CAN SLIM Analysis

A STUDY ON INDIAN BANKING SYSTEM AND ANALYSIS OF BANKING STOCKS USING CANSLIM STRATEGY Submitted by: N.Ramasubramanian Roll-no-B3-37 UNDER THE ESTEEMED GUIDANCE OF Mr.Vinay Kumar Mahipal Lecturer - Finance SIVA SIVANI INSTITUTE OF MANAGEMENT SECUNDERABAD (2009 -11) DECLARATION I hereby declare that the project entitled …………………………………………………………………………………………………… ………………………. submitted for the PGDM-BIFAAS is my original work and the project has not formed the basis for the award of any degree, diploma, associate ship, fellowship or similar other titles. It has not been submitted to any other university or institution for the award of any degree or diploma. N.RAMASUBRAMANIAN DATE: PLACE: CERTIFICATE This is to certify that Mr.N.Ramasubramanian PGDM-BIFAAS, SSIM has undertaken a project on “A STUDY ON INDIAN BANKING SYSTEM AND ANALYSIS OF BANKING STOCKS USING CANSLIM STRATEGY” under my guidance. To the best of my knowledge that project is neither submitted nor published elsewhere. I recommend and forward the project for evaluation for the award of “PGDM- BIFAAS”. Project Guide MR.VINAY KUMAR MAHIPAL Place: Date: ACKNOWLEDGMENT I sincerely feel the credit of the project work could not be narrowed to only one individual. This work is an integrated effort of all those concerned with it, it would have been quite difficult without their direct & indirect co-operation. I wish to express my appreciation and gratitude to all the concerned people. It is my privilege to thank …………………………………………..whose guidance has made me learn and understand the finer aspects of equity analysis. The help and guidance which he has extended to me has made me feel as being an integral part of the organization. First and the foremost my intellectual debt is to MR.VINAY KUMAR MAHIPAL who has contributed significantly towards the completion of the project. They have provided the guidelines on which this project was made. I am thankful to all the people who have given their precious time and provided me with requisite data without which this project would not have completed. I also thank them for giving their valuable suggestions during the entire period of research. However, I accept the sole responsibility for any errors of omission and commission. N.Ramasubramanian Roll no: B3-37 Index 1.Introduction 1.1 Objective of the study 1.2 Scope of the study 1.3 Methodology of the study 1.4 Limitations of the study 2.About the company 3.Historical perspective 4.Central banking and Banking sector Reforms 4.1 Central banking 4.2 Banking sector reforms 5. Regulatory aspects in banking sector 6. Current scenario of banking in India 7. Future landscape of Indian banking 8. CANSLIM ANALYSIS of banking stocks 9. Findings and suggestions of the study 10. Conclusion 11. Bibliography Pg.n o Introduction to the study: This study aims at equity analysis of Indian Banking stocks using CANSLIM method. A crisisproof banking sector is chosen for analysis and this strategy meant for choosing high growth stocks for investment purpose. The financial system is the lifeline of the economy. The changes in the economy get mirrored in the performance of the financial system, more so of the banking industry. A crisis-proof banking sector in India has shown the world that India has strong Banking system. The pace of development for the Indian banking industry has been tremendous over the past decade. As the world reels from the global financial meltdown, India’s banking sector has been one of the very few to actually maintain resilience while continuing to provide growth opportunities, a feat unlikely to be matched by other developed markets around the world. Objectives of study: ➢ To understand the impact of economic reforms on the growth prospects of Indian Banking Sector. ➢ To have a thorough understanding of theoretical aspects of financial analysis of banks. ➢ To apply the CAN SLIM model for selection of bank stocks for investment purpose. Scope of the study: ➢ An overview of Indian Banking sector. ➢ The CANSLIM process is majorly applied for screening the banking stocks for investment purpose. ➢ The study has taken part with 5 years data to screen and mark it for investments in banking stocks. Research methodology: The study has been taken up with the above stated objectives. For fulfilling these objectives – secondary data (from the official documents of Cox and Wings) has been collected. The data collected includes the financial statements/annual reports of the banking scripts. The data collected has been processed through the CAN SLIM model and the results were analyzed. Limitations of study 1) The study has taken place only with secondary data. 2) The stocks finally chosen for long term investment are recommended only under the criteria of CANSLIM method. It does not involve complete fundamental and technical analysis. 2. About the company About the company: Cox & Wings Multi-Services is a private Limited company registered under the Indian companies Act 1956, Incorporated at Hyderabad. The mission is to forge strong, sustained relationships with our clients by creating value for them. They do this by gaining a thorough insight into a client's needs and objectives. Attuned to the fact that no two clients are the same, their approach to underscores the need for personalized solutions in today's markets. In providing services to the clients, company takes the fiduciary trust they place with them very seriously. By strictly adhering to their core values, they ensure that their processes, risk management systems, and staffing are concentrated solely on preserving and increasing their clients' hard earned capital within a transparent and controlled process. The services provided by the company are ➢ Holiday packages ➢ Corporate events ➢ Financial services:  De-mat services  Wealth management  General and Life insurance. India has taken a giant leap from the days of standing in banks queue for several hours for opening a saving account or trying to get some fixed deposits (FD) done. The financial services have increased manifold and now people have the choice to choose the one that most suitably fits the bill. Cox & Wings Multi-Services Pvt Ltd offers several services like stock broking, investment services, financial consulting , mutual funds, equity market and other banking services. DMAT Services Cox & Wings Multi-Services Pvt Ltd is a Channel Partner for Angle Brokering Ltd. