Risk-Return Analysis of BSE BankEx by Pushpavathi

EXECUTIVE SUMMARY “TODAY’S MONEY IS NOT EQUAL TO TOMORROW’S MONEY”, this says that the money invested today does not have same value tomorrow, the time value of money affects to a great extent. So, one has to consider time value of money when going for investment especially in securities as equity shares etc. because the price fluctuations are very rapid. Every individual wants to save money and instead of keeping it idle he/she wants to invest it further for its appreciation i.e., for the returns earned from it in the future. There are many number of investment alternatives, it depends on the individual who wants to invest as which alternative he has to choose i.e., it depends on the rate of return or the amount of return and risk that the individual expect from the investment. Some individuals want high returns and ready to take high risk, few don’t want to take risk and they will be satisfied with the returns they get from the minimum risk. The individuals or the investors who are willing to take risk will go for equity investment, in which they can earn more returns and the other hand those who don’t want to take risk or who wants to minimize the risk will go for bank deposits, investments in mutual funds, debenture bonds, preference shares etc, where they can get a fixed amount who don’t take risk or avoid risk are called as risk aversers. Thus our study is mainly conducted to find out the risk and return that has been associated with the banking stocks of the BSE BankEx and also to know the relationship between Banks return and market returns. My intention of choosing the topic “Risk Return Analysis of BSE BankEx at Kotak Securities, Bangalore” is that, Banking sector is emerging sector now. India is now opening up its economy for banking investments and any country can start Banking in

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India. Thus keeping in mind I took up the study to know how risky the investment in Banking Sector is and the expected return that can get for the risk he has undertaken. Objective of the study is Risk and Returns analysis of BSE BankEx securities and to identify and analyze the correlation between Banks returns with BSE BankEx returns. Scope of the study is limited to only Public Sector Banks, its regards calculation of Returns, Standard Deviation, Beta, Alpha, Co variance and Correlation. The method of data collection is primarily the data and views regarding the Banking sector have been collected by interacting with the executives in the organization as well with the internal guide. Secondary data regarding prices and regarding company profile is collected through internet, news paper etc. Limitations of the study are a good number of explanatory variables must be taken into consideration in order to assess the share prices movement. But, due to time constraints detailed analysis of each bank were now made. Confidently of data, then the analysis carried out and suggestions offered are limited to the researcher’s ability to understand complex financial aspects. As far as findings are concerned Canara Bank leads in the aspects of Risk and Returns. There exists a positive correlation between Banks returns and BSE BankEx returns.

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GENERAL INTRODUCTION INDUSTRY PROFILE Introduction to Capital Market Capital is an important factor of production, necessary for economic development. It is a market for raising funds for capital formation and investment, which is referred to as capital market. Investment comes from savings and the mobilization of savings is a major function of the capital market. Capital market is a wide term used to comprise all operations in the new issues and stock market. New issues made by the companies constitute the primary market, while trading in the existing securities relates to the secondary market. While we can only buy in the primary market, we can buy and sell securities in the secondary market. Capital market thus provides funds from public who are savers to investors. The surpluses of the household sector and foreign sector are used to meet the deficits of the Government and business sectors, who invest more than they save, or spend more than their income. Lending and borrowing of these surpluses and deficits and Bank credit and the credit from financial institutions are all channelized through the capital market. Banks commercial and co-operative as also all financial institutions intermediaries operating in the capital market. This facilitates the project financing and growth of the corporate sector on the one hand and there working in day-to-day operations on the other. Hence the capital market is the market for financial assets that have long or indefinite maturity. When a company wishes to raise capital by issuing securities or other entity intends to

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raise funds through units, debt instrument, bonds, etc., it goes to the primary securities for long-term funds. The primary market facilitates the formation of capital. There are three ways in which a company may raise capital in the primary market: •

Public Issue: This involves sale of securities to members of the public, is the most important mode of raising long-term funds.

•

Rights Issue: This is the method of raising further capital from existing shareholders by offering additional securities to them on a pre-emptive basis.

•

Private Placements: Is a way of selling securities privately to a small group of investors.

The Secondary market in India, where outstanding securities are traded, consists of the stock exchanges which are self-regulatory bodies under the overall regulatory purview of the government/ SEBI. Recently, SEBI has proposed the trading in futures and options (Capital Market Derivatives). Accordingly, the definition of securities under SCRA will have to be amended. The government has accorded powers to the Securities and Exchange Board of India (SEBI), as an autonomous body, to oversee the functioning of the securities market and the operations of intermediaries like mutual funds and merchant bankers, underwriters, portfolio managers, debenture trustee, bankers to an issue, registrars to an issue and share transfer agents, stock brokers, sub-brokers, FII s (Foreign Institutional Investors) plantation companies schemes including rating agencies and also to prohibit insider trading. Structure of the market There are various sub-markets in the capital market in India. The structure has undergone vast changes in recent years. New instruments and new institutions have emerged on the scene. The sub-markets are as follows: PG Department of Management Studies Atria Institute of Technology

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1. Market of Corporate securities – for new issues and old securities. 2. Market for Government securities. 3. Market for Debt instruments – debentures and bonds of private sector, bonds of public sector undertakings, public financial institutions, etc. 4. Mutual fund schemes and UTI schemes, etc. All these markets and submarkets have both Primary markets and Secondary markets. The first one is for raising funds directly from the public and secondary market is for trading and imparting liquidity to existing securities. About BSE The stock exchange, Mumbai, popularly known as “BSE” was established in 1875 as “The Native Share and Stock Brokers Association”. It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is voluntary non-profit making Association o persons (AOP) and is currently engaged in the process of converting itself into demutualised and corporate entity. It has evolved over the years into its present status as the premier stock exchange in the country. It is the first stock exchange in the country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956. The Exchange while providing an efficient market also upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs. A Governing Body comprises nine of elected directors ( one third of them retire every year by rotation ), an Executive Director, three Government nominees, A Reserve Bank of India nominee and five public representatives is the apex body, which regulates the Exchange and decides its policies.

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The Governing Board following the election of directors annually elects a President, Vice-President and an honorary treasurer from among the elected directors. The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Exchange.

About NSE The National Stock Exchange (NSE) is India’s leading Stock Exchange covering various cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The exchange has brought about unparalleled transparency, speed and efficiency, safety and market integrity. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-ofart information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz., demutualization of stock exchange governance, screen based trading, compression of settlement cycles, dematerialization and electronic transfer of securities, securities lending and borrowing, professionalisation of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology.

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NSE Milestones November 1992 April 1993 May 1993 June 1994 November 1994 March 1995 April 1995 June 1995 October 1995 April 1996 April 1996 April 1996 June 1996 November 1996

Incorporation Recognition as a Stock exchange Formulation of business plan Wholesale Debt Market segment goes live Capital Market (Equities) segment goes live Establishment of Investor Grievance Cell Establishment of NSCCL, the first Clearing corporation Introduction of centralized insurance cover for all trading members Establishment of Investor Protection Fund Became largest stock exchange in the country Commencement of clearing and settlement by NSCCL Launch of S&P CNX Nifty Establishment of Settlement Guarantee Fund Setting up of National Securities Depository Limited, first

November 1996 December 1996 December 1996 December 1996 February 1997 November 1997 May 1998

depository in India, co-promoted by NSE Best IT Usage award by Computer Society of India Commencement of trading/settlement in dematerialized securities Dataquest award for Top IT User Launch of CNX Nifty Junior Regional clearing facility goes live Best IT Usage award by Computer Society of India Promotion of Joint venture, India Index Services & Products

May 1998 July 1998 August 1998

Limited (IISL) Launch of NSE’s Web-site: www.nse.co.in Launch of NSE’s Certification Programme in Financial Mkt CYBER CORPORATE OF THE YEAR 1998 launch of Automated

April 1999 October 1999

Lending and Borrowing Mechanism CHIP Web Award by CHIP magazine Setting up of NSE.IT

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January 2000 February 2000 June 2000 September 2000 November 2000

Launch of NSE Research Initiative Commencement of Internet Trading Commencement of Derivatives Trading (Index Futures) Launch of ‘Zero Coupon Yield Curve’ Launch of Broker by Dotex International, a joint venture between

December 2000 June 2001 July 2001 November 2001 December 2001 January 2002 May 2002

NSE.IT Ltd. and i-flex Solutions Ltd. Commencement of WAP trading Commencement of trading in Index Options Commencement of trading in Options on Individual Securities Commencement of trading in Futures on Individual Securities Launch of NSE VaR for Government Securities Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in

October 2002 January 2003 June 2003 August 2003

the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures Launch of Futures & options in CNXIT Index

AT GLANCE: CAPITAL MARKET (EQUITIES) SEGMENT Number of VSATs August 31, 2004 Number of cities covered August 31, 2004 Settlement Guarantee Fund March 31,2004 Investor Protection Fund (CM and F&O) August 31, 2004 Number of securities available for trading August 31, 2004 Record number of trades July 08, 2004 Record daily turnover (quantity) August 19, 2003 Record daily turnover (value) February 28, 2001 Record market capitalisation January 08, 2004 Record value of S&P CNX Nifty Index January 09, 2004 Record value of CNX Nifty Junior Index February 23, 2000

2,869 361 1550.09 crores 130.22 crores 1,355 25,45,755 6,493 lakhs 10,366.52 crores 12,42,778 crores 2,014.65 5,365.90

Record Pay-in/Pay-out (Rolling Settlement) Funds Pay-in/Pay-out February 05, 2004* Securities Pay-in/Pay-out (value) January 13, 2004* Securities Pay-in/Pay-out (Quantity) August 21, 2003*

