holding 0.79

Total Non-Promoter Corporate Holdings 7.92

Total Promoters 21.56

Total Public & Others 12.68

Total 100.00

Income Statement

As On (Months) 31-Mar-07 31-Mar-06 31-Mar-05

Profit / Loss A/c Rs. mn % BT Rs. mn % BT Rs. mn % BT

Interest Income 68890.20 81.29 44753.40 78.67 30934.90 82.92

Other Income 15856.90 18.71 12136.40 21.33 6373.60 17.08

Operating Income (OI) 84747.10 100.00 56889.80 100.00 37308.50 100.00

Interest Expenses 31794.50 37.52 19295.00 33.92 13155.60 35.26

Employee Expenses 7768.60 9.17 4868.20 8.56 2766.70 7.42

OPBDT 18587.50 21.93 14324.00 25.18 11236.60 30.12

OPBT 16391.50 19.34 12538.10 22.04 9795.90 26.26

Extraordinary / Prior period 0.00 0.00 0.00 0.00 0.00 0.00

Tax 4977.00 5.87 3830.30 6.73 3140.30 8.42

PAT 11414.50 13.47 8707.80 15.31 6655.60 17.84

Dividend 2235.70 2.64 1722.30 3.03 1400.70 3.75

Share Statistics

As on 31-Mar-07 31-Mar-06 31-Mar-05

EPS (Rs.) 35.74 27.81 21.48

CFPS (Rs.) 42.61 33.51 26.13

Book Value (Rs.) 201.42 169.24 145.86

DPS (Rs.) 7.00 5.50 4.52

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Balance Sheet (Rs in Cr.)

2007 2006 2005 2004 2003 CAPITAL & LIABILITIES Owners' Fund Equity Share Capital 319.39 313.14 309.88 284.79 282.05Share Application Money 0.00 0.07 0.43 1.45 6.91Peference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves & Surplus 6,113.76 4,986.39 4,209.97 2,407.09 1,962.78Loan Funds Deposits 68,297.94 55,796.82 36,354.25 30,408.86 22,376.07Borrowings made by the bank 2,815.39 4,560.48 5,290.01 2,907.82 2,284.65Other Liabilities & Provisions 13,689.13 7,849.49 5,264.46 6,296.98 3,511.62Total 91,235.61 73,506.39 51,429.00 42,306.99 30,424.08 ASSETS Cash & Balances with RBI 5,182.48 3,306.61 2,650.13 2,541.98 2,081.96 Money at call and Short Notice 3,971.40 3,612.39 1,823.87 1,115.57 1,087.26 Investments 30,564.80 28,393.96 19,349.81 19,256.79 13,388.08 Advances 46,944.78 35,061.26 25,566.30 17,744.51 11,754.86 Fixed Assets Gross Block 1,917.56 1,589.47 1,290.51 1,061.33 854.11Less: Revaluation Reserve 0.00 0.00 0.00 0.00 0.00Less: Accumulated Depreciation 950.89 734.39 582.19 444.42 325.53Net Block 966.67 855.08 708.32 616.91 528.58Capital Work-in-progress 0.00 0.00 0.00 0.00 0.00 Other Assets 3,605.48 2,277.09 1,330.57 1,031.23 1,583.34 Miscellaneous Expenses not written off 0.00 0.00 0.00 0.00 0.00Total 91,235.61 73,506.39 51,429.00 42,306.99 30,424.08

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49

Brief Company Profile : UNION BANK OF INDIA

Union Bank of India (UBI), is the 5th largest state owned bank in India, with a balance sheet

size of >US$25bn as on Mar-07. It has a vast distribution network with over 2,206 branches and

770 ATMS. While the bank has a pan India presence, western region accounts for >40%of its

loans and 30% of its deposit base. With >60 of its total lending to the corporate sector, UBI is

highly leveraged to the rising demand for corporate credit.

It serves approximately 15 million customers. All its branches are computerized, and as its 1,000

branches are under the network of core banking solution, which covers 85% business of the

bank. The bank is providing e-banking services and other online services through all these CBS

branches.