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. 3. The Historical perspective HISTORICAL PERSPECTIVE: Bank of Hindustan, set up in 1870, was the earliest Indian Bank. Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank carried out limited central banking functions also prior to establishment of RBI. It engaged in all types of commercial banking business except dealing in foreign exchange. Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision & control of banks. The Act also vested licensing powers & the authority to conduct inspections in RBI. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as State Bank of India. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states, making them as its 100% subsidiaries. RBI was empowered in 1960, to force compulsory merger of weak banks with the strong ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. In July 1969, government nationalised 14 banks having deposits of Rs.50 crores & above. In 1980, government acquired 6 more banks with deposits of more than Rs.200 crores. Nationalisation of banks was to make them play the role of catalytic agents for economic growth. The Narsimham Committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices. The amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks. Banking Segment in India functions under the umbrella of Reserve Bank of India - the regulatory, central bank. This segment broadly consists of: ➢ Commercial Banks ➢ Co-operative Banks. 4. Central Banking and Banking Sector Reforms: 4.1 CENTRAL BANKING The Reserve Bank was constituted under Section 3 of the Reserve Bank of India Act, 1934 for taking over the management of currency from the Central Government and carrying on the business of banking in accordance with the provisions of the Act. Originally, under the RBI Act, the bank had the responsibility of: ➢ Regulating the issue of bank notes; ➢ Keeping of reserves for ensuring monetary stability; and ➢ Generally to operate the currency and credit system of the country to its advantage. The Bank is the banker to the central Government under section 20 of the Act, and accordingly it is obligatory to undertake banking business for the Central Government. In the State Government, their banking business is undertaken by the bank based on agreements as provided in section 21A. The Reserve Bank is the sole authority for issue and management of currency in India under Section 22 of the RBI Act. The major powers of the Reserve Bank in the different roles as regulator and supervisor can be summed up as under: ➢ Power to license ➢ ➢ ➢ ➢ ➢ ➢ ➢ ➢ Power of appointment and removal of banking boards/personnel Power to regulate the business of banks Power to give directions Power to inspect and supervise banks Power regarding audit of banks Power to collect, collate and furnish credit information Power relating to moratorium, amalgamation and winding up; and Power to impose penalties With the above stated powers, RBI performs all the typical functions of a central bank. Its primary functions are as follows: Issue of paper currency Acting as a banker to the Government Controlling the volume of credit in the country Acting as a lender of the last resort, in addition, RBI carries out the following secondary functions: ➢ Maintenance of the external value of the rupee ➢ Provision of the agriculture credit ➢ Collection and publication of monetary and financial information. ➢ ➢ ➢ ➢ In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at low ebb. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of moneymarket. Reforms phase: The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc. 4.2 BANKING SECTOR REFORMS: Indian banks have witnessed radical transformation through the banking reforms of the 90s, as part of the reforms. The first wave of financial liberalization took place in the second half of the 1980s, mainly taking the form of interest rate deregulation. Prior to this period, almost all interest rates were administered and influenced by budgetary concerns and the degree of concessionality of directed loans. To preserve some profitability, interest rate margins were kept sufficiently large by keeping deposit rates low and non-concessional lending rates high. Based on the 1985 report of the Chakravarty Committee, coupon rates on government bonds were gradually increased to reflect demand and supply conditions. Following the 1991 report of the Narasimham Committee, more comprehensive reforms took place that same year. The reforms consisted of ➢ a shift of banking sector supervision from intrusive micro-level intervention over credit decisions toward prudential regulations and supervision, ➢ a reduction of the CRR and SLR, ➢ interest rate and entry deregulation, ➢ adoption of prudential norms. Further, in 1992, the Reserve Bank of India issued guidelines for income recognition, asset classification and provisioning, and also adopted the Basel Accord capital adequacy standards. The government also established the Board of Financial Supervision in the Reserve Bank of India and recapitalized public-sector banks in order to give banks sufficient financial strength and to enable them to gain access to capital markets. In 1993, the Reserve Bank of India permitted private entry into the banking sector, provided that new banks were well capitalized and technologically advanced, and at the same time prohibited cross-holding practices with industrial groups. The Reserve Bank of India also imposed