685.76 crores 1884.09 crores 1470.14 lakhs

* Settlement Date DERIVATIVES (F&O) SEGMENT PG Department of Management Studies Atria Institute of Technology

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No. of cities covered Settlement Guarantee Fund Record daily turnover (value)

August 31, 2004 March 31, 2004 January 28, 2004

330 4,356.85 crores 21,921.34 crores

WHOLESALE DEBT SEGMENT Number of securities available for trading Record daily turnover (value)

August 31, 2004 August 25, 2003

2,888 13,911.57 crores

Table showing Names of the Stock Exchanges in India

Sl.No. 1 2 3 4 5 6 7 8 9 10

Name of the Stock

Year of

Exchange

Establishment

NSE BSE CALCUTTA DELHI AHMEDABAD UTTAR PRADESH LUDIANA PUNE BANGALORE HYDERABAD

1992 1875 1908 1947 1984 1982 1983 1982 1957 1943

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Recognition date Nov-1992 31-08-1987 10-10-1957 09-10-1957 16-10-1957 03-06-1982 29-04-1983 02-09-1982 16-02-1963 02-09-1958 9

11 12 13 14 15 16 17 18 19 20 21 22 23

INTERCONNECTED SE COCHIN OTCEI MADRAS MADHYA PRADESH MAGADH VADODARA GAUHATI BHUVANESHVAR COIMBATORE JAIPUR MANGALORE SKSE

1999 1978 1989 1908 1930 1986 1990 1984 1989 1991 1984 1984 1989

1999 10-05-1979 Aug-1989 15-10-1975 04-12-1958 11-12-1986 05-11-1990 01-05-1984 05-06-1989 18-01-1991 09-11-1989 09-09-1985 10-07-1989

Introduction to BSE BankEx Indian banking is riding on a major recovery both in terms of strength and soundness since from 2002. India is making sizeable gains in expanding into consumer credit with tightening of credit administration procedures. Major policy actions that led to sharp fall in the interest rates enabled banks to post significant rise in operational profits. For instance trading profits of the public sector banks shot up by Rs. 3749 crores taking their net profits to an all time high of Rs. 8301 crores in FY 02. These developments have impacted the performance of bank stocks significantly. Since bank stocks are emerging as a major segment in the equity markets, BSE considered it important to design an index exclusively for bank stocks. Earlier BSE had launched its first free float index on TMT stocks now popularly known as the BSE TECk Index. Features •

BANKEX will track the performance of the leading banking sector stocks listed on the BSE

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BANKEX is based on the free float methodology of index construction

•

The base date for BANKEX is 1st January 2002.

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•

The base value for BANKEX is 1000 points

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BSE has calculated the historical index values of BANKEX since 1 st January 2002.

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12 stocks which represent 90 percent of the total market capitalization of all banking sector stocks listed on BSE are included in the Index

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The Index will be disseminated on a real-time basis through BSE Online Trading (BOLT) terminals from 23rd June, 2003

Performance of the BANKEX: During the period between 1 Jan 2002 and 13 June 2003, the total market capitalization of BANKEX stocks has increased from 22970 cr. to 55283 cr. while the total market capitalization of BSE TECk index stocks has fallen from 105956 cr. to 80787 cr. and that of FMCG Index stocks from 87637 cr. to 75947 cr. During this period, BANKEX rose by 62 percent showing impressive gains among other major indices. The average daily volatility of BANKEX from its inception to date has been 1.38% as compared to 2.24% for BSE TECk and 1.06% for BSE FMCG Index for the same period.

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BANKEX, is the new entrant in BSE’s current portfolio of 13 indices, and adds value to BSE’s ability in reflecting both the broad market and specific sector movements in the Indian Equity Markets.

History of replacements in BANKEX Date 09.02-2004

Outgoing Scrips ING Vysya Bank

31.01-2005

Corporation Bank Jammu & Kashmir Bank Ltd. UCO Bank

28.11.2005 03.07.2006 08.01.2007

Indusind Bank Ltd Karnataka Bank Vijaya Bank

09.07.2007

Replaced by UTI Bank Ltd. Kotak Mahindra Bank UCO Bank Indian Overseas Bank Jammu & Kashmir Bank Allahabad Bank Ltd. Centurion Bank Ltd. Indusind Bank Ltd Karnataka Bank Limited Federal Bank Ltd. Karnataka Bank Ltd. Yes Bank Ltd.

Scrip selection criteria for BSE BankEx:

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Eligible universe: Scrips classified under banking sector that are present constituents of BSE-500 index would form the eligible universe. Trading Frequency: Scrips should have a minimum of 90% trading frequency in preceding six months. Market Capitalisation: Scrips with a minimum of 90% market capitalisation coverage in each sector based on free-float final rank will form the index. Buffers A buffer of 2% both for inclusion and exclusion in the index is considered so that movements in and out of the index are minimized. E.g. A Company can be included in the index only if it falls within 88% coverage and an existing index constituent cannot be excluded unless it falls above 92% coverage. However, the above buffer criterion is applied only after the minimum 90% market coverage is satisfied. BANKEX Constituents BSE BankEx was launched with an objective of measuring the performance of banking sector stocks listed on the Bombay Stock Exchange. BankEx has a base date of 1st January 2002 and base value of 1000 points. BankEx constituents represent 90% of the total market capitalisation of the banking sector on BSE. The table below provides the list of companies comprising BSE-PSU Index. Code: Each stock listed on BSE is denoted a unique keyword that can be used to get price and other stock related information. Name: This column specifies the name of the company to which particular scrip is denoted. PG Department of Management Studies Atria Institute of Technology

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Adjusting Factor: Adjusting factor refers to the weightage of the constituent stocks in a particular index. Stocks having a higher weightage are likely to have a stronger impact on index movement as compared to stocks having a lower weightage.

As on October 04, 2006 Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Code 532480 532418 532134 532149 532483 532273 500469 500180 532174 532388 532652 500247 500315 532461 500112 532477 532215 532401

Name Allahabad bank Ltd Andhra Bank Bank of Baroda Bank Of India Canara Bank Centurion Bank Ltd. Federal Bank Ltd. HDFC Bank Ltd. ICICI Bank Ltd. Indian Overseas Bank Karnataka Bank Limited Kotak Mahindra Bank Ltd. Oriental Bank of Commerce Punjab National Bank State Bank of India Union Bank of India UTI Bank Ltd. Vijaya Bank

Adj. Factor 0.45 0.50 0.50 0.35 0.30 0.70 1.00 0.80 1.00 0.40 1.00 0.45 0.50 0.45 0.45 0.45 0.75 0.50

Calculation of Total and Average BSE BankEx Returns Weeks Open Close Price change Returns 1st 10870.88 11377.96 507.08 4.6646 nd 2 11377.96 11486.90 108.94 0.9575 3rd 11335.47 10738.59 -596.88 -5.2656 4th 10738.59 11386.35 647.76 6.0321 PG Department of Management Studies Atria Institute of Technology

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5th 6th

11386.35 11905.06

11905.06 12215.84

518.71 310.78 Total Average

4.5555 2.6100

13.5546 2.2591

Introduction on Banking Sector: Banking in one form or another, was in existence even in ancient times. The writing of Manu (the maker of Old Hindu Law) and Kautilya (the minister of Chandragupta Maurya) and the teaching of Christ contained references to banking Existence of banking activities in Babylonia much before Christ. However, modern banking (i.e., Joint Stock Banking) is of recent origin. After the industrial revolution, with the increase in the size of industrial and business units, joint stock company form of business organization came into existence. This form of organization encouraged people with small means to become shareholders of big industrial and business enterprises. Still, there were certain sections of the public who were not prepared to invest their money on the share of joint stock companies. But they were willing to part with their surplus money, it they were assured of the repayment of their money with some interest there on. So, naturally, there arose the need for the formation of financial institution that could collect the surplus funds of the people on terms acceptable to them and make them available to the needy for productive purposes. Accordingly, a large number of such financial institutions called joint stock banks were set up. So, joint stock banks or modern banks are of recent development.

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Nationalization of Banks: In a free enterprise economy, commercial banks operate like any other business and are mainly concerned with the maximization of their private gains. Lacking any social purpose they often channel funds to business units in which the management has its interest and thus contribute in a big way to growth of monopolies and concentration of economic and political power, while overall economic activity suffers because priority sectors/industries fails to get adequate funds. The Hazari committee in its report on ‘Industrial Planning and Licensing Policy’ submitted to the planning commission in September 14, 1967, clearly stated that, “it would be difficult to undertaken credit planning unless the linked control of industry and banks in the same hands is snapped by nationalization of banks”. The government however, decided in favor of social control. The social control phase, however, turned out to be transitory. Expectations of the government that the social control would remove objectionable banking practices of the past and would give a new sense of purpose to the banks for future were believed. Having realized that nothing short of nationalization would solve the mainly, the government took a bold decision to bring under its direct control a substantial segment of the banking system. On July 19, 1969 – fourteen commercial banks with deposits worth Rs. 50 crore or more were nationalized. This was hailed as historic event by the people of the country. GLOBAL TREND Indian banking industry too has fallen in line with the global trend and has made a beginning with small forays into such areas as selling mutual fund units or insurance policies. Viewed thus, the decision to branch out into the business of offering an electronic trading platform in stocks of listed companies for a fee is but a logical extension of its desire to deepen the relationship with its customers. Moreover, the fabric of customer loyalty is beginning to get frayed at the edges in a world of increasing customer choice and changing cultural ethos that looks down upon permanent relationships. So the more facets that a bank evolves to the relationship that it PG Department of Management Studies Atria Institute of Technology

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has with the customer greater are the prospects of such a relationship enduring and possibly even flourish in the future. BASEL II NORMS Meaning: Main feature of Basel – II is that its structure rests on a set of three “Mutually reinforcing” pillars, namely, capital requirements, supervisory review and market discipline. Through this approach, Basel – II aims to correct most of the deficiencies that Basel – I has suffered from. To start with, the standards are now more risk-sensitive. In other words, Banks which have a larger risk exposure will have to set apart more capital to meet the unexpected losses that go with it.