Key Executives

M.V.NAIRChairman & Managing Director

R.S. REDDYExecutive Director

T.Y. PRABHUExecutive Director

SHRI B.S.BHALLA I.A.S. Government of India Nominee

50

Equity ResearchJul 2006

Stock performance

Union Bank of India( Rs 131.6, P/E: 7.8, BUY )

Price Target: Rs. 180

Offering the best risk reward ratio among government banks, Union Bank of India ranks in the top tier on all operating parameters and trades at the lowest end of the valuation range at <0.9x FY09CL adj book

Investment summary

Top-tier ranking on all parametersIt ranks in the top tier on all operational measures with 30% earnings growth in FY08CL and among the highest FY09CL ROEs at 21%. It is effectively leveraging its leadership in technology implementation to achieve the highest growth in fee revenue, improve the percentage of low-cost demand deposits and attain the best operating efficiency.

Moving to a higher growth trajectoryWith the excess of 75% of its lending to the non-retail sector, Union Bank is a key beneficiary of rising corporate credit demand. With management strategically reducing its lending to large corporates and focusing on the SME segment, the margins are expected to expand by 4-7bps over next two years. Strategic initiatives like a life-insurance venture in collaboration with Bank of India and Dai-chi of Japan, can drive next leg of growth.

Earnings to grow +25% in FY08-09UBI’s earnings are expected to grow 30% in FY08, 25% in FY09 led by:

• A pick up in loan growth led by rising corporate credit demand

• 20% sustained growth in fee revenue• Marginal improvement in operating efficiency• Sharp decline in investment hits

Asset quality to remain stable with gross non-performing loans at 2.9%, and a coverage ratio should improve to 100% as the bank maintains its aggressive provisioning policy.

Attractive valuationsGiven >30% earnings growth in FY08 and high ROE of 20% in FY08(21% in FY09), Union Bank could

51

ISIN Code : INE692A01016

Face Value : 10.00

52 Week Low : 142.00

52 Week Hi : 80.50

trade up to 1.2-1.3x one-year forward(FY09CL) adjusted book, underpinning price target of 180.

Financials

Year to 31 Mar 05A 06A 07A 08CL 09CL

Op income (Rsm) 28307 29994 36320 41570 48852

Net profit (Rsm) 7191 6752 8454 11032 13812

EPS (Rs) 15.6 14.0 16.7 21.8 27.3

Pex (@Rs 118.7) 7.6 8.5 7.1 5.4 4.3

Dividend yield % 3.0 3.0 3.0 3.8 4.6

Price/book 1.5 1.3 1.2 1.0 0.8

ROAA 1.10 0.83 0.88 0.98 1.04

ROAE 21.4 16.5 17.3 19.6 21.0

Shareholding Pattern

Govt. Of India56%

FII's20%

Domestic Institutions

9%

Others15%

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Leveraging Technology efficiently

Union bank is amongst the leaders in technology implementation with >80% of its business

being on a common banking platform (CBS). While many other state owned banks have been

implementing CBS, Union bank seems to be amongst the few banks which have effectively

leveraged these initiatives to:

a) drive fee income growth

b) increase the proportion of low cost demand deposits and

c) improve operating efficiency

Fee income growth

UBI’s fee revenues have grown 23% in FY06 and 26% in FY07, one of the highest across state

owned banks, as it leveraged its technology platform to roll out new retail products (depository,

credit card/debit card), increase cross selling to its vast client base and gain market share in areas

like foreign exchange business ( + 33%yoy) etc.

C/I ratio has declined

The bank has re-deployed its surplus staff (outcome of CBS implementation) in new business

initiatives like marketing of retail products, etc. Hence while the bank’s top line has grown

+20%, related costs haven’t increased so much resulting in a significant decline in the C/I

ratio(from 49% in FY05 to 42% in FY07) making itone of the best amongst all state owned

banks.

