Introduction
Banking and Financial sector is assuming greater importance consequent to the implementation of reforms in these sectors in India since 1990. The government’s stake in public sector banks was replaced by public participation and most of the banking scrips are now listed in the major stock exchanges of India. Some banks have grown globally and their shares listed even in the international stock exchanges. The entry of foreign banks increased the competition and in order to retain their market share and remain in the market Indian banks were compelled to re-write their banking philosophy. Almost all banks have now come out of their traditional shell and dressed up in the new attire so as to present a pleasant banking environment to the customers. During the last few years, Indian banks could present a glorious performance. Consequently the demand for banking shares has gone up. Many banks took advantage of this position to mobilize additional resources from the capital market and could get their issues oversubscribed. With this background the study has conducted on the impact of banking stocks on the stock indices SENSEX and NIFTY.
Methodology
NSE’s Nifty and BSE’s SENSEX has taken for the study and worked out the correlation between the Bank Nifty and Nifty and Bankex and Sensex to find out the impact of bank stock indices on the stock indices. We examined the influence of bank’s performance on indices by working out correlation between the Bankex and the stock prices of 5 major banks in the Bankex; viz. Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank and State Bank of India. The study conducted the performance of these banks by studying the YoY changes in respect of 18 performance parameters and worked out a Composite Growth Index (CGI). The CGI is worked out by dividing the total of the YoY changes of these parameters with a common denominator 18. The findings of the study are presented in the next paragraph.
Analysis of Performance
The performance parameters selected for the study are Number of offices, Number of employees, Business per employee, Profit per employee, Capital and Reserves surplus, Deposits, Investments, Advances, Interest income, Other income, Interest expended, Operating expenses, cost of funds, Return on advances adjusted to cost of funds, Wages as percentage to total expenses, Return on assets, CRAR and Net NPA ratio. In order to ensure validity of these parameters we have depended on the values of these parameters provided by Reserve Bank of India in their website http://www.rbi.org.in/. The value of stock indices, Bankex, Bank Nifty and the stock prices of the five banks were collected from the websites of the respective stock exchanges. The correlation was worked out for last 3 months, last 6 months, last one year and last 5 years and the performance of the banks was studied by taking the figures for the years 2006-07 and 2007-08. The audited figures of the banks for the year 2008-09 are not ready for analysis.
Correlation Coefficient
The correlation worked out between Sensex and Bankex is given in the Table 1 below
.
Banking and Financial sector is assuming greater importance consequent to the implementation of reforms in these sectors in India since 1990. The government’s stake in public sector banks was replaced by public participation and most of the banking scrips are now listed in the major stock exchanges of India. Some banks have grown globally and their shares listed even in the international stock exchanges. The entry of foreign banks increased the competition and in order to retain their market share and remain in the market Indian banks were compelled to re-write their banking philosophy. Almost all banks have now come out of their traditional shell and dressed up in the new attire so as to present a pleasant banking environment to the customers. During the last few years, Indian banks could present a glorious performance. Consequently the demand for banking shares has gone up. Many banks took advantage of this position to mobilize additional resources from the capital market and could get their issues oversubscribed. With this background the study has conducted on the impact of banking stocks on the stock indices SENSEX and NIFTY.
Methodology
NSE’s Nifty and BSE’s SENSEX has taken for the study and worked out the correlation between the Bank Nifty and Nifty and Bankex and Sensex to find out the impact of bank stock indices on the stock indices. We examined the influence of bank’s performance on indices by working out correlation between the Bankex and the stock prices of 5 major banks in the Bankex; viz. Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank and State Bank of India. The study conducted the performance of these banks by studying the YoY changes in respect of 18 performance parameters and worked out a Composite Growth Index (CGI). The CGI is worked out by dividing the total of the YoY changes of these parameters with a common denominator 18. The findings of the study are presented in the next paragraph.
Analysis of Performance
The performance parameters selected for the study are Number of offices, Number of employees, Business per employee, Profit per employee, Capital and Reserves surplus, Deposits, Investments, Advances, Interest income, Other income, Interest expended, Operating expenses, cost of funds, Return on advances adjusted to cost of funds, Wages as percentage to total expenses, Return on assets, CRAR and Net NPA ratio. In order to ensure validity of these parameters we have depended on the values of these parameters provided by Reserve Bank of India in their website http://www.rbi.org.in/. The value of stock indices, Bankex, Bank Nifty and the stock prices of the five banks were collected from the websites of the respective stock exchanges. The correlation was worked out for last 3 months, last 6 months, last one year and last 5 years and the performance of the banks was studied by taking the figures for the years 2006-07 and 2007-08. The audited figures of the banks for the year 2008-09 are not ready for analysis.
Correlation Coefficient
The correlation worked out between Sensex and Bankex is given in the Table 1 below
.
Table 1
Correlation between Sensex and Bankex
The above analysis indicates high positive correlation during all periods. Hence the hypothesis that the Sensex is influenced by Bankex proves to be correct.Table 2 below shows the correlation between the NSE’s S&P Nifty and Bank Nifty for the above four periods.
.
Table 2
Correlation between S&P Nifty and Bank Nifty
In this case also we observed high positive correlation between NSE’s Nifty and Bank Nifty. However one of the common features we observed in both the above cases are that the correlation coefficient is comparatively low in the 6 month’s sector. Therefore it can be assumed that the influence is more in the case of immediate short term and long term.
The bank-wise correlation between the Bankex and the price movements in respect of the individual scrips has given consideration. Table 3 below shows the result of this analysis.
Table 3
Correlation between Bankex and Price of Individual Bank Scrips
*Data pertains to period from 02.09.2007 only because the bank’s scrip was included in the index only from that date.