some restrictions on new banks with respect to opening branches, with a view to maintaining the franchise value of existing banks. Impressive institutional reforms have also helped in reshaping the financial marketplace. A highpowered Board for Financial Supervision (BFS), constituted in 1994, exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and nonbanking companies, creating an arms-length relationship between regulation and supervision. On similar lines, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) prescribes policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, authorise the payment and settlement systems and determine criteria for membership to these systems. As a result of the reforms, the number of banks increased rapidly. In 1991, there were 27 publicsector banks and 26 domestic private banks with 60,000 branches, 24 foreign banks with 140 branches, and 20 foreign banks with a representative office. Between January 1993 and March 1998, 24 new private banks (nine domestic and 15 foreign) entered the market; the total number of scheduled commercial banks, excluding specialized banks such as the Regional Rural Banks rose from 75 in 1991/92 to 99 in 1997/98. There are further reforms and regulations in the banking sector like rationalization of branches, linkage of branch licensing policy to performance, dismantling of Centralized Recruitment system (BSRB) for public sector banks and implementation of voluntary retirement scheme for PSBs under which about a lakh of employees have been retired with substantial terminal benefits following staff redundancy on account of large sale automation. To create a more conductive recovery climate and generally strengthen the repayment ethics among borrowers and profitability of banks through better recoveries, Government of India has created initially Debt Recovery Tribunals (DRTs) for fast track disposal of cases involving bank loans. Later securitization Act has been passed to enable the banks to take possession of assets of the defaulting firms without the intervention of courts, for eventual, disposal. This has tremendous deterrence value and resulted in speedy recovery of bad loans. RBI has taken up the issue of RTGS among banks to enable quick and seamless settlements in expensively. Cheque Truncation is yet another reform that is in experimental stage. If it is implemented eventually, it results in very speedy clearance of outstation cheques. Reforms in the monetary policy: Far reaching monetary reforms have been introduced like radical reduction in the levels of statutory pre-emption, empowering the Central Banks to decide on the caps for them, dismantling of administered interest rate structures, elimination of automatic monetization of the deficit etc. fine tuning liquidity management through what is called Liquid Adjustment Facility (LAF), is yet another monetary reform two years back. RBI Guidelines on Base Rate: Deficiencies in the existing system: The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could lend below BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. Purpose of Working Group: RBI constituted a Working Group on Benchmark Prime Lending Rate (Chairman: Shri Deepak Mohanty) to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. Transition to Base Rate: In the light of the comments/suggestions received, RBI has decided that banks switch over to the system of Base Rate for enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. Key Features of Base Rate: The Base Rate system replaced the BPLR system from July 1, 2010. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. Banks are free to use any other methodology, as considered appropriate, provided it is consistent and are made available for supervisory review/scrutiny, as and when required. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate. In order to give banks some time to stabilize the system of Base Rate calculation, banks are permitted to change the benchmark and methodology any time during the initial six month period i.e. end-December 2010. The actual lending rates charged may be transparent and consistent and be made available for supervisory review/scrutiny, as and when required Applicability of Base Rate all categories of loans should henceforth be priced only with reference to the Base Rate. However, the following categories of loans could be priced without reference to the Base Rate: (a) DRI advances (b) loans to banks’ own employees (c) loans to banks’ depositors against their own deposits. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal. Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate, in a transparent and non-discriminatory manner. Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate and direct bank finance will provide effective competition to other forms of high cost credit. Reserve Bank of India will separately announce the stipulation for export credit. Review of Base Rate: Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice. Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. Banks are required to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis, as hitherto. Transitional issues: The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switchover. 