The Three Pillars: The capital framework, under the New Basel Capital Accord, rests on the following three “Mutually reinforcing” pillars: Pillar 1: Minimum Capital Requirements Banks will be required to set apart capital for the credit market and operational risks faced by them. A menu of approaches of increasing sophistication and lesser capital requirement will be available to choose from for each of the three risks. Pillar 2: Supervisory Review This will involve a comprehensive review of the systems to calculate capital and also risks not covered under pillar 1 to ensure required as a minimum. The supervisor may, based on the review, adjust the capital requirement upward. Pillar 3: Market Discipline This is aimed at enhancing market discipline by ensuring that an adequate level of transparency is maintained by banks in their disclosures to the market participants in respect of various critical aspects of their functioning.

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Introduction to Banks under study 1. Allahabad Bank Allahabad Bank was set up on 24th April, 1865 at Allahabad by a Group of Europeans with subscribed capital of Rs.3 lakh. It is the oldest Bank in the country at present. The P & O Banking Corporation took over the bank by acquiring its shares. In 1969 it was nationalized. The Bank has entered into an MOU with the Small Industries Development Bank of India (SIDBI) for financing small scale industrial units. The Bank has 5 International Branches and 4 International Divisions. The Allahabad Bank has become one of the first banks in the country to draw up a credit management policy following the dismantling of the Reserve Bank of India-prescribed Maximum Permissible Bank Finance (MPBF) norms. Allahabad Bank becomes the first public sector bank to have an exclusive Web site of its own, www.allbankcarloans.com, dedicated to sanctioning car loans through the Internet. 2. Andhra Bank

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The Bank came into existence on by consequent to the taking over of the undertaking of Andhra Bank, Ltd. It is a Government of India undertaking. The Bank transacts general banking business of all kinds including foreign exchange. The Bank has 974 full fledged branches, 40 cluster branches, 76 extension counters. Andhra Bank has tied up with a real estate portal indiaproperties.com, to provide housing loans through the Internet. Bank started a new service called collection of Direct taxes which comprises corporate tax, estate tax, gift tax etc. Andhra Bank has received Insurance Regulatory and Development Authority license to act as a corporate agent for procuring or soliciting business of the United India Insurance Company Ltd. Andhra Bank has achieved 100% computerization of all its branches and all of them are running on uniform application software. 3. Bank of Baroda The Bank was brought into existence by an Ordinance issue, by the Central Government. The Bank is a Government of India Undertaking and carries on all types of banking business including foreign exchange. The bank had established a new department to act as custodian of local shares issued by Indian companies who came out with Euro Issues (GDRs/ADRs) to raise funds from abroad. With this in view, the bank entered into an agreement with Bank of New York, who act as Depository for issue of GDRs by companies. The bank was associated as lead manager/co-manager in respect of 142 issues involving a sum of Rs 3411 crores. The Bank of Baroda has signed up to be a depository participant with Central Depository Services (India) Ltd. 4. Bank of India The Bank was brought into existence by an Ordinance issued, by the Central Government. In terms of the Ordinance, the Undertaking of `The Bank of India Ltd.' was transferred to and vested in the new bank. The Company became Depository Participate of National Securities Depository Ltd., for the purpose of clearing and settlement of trades in the dematerialized segment of BSE. Bank of India has introduced floating interest rate on deposits for select customers, besides advancing on Mumbai Inter Bank Offer Rate (MIBOR). The Bank has joined Central Depository Services as depository PG Department of Management Studies Atria Institute of Technology

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participant. Four state-owned banks (Bank of India (BoI), Indian Bank, Syndicate Bank and United Bank of India) enter into an agreement to share their respective ATM (automated teller machine) networks. 5. Canara Bank The Bank is a Government of India undertaking, and carries on all banking business. The Bank was brought into existence by an ordinance, by the Central Government.Canara Bank became the first public sector bank to join the MasterCard ATM network. The Public Sector Canara Bank has entered into an arrangement with the Infrastructure Development Finance Company for financing core sector projects. Canara Bank, Central Bank of India (CBI), Indian Overseas Bank (IOB), UCO Bank and Union Bank of India (UBI) form an alliance to launch `Cash Online' ATM network Canara Bank has entered into a franchise agreement with Western Union Financial Services for money transfer facility.

6. Indian Overseas Bank Indian overseas bank, had the distinction of three branches, at Chennai, Karaikudi and Rangoon simultaneously commencing business on the inaugural day. When it was nationalized, the bank had 208 branches and business mix of Rs.156 crores. Indian Overseas Bank the first public sector bank in the country to introduce mobile banking services using Wireless Application Protocol (WAP). Indian Overseas Bank (IOB) ties up with Times Online Money to launch an Internet-based remittance product, e-Cash Home, targeted at NRIs in the US wishing to transfer money to India. 7. Punjab National Bank Punjab National Bank (PNB) has formed a strategic alliance with Infrastructure Leasing and Financial Services Ltd (IL&FS) to set up a private equity fund for investing in domestic companies. Punjab National Bank has informed that the Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division), New Delhi PG Department of Management Studies Atria Institute of Technology

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vide Notification dated June 06, 2007 has appointed Shri. Jag Mohan Garg as a Wholetime-Director (designated as Executive Director) on the Board of Punjab National Bank from the date of his taking over charge of his post or until further orders or till the date of his superannuation i.e. upto July 31, 2010 whichever is earlier. Punjab National Bank is entering into a MoU with India Infrastructure Finance Co. (IIFC) on October 17, 2007 with an aim to extend its cooperation and support to IIFC in areas of creating a deal flow of infrastructure projects. 8. State Bank of India In 1921, the Imperial Bank of India, the precursor to State Bank of India, was formed as the result of amalgamation of the Bank of Bengal and two other presidency banks, namely, Bank of Madras and Bank of Bombay. In 1955, it was abolished by an Act of Parliament, which handed over its assets and operations to a new entity called State Bank of India. As the government wanted more control over the credit delivery, it nationalized 14 largest commercial banks in India in 1969. The SBI has a sense of social responsibility and caters to various sections of the society. Current Issues Regarding Banking Sector •

E-trading: A Strategic imperative for banks

The country’s leading public sector banks has recently said that its own broking arm SBICAP securities would be offering an electronic trading platform in listed stocks for its customers. This would supplement an arrangement it already has with a private stock broking firm. Other banks such as Punjab National Bank, Union Bank, Bank of India etc., too have announced tie-ups with broking outfits to offer such a facility. It is just as well that a number of public sector banks are taking to offering an online trading platform in listed stocks for their customers. The concept of a bank cross-selling its third-party financial products to supplement its core business of accepting deposits and on-lending it to borrowers at a profit has come to be well recognized within the industry as a key component of a successful business strategy. It seeks to leverage a bank’s core strength of a customer network to generate PG Department of Management Studies Atria Institute of Technology

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higher profits than may be inherent in the banking relationship that it may have with its customers. Improved confidence As the 50 bps hike in CRR has already been expected by market men, it did not affect the sentiment towards banking sector. “People seem to have digested the 50 bps hike in CRR by the RBI, has reduced uncertainty towards the banking sector now. Most banks are also reducing their interest rates, which will take care of the growth of this sector. Now, the overall confidence of investors has increased,” said a banking analyst with a broking firm. Economists have said the banking industry will reflect the growth of an economy. “FIIs bet on India because of the growth of the economy, they also bet on the banking sector, as it is performing quiet well”. Even though the interest rate has increased this hasn’t deteriorated the asset quality as much, as most banks have updated their technical platform. •

Mr. P Chidambaram, Union Finance Minister, said

Public Sector Banks have largely driven the growth in the banking industry in spite of the several constraints faced by them. He also says Tech adoption can quicken financial inclusion and the Indian Banking industry was among the best in the world. “Our nonperforming assets are the smallest and the net interest margin and return on assets are of substantial standards,” he said. Emphasising the role of technology, he said that it was a key factor in bringing about greater financial inclusion. “We must push the frontiers of technology in order to speed up the process of financial inclusion,” he said. The technology centre would host the bank’s data centre with high-end servers. The bank announced its plans to bring all its 2,400 branches under the core-banking platform by March 2008.

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•

Banks with global ambition must have India presence: E&Y

“In the near future, banks will not be able to say they are global unless they have a presence in China, India, because these emerging markets are going to be a major source of financial sector revenue and profit growth,” the international consulting firm said in a report. The report titled ‘Strategic Business Risk 2008 – the top 10 risks for business’, noted that a late entry into Asia would make it difficult for foreign banks to keep up with competition. For the Asian banks themselves, one of the main threats is the rapid transformation from “Government bureaucracies into corporate governance and transparency-driven organizations”. •

STATE BANK OF INDIA  State Bank of India plans to enter general insurance early this year. The bank is likely to tie up with a foreign player to set up a joint venture for general venture Mr. O.P.Bhatt its chairman said.  Higher non-interest income helped State Bank of India, to report a 36 per cent rise in second quarter net profit at Rs.1611.4 crore against Rs.1,184.4 crore in the same quarter last year. The bank’s Capital Adequacy Ratio was 12.85 per cent (12.63 percent).  The bank also has plenty of liquidity because it had opened a lot of accounts, especially term deposits due to the smart products and aggressive pricing. But Mr. Bhatt expects credit to pick up in the second half. The bank has about Rs.1,000 crore of sanctions pending disbursals.