Asset quality to remain stable

Union bank has seen a sharp improvement in asset quality over the past two years with its gross

NPLs declining to <3% of advances in FY07 (v/s 7.6% in FY04) and net NPLs to <0.5%. The

improvement has been led by lower incremental delinquencies, higher recoveries and aggressive

provisioning. In FY07 Union Bank’s total NPL provisioning, at around 0.8% of advances, was at

the higher end of all state-owned banks.

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Income Statement

Income (Rs Mn) FY05A FY06A FY07A FY08CL FY09CLInterest income 49698 58637 73822 89621 108189Interest Expense 29052 34894 45920 56595 68961Net Interest income 20646 23743 27902 33026 39228Other income 7661 6251 8418 8545 9624- Treasury Gains 2603 954 1085 750 600Total income 28307 29994 36320 41570 48852Operating expenses 12575 14024 14759 16812 18744Pre-provision profit 15732 15970 21561 24758 30107Total provision 9616 7023 7757 8293 9493-Provision for NPL 2391 2567 5044 6250 7500- for investments 5712 4338 2714 2043 1993- Other 1513 118 000 000 000PBT 6116 8947 13804 16466 20614PAT 7191 6752 8454 11032 13812

Key Ratios

FY05A FY06A FY07A FY08CL FY09CLEPS 15.6 13.4 16.7 21.8 27.3Earnings Growth 1.0% -14.5% 25.2% 30.5% 25.2%Capital Adequacy 12.3% 11.4% 12.8% 11.4% 11.5%Cost-Income ratio 49% 48% 42% 41% 39%Loan Growth 36% 33% 17% 22% 20%Yield on Investments 8.4% 8.0% 7.8% 7.9% 8.0%Dividend per share 3.5 3.5 3.5 4.5 5.5Dividend payout 25% 29% 24% 23% 23%Dividend yield 2.9% 2.9% 2.9% 3.8% 4.6%P/E 7.7 9.0 7.2 5.5 4.4

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Balance sheet

( Rs bn) FY04 FY05A FY06 FY07E FY08ECash balances 38.5 65.7 63.9 84.3 87.8Advances 294.3 401.1 533.8 623.9 761.1Investments 224.4 227.9 259.2 279.8 318.6Fixed assets 7.7 8.2 8.1 8.2 7.8Current Assets 18.3 21.2 26.3 30.6 35.2Total Assets 583.2 724.1 891.3 1026.8 1210.6Equity capital 4.6 4.6 5.1 5.1 5.1Reserves & Surplus 26.3 31.5 40.5 46.8 55.3Shareholder’s funds 30.9 36.1 45.6 51.9 60.4Deposits 505.6 618.3 740.9 851.8 1003.8Borrowings 9.3 20.2 39.7 42.2 48.5Subordinated debt 15.2 19.7 27.7 34.2 42.8Current liabilities 22.2 29.8 37.3 46.7 55.1Total Liabilities 583.2 724.1 891.3 1026.8 1210.6

55

Findings & Conclusion

Stock Target Price (Rs) RecommendationICICI Bank 1100 BUYHDFC Bank 1435 BUY

Union Bank Of India 180 BUY

Current scenario suggests, markets are on a bullish run, especially in case of Banking Industry.

Analysis suggests that all the chosen stocks ie ICICI Bank, HDFC Bank and UBI are going to

perform well, with huge potential of earnings for equity holders.

It is recommended to increase the investment in Banks.

Stock P/E ratioICICI Bank 26.6HDFC Bank 33.2

Union Bank of India 7.8

Investment in Union Bank of India should be increased from current 0.95% to at least 2% of

the total investments in the equity market.

56

BIBLIOGRAPHY

Websites Referred:

www.moneycontrol.com

www.myiris.com

www.indiaearnings.moneycontrol.com

http://finance.yahoo.com

www.wikipedia.org

www.reuters.com

www.kotaklifeinsurance.com

www.hdfcbank.com

www.investopedia.com

Reports Referred:

CLSA – Asia Pacific Markets analysis of Union Bank of India

Merril Lynch analysis of HDFC Bank

India Infoline report on ICICI Bank’s FPO

57