The above analysis indicates that the Bankex is highly influenced by the price movement of the shares of these five banks. However it may be observed that though the correlation coefficients in respect of the shares of HDFC bank and Kodak are positive, they are compared to be low in respect of 6 months in the case of HDFC Bank and in the first two time slots in the case of Kodak Mahindra Bank. The shares of these banks appear to be much in demand among investors.
Performance Analysis
The analysis and performance of these five banks has done by comparing the selected parameters for the financial years 2006-07 and 2007-08. Table 3 below shows the YoY percentage of changes in respect of these parameters.
Table 4
Performance Analysis of Five Banks
*Adjusted to CoF
Source: www.rbi.org.in
Some of the noteworthy features are:
(a) Business per Employee and Profit per Employee show the highest value in the case of State Bank of India. Business per Employee and Profit per Employee show negative variation in the case of ICICI Bank and Profit per employee shows a negative variation in the case of HDFC Bank.
(b) ICICI Bank shows the highest increase in respect of number of offices whereas HDFC Bank shows the highest value with regard to number of employees.
(c) Axis bank could expand the capital base more than the other 4 banks.
(d) Deposit accretion in ICICI Bank was the lowest
(e) Credit dispensation in Axis Bank was the highest
(f) Increase in investments was more in HDFC Bank
(g) While Kodak Mahindra bank could increase the interest income, HDFC Bank could mop up more other income.
(h) Interest expenses and Operating expenses were more in Kodak Mahindra Bank
(i) Variation in Cost of funds was more in SBI
(j) The return on advances was low in the case of ICICI Bank, whereas SBI shows a negative movement
(k) There was no increase in wages in case of ICICI Bank and SBI
(l) Return on asset was low in the case of HDFC Bank
(m) Variation in CRAR was low in the case of SBI and high in Kodak
(n) The highest variation in Net NPA was in ICICI Bank whereas was negative in the case of Axis and Kodak.
The CGI is very low in the case of SBI and very high in the case of Kodak. The analysis also indicates strong capital base for all these banks low NPA except in the case of ICICI Bank. All the five banks exhibit excellent growth prospects. The analysis further confirms the influence by the scrips of these five banks on the Bankex.
Conclusion
The study establishes positive relationship between the SENSEX and Bankex and Nifty and Bank Nifty. Further the individual scrips of these banks are a deciding factor in moving the bank-specific stock indices. The most interesting factor which we noticed is the SBI’s performance in certain vital areas. The study reveals that the financial service sector will continue to be one among the best investment opportunity in India.
Prepared in association with Dr.K.Sasidharan
Table 2
Correlation between S&P Nifty and Bank Nifty
In this case also we observed high positive correlation between NSE’s Nifty and Bank Nifty. However one of the common features we observed in both the above cases are that the correlation coefficient is comparatively low in the 6 month’s sector. Therefore it can be assumed that the influence is more in the case of immediate short term and long term.The bank-wise correlation between the Bankex and the price movements in respect of the individual scrips has given consideration. Table 3 below shows the result of this analysis.
Table 3
Correlation between Bankex and Price of Individual Bank Scrips
*Data pertains to period from 02.09.2007 only because the bank’s scrip was included in the index only from that date.
The above analysis indicates that the Bankex is highly influenced by the price movement of the shares of these five banks. However it may be observed that though the correlation coefficients in respect of the shares of HDFC bank and Kodak are positive, they are compared to be low in respect of 6 months in the case of HDFC Bank and in the first two time slots in the case of Kodak Mahindra Bank. The shares of these banks appear to be much in demand among investors.
Performance Analysis
The analysis and performance of these five banks has done by comparing the selected parameters for the financial years 2006-07 and 2007-08. Table 3 below shows the YoY percentage of changes in respect of these parameters.
Table 4
Performance Analysis of Five Banks
*Adjusted to CoF
Source: www.rbi.org.in
Some of the noteworthy features are:
(a) Business per Employee and Profit per Employee show the highest value in the case of State Bank of India. Business per Employee and Profit per Employee show negative variation in the case of ICICI Bank and Profit per employee shows a negative variation in the case of HDFC Bank.
(b) ICICI Bank shows the highest increase in respect of number of offices whereas HDFC Bank shows the highest value with regard to number of employees.
(c) Axis bank could expand the capital base more than the other 4 banks.
(d) Deposit accretion in ICICI Bank was the lowest
(e) Credit dispensation in Axis Bank was the highest
(f) Increase in investments was more in HDFC Bank
(g) While Kodak Mahindra bank could increase the interest income, HDFC Bank could mop up more other income.
(h) Interest expenses and Operating expenses were more in Kodak Mahindra Bank
(i) Variation in Cost of funds was more in SBI
(j) The return on advances was low in the case of ICICI Bank, whereas SBI shows a negative movement
(k) There was no increase in wages in case of ICICI Bank and SBI
(l) Return on asset was low in the case of HDFC Bank
(m) Variation in CRAR was low in the case of SBI and high in Kodak
(n) The highest variation in Net NPA was in ICICI Bank whereas was negative in the case of Axis and Kodak.
The CGI is very low in the case of SBI and very high in the case of Kodak. The analysis also indicates strong capital base for all these banks low NPA except in the case of ICICI Bank. All the five banks exhibit excellent growth prospects. The analysis further confirms the influence by the scrips of these five banks on the Bankex.
Conclusion
The study establishes positive relationship between the SENSEX and Bankex and Nifty and Bank Nifty. Further the individual scrips of these banks are a deciding factor in moving the bank-specific stock indices. The most interesting factor which we noticed is the SBI’s performance in certain vital areas. The study reveals that the financial service sector will continue to be one among the best investment opportunity in India.
Prepared in association with Dr.K.Sasidharan