•

Canara Bank rejigs credit portfolio; Q2 net up 11%

Canara Bank rebalanced its credit portfolio and shifted focus to priority sector areas during the second quarter of the current financial year. Canara Bank Chairman and Managing Director, Mr. M.B.N. Rao said, “We have contained the growth of retail advances.” Retail advances grew only 5.91 % on year-on-year basis to Rs. 17,187 crore. Priority sector advances grew 25.08 % during the same period to Rs. 38,920 crore.

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Introduction to Company The Kotak Mahindra Group Kotak Mahindra is one of India's leading financial conglomerates, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporates. The group has a net worth of over Rs. 5,230 crore, employs around 15,300 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 340 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore. The Group services around 3.2 million customer accounts. PG Department of Management Studies Atria Institute of Technology

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MILESTONE The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady and confident journey to growth and success. •

First Phase (1986-1990)

Kotak Mahindra Finance Limited starts the activity of Bill Discounting, Lease and Hire Purchase market, and The Auto Finance division. •

Second Phase (1991-1995)

The Investment Banking Division is started. Takes over FICOM, one of India's largest financial retail marketing networks, Enters the Funds Syndication sector, Brokerage and Distribution businesses incorporated into a separate company - Kotak Securities. Investment banking division incorporated into a separate company - Kotak Mahindra Capital Company •

Third Phase (1996-2000)

The Auto Finance Business is hived off into a separate company - Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. Enters the mutual fund market with the launch of Kotak Mahindra Asset Management Company. Kotak Mahindra ties up with Old Mutual plc for the Life Insurance business; Kotak Securities launches its on-line broking site (now www.kotaksecurities.com). Commencement of private equity activity through setting up of Kotak Mahindra Venture Capital Fund. •

Fourth Phase (2001-2006)

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Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian company to do so. Launches India Growth Fund, a private equity fund, Kotak Group realigns joint venture in Ford Credit; Buys Kotak Mahindra Prime (formerly known as Kotak Mahindra Primus Limited) and sells Ford credit Kotak Mahindra.Launches a real estate fund, Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Kotak Securities MANAGEMENT CONTROL Mr. Uday Kotak

Executive Vice Chairman & Managing Director.

Mr. Shivaji Dam Mr. C. Jayaram Mr. Dipak Gupta CORPORATE IDENTITY

Kotak Group Product & Services: •

Bank

•

Life Insurance

•

Mutual Fund

•

Car Finance

•

Securities

•

Institutional Equities

•

Investment Banking

•

Kotak Mahindra International

•

Kotak Private Equity

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•

Kotak Realty Fund

Kotak Securities Ltd. is India's leading stock broking house with a market share of 8.5 percent as on 30th September, 2007. Kotak Securities Ltd. has been the largest in IPO distribution. The accolades that Kotak Securities has been graced with include:

•

"Best Brokerage Firm in India" by Asiamoney in 2007

•

‘The Leading Equity House in India’ in Thomson Extel Surveys Awards for the year 2007.

•

Euromoney Award (2006 & 2007) - Best Provider of Portfolio Management : Equities

•

Avaya Customer Responsiveness Awards (2006) in Financial Institution Sector

•

Asiamoney Award (2006)- Best Broker In India

•

Euromoney Award (2005)-Best Equities House In India

•

Finance Asia Award (2005)-Best Broker In India

•

Finance Asia Award (2004)- India's best Equity House

•

Prime Ranking Award (2003-04)- Largest Distributor of IPO's

The company has a full-fledged research division involved in Macro Economic studies, Sectoral research and Company Specific Equity Research combined with a strong and well networked sales force which helps deliver current and up to date market information and news. PG Department of Management Studies Atria Institute of Technology

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Kotak Securities Ltd is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), providing dual benefit services wherein the investors can use the brokerage services of the company for executing

the

transactions

and

the

depository

services

for

settling

them.

Kotak Securities has 862 outlets servicing over 3,60,000 customers and a coverage of 310 cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet Broking services and also online IPO and Mutual Fund Investments. Kotak Securities Limited has over Rs. 3490 crore of Assets Under Management (AUM) as of 30th September, 2007. The portfolio Management Services provide top class service, catering to the high end of the market. Portfolio Management from Kotak Securities comes as an answer to those who would like to grow exponentially on the crest of the stock market, with the backing of an expert. Kotak Mahindra Old Mutual Life Insurance Ltd. Kotak Mahindra Old Mutual Life Insurance is a 74:26 joint venture between Kotak Mahindra Bank Ltd. 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. Old Mutual, a company with 160 years experience in life insurance, is an international financial services group listed on the London Stock Exchange and included in the FTSE 100 list of companies, with assets under management worth $ 400 Billion as on 30th June, 2006. For customers, this joint venture translates into a company that combines international expertise with the understanding of the local market. Kotak Mahindra Asset Management Company Limited (KMAMC) Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KMBL, is the Asset Manager for Kotak Mahindra Mutual Fund (KMMF). PG Department of Management Studies Atria Institute of Technology

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KMAMC started operations in December 1998 and has over 4 Lac investors in various schemes. KMMF offers schemes catering to investors with varying risk - return profiles and was the first fund house in the country to launch a dedicated gilt scheme investing only in government securities. We are sponsored by Kotak Mahindra Bank Limited, one of India's fastest growing banks, with a pedigree of over twenty years in the Indian Financial Markets. Kotak Mahindra Asset Management Co. Ltd., a wholly owned subsidiary of the bank, is our Investment Manager. We made a humble beginning in the Mutual Fund space with the launch of our first scheme in December, 1998. Today we offer a complete bouquet of products and services suiting the diverse and varying needs and risk-return profiles of our investors. We are committed to offering innovative investment solutions and world-class services and conveniences to facilitate wealth creation for our investors Car Finance Kotak Mahindra Prime Limited (KMPL) is a subsidiary of Kotak Mahindra Bank Limited formed to finance all passenger vehicles. The company is dedicated to financing and supporting automotive and automotive related manufacturers, dealers and retail customers. The Company offers car financing in the form of loans for the entire range of passenger cars and multi utility vehicles. The Company also offers Inventory funding to car dealers and has entered into strategic arrangement with various car manufacturers in India for being their preferred financier. Kotak Securities Ltd - Institutional Equities Kotak Securities, a subsidiary of Kotak Mahindra Bank, is the stock-broking and distribution arm of the Kotak Mahindra Group. The institutional business division primarily covers secondary market broking. It caters to the needs of foreign and Indian institutional investors in Indian equities (both local shares and GDRs). The division also has a comprehensive research cell with sectoral analysts covering all the major areas of the Indian economy.

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Kotak Mahindra Capital Company (KMCC) Kotak Mahindra Capital Company (KMCC) helps leading Indian corporations, banks, financial institutions and government companies’ access domestic and international capital markets. KMCC has the most current understanding of investor appetite, having been the leading book runner/lead manager in public equity offerings in the period FY 2002-06. Kotak Private Equity: "Partnering to Build Leaders of Tomorrow" Kotak Private Equity Group (KPEG) is a specialist Private Equity arm of Kotak Mahindra Bank. We are a leading Private Equity Fund Manager focused on helping emerging corporates and mid-size enterprises evolve into tomorrow's industry leaders. KPEG provides these companies a combination of equity capital, strategic support and other value added services, playing a pro-active role with the entrepreneur in building the business. Kotak Reality Fund Kotak Realty Fund, established in May 2005, is one of India's first private equity funds with a focus on real estate and real estate intensive businesses. Kotak Realty Fund operates as a venture capital fund, under the SEBI Venture Capital Fund Regulations, 1996 in India. The fund's corpuses have been contributed by leading banks, domestic corporates, family offices and high net worth individuals. The fund is closed ended and has a life of seven years. Investment Formats The funds would seek equity investments in development projects, enterprise level investments in real estate operating companies, and in real estate intensive businesses not limited to hotels, healthcare, retailing, education and property management. Further, the funds would also be investing in non-performing loans with underlying property collateral.

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Asset Class The funds would invest in all the main property asset classes such as residential (townships, luxury residential, low cost housing, golf communities), hospitality (hotels and serviced apartments), office (core and business parks), shopping centers and alternative asset classes such as logistics and warehousing. Geographical Locations: In order to achieve geographical diversity, the funds would invest in not just the Tier I cities such as Mumbai, NCR and Bangalore but also in Tier II cities such as Pune, Kolkatta, Hyderabad and Chennai) and other Tier III cities, examples of which are Nagpur, Coimbatore, Mysore and Ludhiana) The Fund Manager believes that through diversification in geographies, asset class and investment formats, the Funds should be well positioned to achieve superior risk adjusted returns. Fund Management Team: Kotak Realty Fund is managed by its investment team located in Mumbai, India and supported by an organization in which thought leadership, contrarian play, due diligence, communication and collaborative partnerships take precedence. The Funds have a core team of professionals dedicated to sourcing, analyzing, executing and managing the investments. This unique team brings together profiles combining real estate corporate finance advisory, investment banking, venture capital, infrastructure development and finance, and REITS valuation experience. Leading players: In a competitive world the following emerging stock broking firms are leading the industry.  Motilal Oswal Securities Ltd.  Kotak Securities Ltd. PG Department of Management Studies Atria Institute of Technology

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 Karvy Financials.  India Bulls.  Geojit Financial Services Limited.  Sharekhan.  IL&FS Investments Ltd. Motilal Oswal Securities Ltd: One of the top-3 stock – broking houses in India, with a dominant position in both institutional and retail broking. MOSL is amongst the best-capitalized firms in the broking industry in terms of net worth. MOSL was founded in 1987 as a small sub-broking unit, with just two people running the show. Focus on customer-first-attitude, ethical and transparent business practices, respect for professionalism, research-based value investing and implementation of cutting-edge technology have enabled it to blossom into a thousand-member team. The institutional business unit has relationships with several leading Foreign Institutional Investors (FII’s) in the US, UK, Hong Kong and Singapore. In a recent media report MOSL was rated as one of the top-10 brokers in terms of business transacted for FII’s. The retail business unit provides equity investment solutions to more than 74,000 investors through 400 outlets spanning 200 cities and 22 states.

MOSL provides, 

Advice-Based Broking

PG Department of Management Studies Atria Institute of Technology

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

Portfolio Management Services (PMS)



E-Broking Services, Depository Services,



Commodities Trading



IPO and Mutual Fund Investment Advisory Services.

One thing that sets MOSL apart is its time-tested and well-recognized equity research capability. With value investing at the core of its investment philosophy, a strong research team consistently provides high-performance ideas. These are in turn converted to sound, personalized investment strategies, keeping in view unique client needs. As a result, the Capital Market now recognizes MOSL as synonymous to Solid Research and Solid Advice. Kotak Securities Ltd: Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank and Goldman Sachs (holding 25% - one of the world’s leading investment banks and brokerage firms) is India’s leading stock broking house with a market share of 5 – 6%. Kotak Securities Ltd has been the largest in IPO distribution – it was ranked number one in 2003-04 as Book Running Lead Managers in public equity offerings by PRIME Database. It has also won the Best Equity House Award from Finance Asia – April 2004. The company has a full fledged research division involved in Macro Economic Studies, Sectoral research and company specific equity research combined with a strong and well networked sales force which helps deliver current and up to date market information and news. Kotak Securities Ltd is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) providing dual benefit services wherein the investors can use the brokerage services of the company for executing the transactions and the depository services for settling them. PG Department of Management Studies Atria Institute of Technology

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Kotak Securities has 862 outlets servicing over 3,60,000 customers and a coverage of 310 cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet Broking services and also online IPO and Mutual Fund Investments. Kotak Securities Limited has over Rs. 3490 crore of Assets Under Management (AUM) as of 30th September, 2007. The portfolio Management Services provide top class service, catering to the high end of the market. Portfolio Management from Kotak Securities comes as an answer to those who would like to grow exponentially on the crest of the stock market, with the backing of an expert. Karvy Financials: Karvy is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporates. KARVY covers the entire spectrum of financial services such as Stock Broking, Depository Participants, Distribution of Financial Products – Mutual funds, Bonds, Fixed Deposit, Equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant banking and Corporate finance, Placement of Equity, IPO’s among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments. India Bulls: India bulls are India’s leading retail financial services company with 135 locations spread across 95 cities. Which its size and strong balance sheet allow us to provide you with varied products and services at very attractive price, it’s over 750 Client Relationship Managers are dedicated to serving your unique needs. India bulls are lead by a highly regarded management team that has invested crores of rupees into a world class Infrastructure that provides clients with real-time service & 24/7 access to all information and products. Flagship India Bulls Professional PG Department of Management Studies Atria Institute of Technology

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Network TM offers real-time prices detailed data and news, intelligent analytics, and electronic trading capabilities, right at your fingertips. This powerful technology is complemented by our knowledgeable and customer focused Relationship Managers. IB are creating a world of Smart Investor. India bulls offer a full range of financial services and products ranging from Equities to Insurance to enhance your wealth and hence, achieve your financial goals. India bulls is a full service investment firm offering clients access to a tremendous range of financial services from 135 locations across 95 cities. We have a strong team of over 750 Client Relationship Managers focused on serving your unique needs. Geojit Financial Services Limited: Geojit Financial Services Limited was founded by Mr. George in 1987 as a Partnership for doing Broking business in Cochin Stock Exchange. In 1994, the business was taken over by Geojit’s Financial Services Ltd, a Joint Venture between Mr. George and the Kerala State Industrial Development Corporation Ltd. In the following year, the company came up with an IPO and the shares were listed in various stock exchanges in India in 1995. Geojit’s Business Plan is developed and implemented under the supervision of a Board constituted by eminent professionals who are experts in varied fields. Mr. Kurian, chairman of Geojit Financial Services Ltd, is a former executive trustee of Unit Trust of India, India’s largest mutual fund. Mr. Kurian is presently the chairman of the Association of Mutual Funds in India (AMFI) and is on the Board of National Stock Exchange (NSE) and several of the country’s leading corporations. Sharekhan: Sharekhan is an Equities focused organization tracing its lineage to SSKI, a veteran Equities solutions company with over 8 decades of experience in the Sharekhan does not claim expertise in too many things. Sharekhan’s expertise lies in stocks and PG Department of Management Studies Atria Institute of Technology

35

that’s what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfolio based strategy is better than betting on a single horse, it is something that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Sharekhan does in fact Sharekhan runs India’s largest chain of share shops with around 250 outlets in 113 cities. IL&FS Investments Ltd: IL&FS Investsmart leverages on its pedigree of IL&FS, which has the core competency of institutional and retail financial services. Infrastructure Leasing and Financial Services Limited (IL&FS), the promoters of IL&FS Investsmart Limited, is a multi-faceted organization providing a range of fund and non-fund based financial services. IL&FS was incorporated in 1987 and is amongst the few institutions in the country specifically mandated to implement infrastructure projects on a commercial format. To serve the investors of various kinds, the broking firms offer different types of products and services to cater to the needs of all such customers. The following are the main products offered by the brokering institutions:  Online securities trading  Offline securities trading  Portfolio Management Services  Commodities trading  Demat services Apart from these trading products they provide some Research Products, i.e., the Fundamental and Technical analysis Reports, Comprehensive Market Research Reports PG Department of Management Studies Atria Institute of Technology

36

etc for particular sectors and for individual companies also. These special services are provided as daily, weekly, or on monthly basis.

a. STATEMENT OF PROBLEM “Risk – Return Analysis of BSE BankEx at Kotak Securities, Bangalore” b. OBJECTIVES OF THE STUDY 1. The study will deal with Return and Risk analysis of BSE BankEx securities. 2. To identify and analyze the correlation between Banks returns with BSE BankEx returns. 3. To examine and evaluate the growth prospects of BSE BankEx securities. 4. To identify profitable investment opportunities in Banking Sector Stocks. 5. To fulfill the requirement of award of MBA. 6. To offer suggestions. c. SCOPE OF THE STUDY 1. The scope of the study limits to the Public Sector banks only. 2. To understand the causes, which leads to investment ideas. 3. To ascertain the technique for investing in banking sectors. 4. To calculate Returns, Standard Deviation, Beta, Alpha, Covariance and Correlation. d. METHODOLOGY SOURCES OF DATA: Primary Data The primary data has been collected from discussions with the officials of the company. Secondary Data

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The secondary data for this study was collected from News Papers, Magazines, Internet, and Text Books etc.

LIMITATIONS OF THE STUDY 1. A good number of explanatory variables must be taken into consideration in order to assess the share price movement. But due to time constraints detailed analysis of each bank were not made. 2. This is a one time study. 3. This being an academic study suffers from time and cost constraints 4. This is limited to BSE BANKEX. 5. This study is related to data collected from 3 rd December, 2007 to 11th January, 2008. 6. During the study the Stock Market was Bullish. 7. Confidentiality of data – organizational constraints. 8. The analysis carried out and suggestions offered are limited to the researcher’s ability to understand complex financial aspects. 9. Observations made and suggestions offered cannot be generalized.

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INTRODUCTION TO RISK AND RETURN RISK Risk and Uncertainty are an integral part of an investment decision. Technically ‘Risk’ can be defined as a situation where the possible consequences of the decision that is to be taken are known. ‘Uncertainty’ is generally defined to apply to situation where the probabilities cannot be estimated. However, Risk and Uncertainty are used interchangeably. Risk is composed of the demands that bring in variations in return of income. The main forces contributing to risk are price and interest. Risk is also influenced by external and internal considerations. External risks are uncontrollable and broadly affect investments. These external risks are called systematic risk. Risk due to internal environment of a firm or that affecting a particular industry is referred to as unsystematic risk. Systematic risk is non-diversifiable and is associated with the securities market as well as the economic, sociological, political and legal considerations of the prices of all securities in the economy. The effect of these factors is to put pressure on all securities in such a way that the prices of stock will move in the same direction. For example, during a boom period, prices of all securities will rise indicate that the economy is moving towards prosperity.

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Unsystematic risk is unique to a firm or industry. It does not affect an average investor. Unsystematic risk is caused by factors like labor strike, irregular disorganized management policies and consumer preferences. These factors are independent of the price mechanism operating in the securities market. The problems of both systematic and unsystematic risk are inherent in industries dealing with basic raw materials as well as in consumer goods industries.

SYSTEMATIC RISK Market risk, Interest rate risk and Purchasing power risk are grouped under systematic risk. •

Market risk:

Market risk is referred to as stock variability due to changes in investor’s attitude and expectations. The investor’s reaction towards tangible and intangible events in the chief cause affecting ‘market risk’. Market risk triggers off through real events comprising political, social and economic reasons. •

Interest rate risk:

There are four types of movements in prices of stocks in the market. These may be termed as (1) long-term, (2) cyclical (bull and bear markets), (3) intermediate or within the cycle and (4) short-term. The prices of all securities rise or fall depending on the change in interest rates. •

Purchasing Power Risk:

Purchasing power risk is also known as inflation risk. This risk rises out of change in the prices of goods and services and technically it covers both inflation and deflation periods. During the last two decades, it has been seen that inflationary pressures have been continuously affecting the Indian Economy.

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UNSYSTEMATIC RISK The importance of unsystematic risk arises out of uncertainty surrounding a particular firm or industry due to facts like labor strike, consumer preferences and management policies. •

Business Risk

Business risk is also associated with risks directly affecting the internal environment of the firm and those of circumstances beyond its control. The former is classified as internal business risk and the later as external business risk. Within these two broad categories of risk the firm operates. •

Financial Risk

Financial risk in a company is associated with the method through which it plans its financial structure. If the capital structure of a company tends to make earnings unstable, the company may fail financially. BETA An important measure of risk, the beta coefficient or simply ‘beta’ measure the sensitivity of a stock price relative to the fluctuations of a particular stock market index. Risk and Return are the two sides of the investment coin. Many investors are familiar with techniques to calculate returns of investment; but they are not familiar with the measure of risk of an investment. Beta is calculated by relating the relevant returns on a security with the returns for the market. Market return is measured by the average returns of a large sample of stocks such as BSE BankEx, S&P CNX Nifty etc., beta can be positive or negative. The risk in a share can be divided into two parts; one is market risk and other is company specific risk. The market risk is also called systematic risk; affect all the stocks in the market. E.g., a change of Government policy, revision of interest rates, exim polity

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etc., will affect all the stocks in the market. The company specific risk is also known as unsystematic risk and affects the specific company or industry. The systematic portion of risk is practically impossible to reduce. So it is important to quantify this market risk. This risk can be measured by the Scrips betas. If a stock moves exactly in tandem with a market index such as the BSE BankEx, it is said to have a beta of one. A stock with a beta higher than one is called a risky stock i.e., that is Aggressive stock and its market price may move faster than the market. If beta is less than one, the stock is called a Defensive stock. The concept of beta for measuring the riskiness of a stock is, if an investor selects stocks with low betas (i.e., less than 1), then the investor will suffer less in a falling market. Of course, at the same time investor will also stand to gain less than the market average in rising market. In case an investor is prepared to take greater risk then he can choose stock with higher betas (beta>1) in order to gain more than the market average in a rising market. At the same time the investor should be prepared to lose more than the market average, in case the market crashes. However, it is desirable to choose stocks with betas varying between 0.5 and 1.5. ALPHA Alpha is commonly known as Unique Risk. This unique risk is mainly for a particular organization and does not affect the whole industry. Lesser the value of Alpha lesser is the risk. VARIANCE The variance is the sum of the squares of the deviations of actual returns from the expected returns. Positive value of variance is considered unfavorable and negative values as favorable. STANDARD DEVIATION PG Department of Management Studies Atria Institute of Technology

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It is the square root of averaged of squared deviations. Positive value of Standard Deviation is considered unfavorable and negative values as favorable. CORRELATION It is simply the covariance divided by the product of Standard Deviations. The Correlation co-efficient can vary between -1.0 and +1.0. A value of -1.0 means perfect negative correlation or co movement in a opposite direction, a value of 0 means no correlation or co movement. Whatsoever a value of +1.0 means perfect correlation or co movement in the same direction.

TOOLS OF ANALYSIS Before calculating Beta and Correlation Coefficient for each of the securities we have to calculate the Returns and Standard Deviation i.e., the risk factors for the individual securities. The following tables show the Returns and Standard Deviation for each of the securities based on the total observations and matched observations with BSE BankEx. We are calculating returns based on opening and closing price of the securities by collecting the prices weekly for 6 weeks. Thus the calculations wholly depend on the data collected from internet. 1) Beta 2) Alpha 3) Variance 4) Standard Deviation 5) Correlation

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Use of Tools Formulas used;

1.

Computation of Rate of Return for Listed Banks.

The rate of return is calculated using opening and closing prices of each Bank on weekly basis.

RA = Closing price of last day of a week – Opening price of the first day of a week Opening price of the first day of a week

2.

Computation of Rate of Return for BSE BANKEX.

The rate of return is calculated using opening and closing prices of each Bank on weekly basis.

RM = Closing index of last day of a week – Closing index of the first day of a week Closing index of the first day of a week

3.

Computation of Covariance

COV (R , R ) or σ A M im

PG Department of Management Studies Atria Institute of Technology

= Σ(RA – RA/) (RM – RM/) 44

n-1

4.

Computation of variance of the Market Index

= Σ(RM – RM/) 2

σ 2 m

n–1

5.

Computation of Beta

βeta

= σ im σm 2

6.

Computation of Alpha

άA = RA/ – β.RM/

7.

Computation of Variance of the scrips

Variance or σA 2 =

Σ(RA – RA/) 2 n–1

8.

Computation of standard deviation of the scrips

σA = variance or σA 2

9.

Computation of standard deviation of the market

σM = variance of market or σm2

10.

computation of Correlation

correlation = Cov(RA.RM) σA.σM

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Calculation part 1. Allahabad Bank Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 113.00 116.50 121.00 115.00 119.00 135.00

RA

Close 116.10 121.30 113.40 117.25 134.90 124.65

RM

Price change 3.10 4.80 -7.60 2.25 15.90 -10.35 Total Average

RA-RA/

Valid Returns 2.7434 4.1202 -6.2810 1.9565 13.3613 -7.6667 8.2337 1.3723

RM-RM/

RA-RA/*RMRM/

(RA-RA/)2

(RM-RM/)2

st

1

2.7434

4.6646

1.3711

2.4055

3.2982

1.8799

5.7864

2nd

4.1202

0.9575

2.7479

-1.3016

-3.5767

7.5510

1.6942

rd

-6.2810

-5.2656

-7.6533

-7.5247

57.5887

58.5727

56.6211

th

1.9565

6.0321

0.5842

3.7730

2.2042

0.3413

14.2355

th

13.3613

4.5555

11.9890

2.2964

27.5316

143.7365

5.2735

th

-7.6667 8.2337

2.6105 13.5546

-9.0390

0.3514

-3.1763 83.8697

81.7032 293.7848

0.1235 83.7342

3 4 5

6 Total 1 2 3 4 5 6 7 8 9 10

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips SD of Market Correlation

PG Department of Management Studies Atria Institute of Technology

1.3723 2.2591 16.7739 58.7570 16.7468 1.0016 -0.8905 7.6653 4.0923 0.5347

46

2. Andhra Bank Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 103.00 106.50 111.80 104.95 106.00 122.00

RA

Close 104.35 110.40 101.40 105.50 124.65 112.60

RM

Price change 1.35 3.90 -10.40 0.55 18.65 -9.40 Total Average

RA-RA/

Valid Returns 1.3107 3.6620 -9.3023 0.5241 17.5943 -7.7049 6.0839 1.0140

RA-RA/*RMRM/

RM-RM/

(RA-RA/)2

(RM-RM/)2

st

1.3107

4.6646

0.2967

2.4055

0.7138

0.0880

5.7864

nd

3.6620

0.9575

2.6480

-1.3016

-3.4467

7.0120

1.6942

rd

-9.3023

-5.2656

-10.3163

-7.5247

77.6269

106.4257

56.6211

th

0.5241

6.0321

-0.4899

3.7730

-1.8483

0.2399

14.2355

th

17.5943

4.5555

16.5803

2.2964

38.0750

274.9069

5.2735

th

-7.7049 6.0839

2.6105 13.5546

-8.7189

0.3514

-3.0638 108.0569

76.0189 464.6916

0.1235 83.7342

1 2 3 4 5

6 Total

1 2 3 4 5 6 7 8 9 10

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips SD of Market Correlation

PG Department of Management Studies Atria Institute of Technology

1.0140 2.2591 21.6114 92.9383 16.7468 1.2905 -1.9013 9.6405 4.0923 0.5478

47

3. Bank of Baroda Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks 1st

Open 382.10 392.25 426.00 406.00 454.05 472.00

RA

Close 391.40 431.50 403.90 456.70 481.60 444.15

RM

Price change 9.30 39.25 -22.10 50.70 27.55 -27.85 Total Average

RA-RA/

Valid Returns 2.4339 10.0064 -5.1878 12.4877 6.0676 -5.9004 19.9074 3.3179

RA-RA/*RMRM/

RM-RM/

(RA-RA/)2

(RM-RM/)2

2.4339

4.6646

-0.8840

2.4055

-2.1265

0.7815

5.7864

nd

10.0064

0.9575

6.6885

-1.3016

-8.7058

44.7360

1.6942

rd

-5.1878

-5.2656

-8.5057

-7.5247

64.0028

72.3469

56.6211

th

12.4877

6.0321

9.1698

3.7730

34.5977

84.0852

14.2355

th

6.0676

4.5555

2.7497

2.2964

6.3144

7.5609

5.2735

th

-5.9004 19.9074

2.6105 13.5546

-9.2183

0.3514

-3.2393 90.8434

84.9771 294.4876

0.1235 83.7342

2 3 4 5

6 Total

1 2 3 4 5 6 7 8

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips

PG Department of Management Studies Atria Institute of Technology

3.3179 2.2591 18.1687 58.8975 16.7468 1.0849 0.8670 7.6745

48

9 10

SD of Market Correlation

4.0923 0.5785

4. Bank of India Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 353.00 355.00 369.00 355.00 366.00 382.10

RA

Close 357.45 370.60 351.25 365.25 380.20 412.75

RM

Price change 4.45 15.60 -17.75 10.25 14.20 30.65 Total Average

RA-RA/

Valid Returns 1.2606 4.3944 -4.8103 2.8873 3.8798 8.0215 15.6333 2.6056

RA-RA/*RMRM/

RM-RM/

(RA-RA/)2

(RM-RM/)2

st

1.2606

4.6646

-1.3450

2.4055

-3.2353

1.8089

5.7864

nd

4.3944

0.9575

1.7889

-1.3016

-2.3284

3.1999

1.6942

rd

3

-4.8103

-5.2656

-7.4159

-7.5247

55.8020

54.9948

56.6211

4th

2.8873

6.0321

0.2818

3.7730

1.0630

0.0794

14.2355

th

3.8798

4.5555

1.2743

2.2964

2.9262

1.6237

5.2735

th

8.0215 15.6333

2.6105 13.5546

5.4160

0.3514

1.9032 56.1308

29.3325 91.0393

0.1235 83.7342

1 2

5

6 Total

1 2 3 4 5 6 7 8

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips

PG Department of Management Studies Atria Institute of Technology

2.6056 2.2591 11.2262 18.2079 16.7468 0.6703 1.0912 4.2671

49

9 10

SD of Market Correlation

4.0923 0.6429

5. Canara Bank Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 275.10 308.00 309.55 304.80 315.00 380.00

RA

Close 302.05 313.85 297.25 311.20 399.60 371.35

RM

Price change 26.95 5.85 -12.30 6.40 84.60 -8.65 Total Average

RA-RA/

Valid Returns 9.7964 1.8994 -3.9735 2.0997 26.8571 -2.2763 34.4028 5.7338

RM-RM/

RA-RA/*RMRM/

(RA-RA/)2

(RM-RM/)2

st

9.7964

4.6646

4.0626

2.4055

9.7726

16.5047

5.7864

nd

1.8994

0.9575

-3.8344

-1.3016

4.9909

14.7026

1.6942

rd

3

-3.9735

-5.2656

-9.7073

-7.5247

73.0445

94.2317

56.6211

4th

2.0997

6.0321

-3.6341

3.773

-13.7115

13.2067

14.2355

th

26.8571

4.5555

21.1233

2.2964

48.5075

446.1938

5.2735

th

-2.2763 34.4028

2.6105 13.5546

-8.0101

0.3514

-2.8147 119.7893

64.1617 649.0012

0.1235 83.7342

1 2

5

6 Total

1 2 3 4 5 6 7 8

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips

PG Department of Management Studies Atria Institute of Technology

5.7338 2.2591 23.9579 129.8002 16.7468 1.4306 2.5020 11.393

50

9 10

SD of Market Correlation

4.0923 0.5139

6. Indian Overseas Bank Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 166.00 172.65 185.00 178.90 180.70 202.00

RA

Close 174.85 186.25 165.20 177.30 201.85 186.20

Price change 8.85 13.60 -19.80 -1.60 21.15 -15.80 Total Average

RM

RA-RA/

Valid Returns 5.3313 7.8772 -10.7027 -0.8944 11.7045 -7.8218 5.4941 0.9157

RM-RM/

(RA-RA/)2

(RM-RM/)2

10.6218

19.4977

5.7864

-1.3016

-9.0611

48.4627

1.6942

-11.6184

-7.5247

87.4248

134.9868

56.6211

6.0321

-1.8101

3.7730

-6.8294

3.2764

14.2355

11.7045

4.5555

10.7888

2.2964

24.7754

116.3986

5.2735

-7.8218 5.4941

2.6105 13.5546

-8.7375

0.3514

-3.0704 103.8611

76.3436 398.9658

0.1235 83.7342

st

5.3313

4.6646

4.4156

2.4055

nd

7.8772

0.9575

6.9615

rd

3

-10.7027

-5.2656

4th

-0.8944

th th

1 2

5

6 Total

1 2 3 4 5 6 7 8

RA-RA/*RMRM/

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips

PG Department of Management Studies Atria Institute of Technology

0.9157 2.2591 20.7722 79.7932 16.7468 1.2404 -1.8864 8.9327

51

9 10

SD of Market Correlation

4.0923 0.5682

7. Punjab National Bank Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 606.50 635.00 678.00 630.00 680.00 669.10

RA

Close 631.30 681.05 621.20 671.25 699.10 653.85

Price change 24.80 46.05 -56.80 41.25 19.10 -15.25 Total Average

RM

RA-RA/

Valid Returns 4.0890 7.2520 -8.3776 6.5476 2.8088 -2.2792 10.0406 1.6734

RM-RM/

(RA-RA/)2

(RM-RM/)2

5.8106

5.8350

5.7864

-1.3016

-7.2611

31.1204

1.6942

-10.0510

-7.5247

75.6310

101.0233

56.6211

6.0321

4.8742

3.7730

18.3902

23.7575

14.2355

2.8088

4.5555

1.1354

2.2964

2.6073

1.2891

5.2735

-2.2792 10.0406

2.6105 13.5546

-3.9526

0.3514

-1.3890 93.7891

15.6233 178.6485

0.1235 83.7342

st

4.0890

4.6646

2.4156

2.4055

nd

7.2520

0.9575

5.5786

rd

3

-8.3776

-5.2656

4th

6.5476

th th

1 2

5

6 Total

1 2 3 4 5 6 7 8

RA-RA/*RMRM/

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips

PG Department of Management Studies Atria Institute of Technology

1.6734 2.2591 18.7578 35.7297 16.7468 1.1201 -0.8569 5.9774

52

9 10

SD of Market Correlation

4.0923 0.7668

8. State Bank of India Calculation of Total and Average Returns Weeks 1st 2nd 3rd 4th 5th 6th

Weeks

Open 2330.00 2445.00 2415.00 2295.00 2400.00 2392.00

RA

Close 2436.60 2410.55 2265.20 2384.45 2390.75 2437.25

RM

Price change 106.60 -34.45 -149.80 89.45 -9.25 45.25 Total Average

RA-RA/

Valid Returns 4.5751 -1.4090 -6.2029 3.8976 -0.3854 1.8917 2.3671 0.3945

RM-RM/

(RA-RA/)2

(RM-RM/)2

10.0564

17.4773

5.7864

-1.3016

2.3475

3.2527

1.6942

-6.59742

-7.5247

49.6436

43.5259

56.6211

6.0321

3.503083

3.7730

13.2171

12.2716

14.2355

-0.3854

4.5555

-0.77992

2.2964

-1.7910

0.6083

5.2735

1.8917 2.3671

2.6105 13.5546

1.497183

0.3514

0.5261 73.9997

2.2416 79.3773

0.1235 83.7342

st

4.5751

4.6646

4.180583

2.4055

nd

2

-1.4090

0.9575

-1.803520

3rd

-6.2029

-5.2656

th

3.8976

th th

1

4 5

6 Total

1 2 3 4 5 6 7 8

RA-RA/*RMRM/

RA/ RM/ COV(RA,RM) Variance of Scrips Variance of Market Beta Alpha SD of Scrips

PG Department of Management Studies Atria Institute of Technology

0.3945 2.2591 14.7999 15.8755 16.7468 0.8837 -1.6020 3.9844

53

9 10

SD of Market Correlation

4.0922 0.9077

(iv). Interpretation and Inference Table showing Returns of Banks Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

PG Department of Management Studies Atria Institute of Technology

Valid Returns 8.23 6.08 19.91 15.63 34.40 5.49 10.04 2.37

54

Returns Chart

35

30

25

20

Values 15

10

5

0

Allahabad Andhra Bank Bank Valid Returns

8.23

6.08

Bank of Baroda

Bank of India

Canara Bank

19.91

15.63

34.4

Indian Punjab Overseas National Bank Bank 5.49

10.04

State Bank of India 2.37

Banks

Interpretation and Inference : The above graph represents the Returns of Banks. The above table shows that, the returns of Canara Bank are highest compared to any other banks. Therefore, Canara Bank leads with highest returns of 34.40% and thus investor who are willing to get high return can invest and gain in this securities. Followed by Bank of Baroda having next highest returns of 19.91%. The State Bank of India has the least returns of 2.37%.

PG Department of Management Studies Atria Institute of Technology

55

Table showing Average weekly returns of Banks Since the study is conducted for 6 weeks. The weekly average return of each bank is as under Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

PG Department of Management Studies Atria Institute of Technology

Average weekly returns 1.37 1.01 3.32 2.61 5.73 0.92 1.67 0.39

56

Average weekly returns chart

6

5

4

Values 3

2

1

0

Average weekly returns

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Canara Bank

Indian Overseas Bank

Punjab National Bank

State Bank of India

1.37

1.01

3.32

2.61

5.73

0.92

1.67

0.39

Banks

Interpretation and Inference : The above graph represents the average weekly Returns of Banks. The above table shows that, the average weekly returns of Canara Bank are highest compared to any other banks. Therefore, Canara Bank leads with highest average weekly returns of 5.73% PG Department of Management Studies Atria Institute of Technology

57

and thus investor who are willing to get high average weekly return can invest and gain in these securities. Followed by Bank of Baroda having next highest average weekly returns of 3.32%. The State Bank of India has the least average weekly returns of 0.39%.

Table showing Standard Deviation of banks

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58

Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

Standard Deviation 7.67 9.64 7.67 4.27 11.39 8.39 5.98 3.98

PG Department of Management Studies Atria Institute of Technology

59

Standard Deviation chart

12

10

8

Values 6

4

2

0

Allahabad Andhra Bank Bank Standard Deviation

7.67

9.64

Bank of Baroda

Bank of India

Canara Bank

Indian Overseas Bank

Punjab National Bank

State Bank of India

7.67

4.27

11.39

8.39

5.98

3.98

Banks

Interpretation and Inference : The most commonly used measures of risk in finance are variance or its square root i.e. the Standard Deviation. Positive value of Standard Deviation is considered unfavorable and negative values as favorable. The above graph shows that, Canara Bank stocks have highest volatility though the Canara Bank has the highest returns but when it comes to certainty investors are not guaranteed about the returns, they may get even less than that also. From the Standard Deviation one may infer that Canara Bank stocks have standard deviation of 11.39% and followed by Andhra Bank with 9.64%. The State Bank of India has the least i.e. 3.98%. PG Department of Management Studies Atria Institute of Technology

60

Table showing Beta of Banks Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

PG Department of Management Studies Atria Institute of Technology

Beta 1.00 1.29 1.08 0.67 1.43 1.24 1.12 0.88

61

Beta chart

1.6 1.4 1.2 1

Values 0.8 0.6 0.4 0.2 0

Beta

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Canara Bank

Indian Overseas Bank

Punjab National Bank

State Bank of India

1

1.29

1.08

0.67

1.43

1.24

1.12

0.88

Banks

PG Department of Management Studies Atria Institute of Technology

62

Beta values

No. of Banks

0.00 – 0.50

0

0.50 – 1.00

2

1.00 – 1.50

6

1.50 – 2.00

0

Total

8

Interpretation and Inference : Compared with BSE BankEx, Canara Bank with Beta of 1.43% is leading and Bank of India with Beta 0.67% is least among the list. Bank of India and State Bank of India having the Beta in the range of 0.50 to below 1.00, when the market moves by 10%, the stocks of these companies will move up by 5 to 10 % and if the market declines by 10%, the stocks price will decline an average of 5 to 10%. Hence, these stocks are lesser sensitive to market risk, at the same time investor will also stand to gain less than the market average in rising market. Remaining banks are having Beta in the range of 1.00 to below 1.50, when the market moves up by 10%, the stocks of these companies will move up by 10 to 15% and if the market declines by 10%, the stock price will decline an average by 10 to 15%. Though, the stocks of these banks are more sensitive, during bullish trend the holders will get more than the market average. It is not sensible to invest when the market is bearish. Hence, it is desirable to choose stocks with betas varying between 0.50 to 1.50.

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63

Table showing Alpha of Banks Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

Alpha

PG Department of Management Studies Atria Institute of Technology

-0.89 -1.90 0.87 1.09 2.50 -1.89 -0.86 -1.60

64

Alpha chart

2.5 2 1.5 1 0.5

Values 0 -0.5 -1 -1.5 -2

Alpha

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Canara Bank

Indian Overseas Bank

Punjab National Bank

State Bank of India

-0.89

-1.9

0.87

1.09

2.5

-1.89

-0.86

-1.6

Banks

Interpretation and Inference : The above graph represents the value of Alpha which is commonly known as Unique Risk. This unique risk is mainly for a particular organization and does not affect the whole industry. It is calculated and exhibited in the form of graph for banks. Lesser the value of Alpha lesser is the risk. From the above table, one can infer that Andhra Bank is having Alpha of -1.90 followed by Indian Overseas Bank with -1.89 which are lesser sensitive and thus have less risk. In this respect, Canara Bank is having an Alpha of 2.50 i.e. its stocks being highly sensitive and riskier.

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65

Table showing Variance of Banks Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

Variance 58.76 92.94 58.90 18.20 129.80 79.79 35.73 15.88

PG Department of Management Studies Atria Institute of Technology

66

Variance charts

140

120

100

80

Values 60

40

20

0

Variance

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Canara Bank

Indian Overseas Bank

Punjab National Bank

State Bank of India

58.76

92.94

58.9

18.2

129.8

79.79

35.73

15.88

Banks

Interpretation and Inference : The most commonly used measures of risk in finance are variance. Positive value of variance is considered unfavorable and Negative values of variance are considered

PG Department of Management Studies Atria Institute of Technology

67

favorable. Therefore from the above values and chart it is evident that State Bank of India has least risk of 15.88% followed by Bank of India with 18.20%. The above graph shows that, Canara Bank has highest variance of 129.80% and followed by Andhra Bank with 92.94%. From the Variance one may infer that Canara Bank and Andhra Bank securities have more risk of volatility.

Table showing Correlation of Banks

PG Department of Management Studies Atria Institute of Technology

68

Sl.No 1 2 3 4 5 6 7 8

Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Canara Bank Indian Overseas Bank Punjab National Bank State Bank of India

Correlation 0.53 0.55 0.58 0.64 0.51 0.57 0.77 0.91

Correlation chart

1 0.9 0.8 0.7 0.6

Values 0.5 0.4 0.3 0.2 0.1 0

Correlation

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Canara Bank

Indian Overseas Bank

Punjab National Bank

State Bank of India

0.53

0.55

0.58

0.64

0.51

0.57

0.77

0.91

Banks

PG Department of Management Studies Atria Institute of Technology

69

Interpretation and Inference : Correlation co-efficient is simply covariance divided by the product of Standard Deviation. The Correlation co-efficient can vary between -1 to +1. As the correlation values are positive, there is a perfect correlation or comovement in the same direction. Hence, there is a positive correlation a small increase in BankEx will lead to change in Share prices and vice versa. By the above graph we can infer that State Bank of India, Punjab National Bank and Bank of India stocks are closely correlated with correlation of 0.91, 0.77 and 0.64 respectively, Whereas Canara Bank and Allahabad Bank stocks are lesser correlated with correlation co-efficient of 0.53 and 0.51 respectively.

PG Department of Management Studies Atria Institute of Technology

70

(V) FINDINGS AND RECOMMENDATIONS 1. It is clearly evident that Canara Bank has the highest returns of 34.40% followed by Bank of Baroda with 19.91%. Whereas, State Bank of India has the least returns of 2.37%. It has been calculated by considering weekly values of stocks for 6 weeks. 2. It is clearly evident that Canara Bank has the highest average weekly returns of 5.73% followed by Bank of Baroda with 3.32%. Whereas, State Bank of India has the least average weekly returns of 0.39%. It has been calculated by dividing the total returns by 6 weeks as the study is conducted for 6 weeks. 3. Positive values of Standard deviation are considered unfavorable and Negative values as favorable. Therefore, as per the study Canara Bank is having standard deviation of 11.39% followed by Andhra Bank with 9.64%. Whereas, State Bank of India has the least standard deviation of 3.98%. Thus, it is less volatile. 4. Bank of India and State Bank of India is having Beta ranging from 0.50 to 1.00 therefore, they are lesser sensitive. Whereas, remaining 6 Banks have Beta ranging from 1.00 to 1.50, hence, they are much volatile at the same time holders will get more than the market average. 5. Andhra Bank and Indian Overseas Bank are having less risk i.e. Alpha value of -1.90 and -1.89 respectively. Whereas, Canara Bank is having an Alpha of 2.50, which clearly states that these stocks are highly sensitive and riskier. 6. Positive values of Variance are considered unfavorable and Negative values as favorable. Therefore, it is evident that State Bank of India and Bank of India are having least risk i.e. 15.88% and 18.20% respectively. Whereas, Canara Bank and Andhra Bank are having highest risk of 129.80% and 92.94% respectively. PG Department of Management Studies Atria Institute of Technology

71

7. As far as our study to find out the relationship between BankEx returns and Bank returns is considered there is a positive correlation between them, as it is evident through the values or correlation calculated. State Bank of India, Punjab National Bank and Bank of India are having correlation co-efficient of 0.91, 0.77 and 0.64 respectively. Whereas, Allahabad Bank and Canara Bank are having correlation co-efficient of 0.53 and 0.51 respectively. (VI) CONCLUSION As far as our study is concerned Canara Bank is giving highest returns with moderate risk i.e. 34.40% of returns, for the risk of 11.39%. Thus, as the returns are double an investor can think of investment in these shares. It is suitable to risk taking investors. Even Bank of Baroda is giving moderate returns for moderate risk i.e. 19.91% of returns, for the risk of 7.68%. Thus, as the returns are more than one and half percent investment in these shares are also recommended. It is suitable for risk averse investors. Even the Bank of India is giving high returns with least risk i.e. 15.63% of returns, for the risk of 4.27%. Thus as the returns are more as compared to risk investment in these shares are also recommended. It is suitable for risk averse investors.

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72

BIBLIOGRAPHY WEBSITES •

www.Kotaksecurities.com

•

www.Bseindia.com

•

www.Rediffmail.com

•

www.Moneycontrol.com

•

www.Google.com

•

www.Allahabadbank.com

•

www.Andhrabank.com

•

www.Bankofbaroda.com

•

www.Bankofindia.com

•

www.Canarabank.com

•

www.Indianoverseasbank.com

•

www.Punjabnationalbank.com

•

www.Statebankofindia.com

TEXT BOOKS Sl. no 1

2

Title Investment Analysis and

Author Prasanna Chandra

Publication and Edition Tata McGraw-Hill

Portfolio Management

Publishing co. ltd, Second

Financial Management

Edition Tata McGraw-Hill

PG Department of Management Studies Atria Institute of Technology

M.Y. Khan and P.K. Jain

73

Publishing co. ltd, Fifth Edition

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74