5. Regulatory aspects in Banking Sector REGULATORY ASPECTS IN BANKING SECTOR: Banking in India is mainly governed by the Banking Regulation Act,1949 and the Reserve Bank of India Act,1934. The Reserve of India and the Government of India exercise control over banks from the opening of banks to their winding up by virtue of the powers conferred under these statutes. License for Banking: In India, it is necessary to have a license from the Reserve bank under Section 22 of the Banking Regulation Act for commencing or carrying on the business of banking. Every banking company has to use the word “bank” as part its name (Section 7 of the Act) and no company other than a banking company can use the words ‘bank’. ‘banker’, ‘banking’ as part of its name. Reserve Bank of India Act, 1934: This act deals with constitution, powers and functions of the Reserve Bank. It does not deal with regulation of the banking system except for Section 42, which provides for cash reserves of scheduled banks to be kept with the Reserve Bank, with a view to regulating the credit system and ensuring monetary stability. The Act deals with ➢ Incorporation, capital, management and business of the bank ➢ The central banking functions like issue of bank notes, monetary control, acting as the banker to governments and banks, lender of the last resort; ➢ Collection and furnishing of credit information; ➢ General provisions regarding reserve fund, credit fund, publication of bank rate, audit and accounts; and ➢ Penalties for violation of the provisions of the act or the directions issued thereunder. Banking Regulation Act, 1949: This law was enacted to consolidated and amend the law relating to banking and to provide for a suitable framework for regulating the banking companies. The Act provides for control over the management of banking companies and also deals with the procedure for winding up the business of the banks and penalties for violation of its provisions. The Act deals with ➢ ➢ ➢ ➢ Regulation business of banking companies Control over the management of banking companies Suspension and winding up of banking business and Penalties for violation of the provisions of the Act The Banking Regulation empowers the Reserve Bank the issue directions to banking companies in public interest, in the interest of banking policy and in the interest of depositors. Section 21 provides for the issue of directions to regulate loans and advances by banking companies, this may be done by regulating the purposes of lending, margins in respect of secured loans, rate of interest and terms and conditions of lending. Laws of the Debts Recovery Tribunal The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. For this the Debts Recovery Tribunal (Procedure) Rules 1993 were also drafted. While initially the Debts Recovery Tribunals did perform well and helped the Banks and Financial Institutions recover substantially large parts of their non performing assets, or their bad debts as they are commonly known, but their progress was stunted when it came to large and powerful borrowers. These borrowers were able to stall the progress in the Debts Recovery Tribunals on various grounds, primarily on the ground that their claims against the lenders were pending in the civil courts, and if the Debts Recovery Tribunal were adjudicate the matter and auction off their properties irreparable damage would occur to them. While the amending notification of 2000 did bring in some amount rationalization in the jurisdiction of the Debts Recovery Tribunal, yet it was not sufficient to coax the big borrowers to acquiesce to the jurisdiction of the Debts Recovery Tribunal easily. The lenders continued to groan under the weight of the Non Performing Assets. This led to the enactment of one more drastic act titled as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, also called as SARFAESI Act. SARFAESI ACT: Incorporation & Registration of Special Purpose Companies: The Securitisation Act proposes to securitise and reconstruct the financial assets through two special purpose vehicles viz. 'Securitisation Company ('SCO')' and 'Reconstruction Company (RCO)'. SCO and RCO ought to be a company incorporated under the Companies Act, 1956 having securitisation and asset reconstruction respectively as main object. The Securitisation Act requires compulsory registration of SCO and RCO under the Securitisation Act before commencing its business. Further a minimum financial stability requirement is also provided by requiring SCO and RCO to possess owned fund of Rs.2 crore or up to 15% of the total financial assets acquired or to be acquired. The RBI has the power to specify the rate of owned fund from time to time. Different rates can be prescribed for different classes of SCO and RCO. Enforcement of security interest:Under the Act security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provision of this Act. (Notwithstanding anything contained in section 69 or section 69(A) of the Transfer of Property Act, 1882) Section 13(2) Where any borrower, who is under a liability to a secured creditor under a security under a security agreement, makes any default in repayment of secured debt or any installment thereof , and his account in respect of such debt is classified by the secured creditor as non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor with in sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4) In case the borrower fails to discharge his liability in full within the period specified in subsection(2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:(a) Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset. (b) Take over the management of the assets of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset. (c) Appoint any person to manager the secured assets the possession of which has been taken over by the secured creditor. (d) Require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money any money is due or may become due to the borrower, to pay the secured creditor o much of the money as is sufficient to pay the secured debt. Under section 69 of Transfer of Property Act, mortgagee can take possession of mortgaged property and sale the same without intervention of Court only in case of English mortgage. In addition mortgagee can take possession of mortgaged property where there is a specific provision in mortgage deed and the mortgaged property is situated in towns of Kolkata, Chennai or Mumbai. In other cases possession can be taken only with the intervention of court. Therefore till now Banks/Financial Institutions had to enforce their security through court. This was a very slow and time-consuming process. THE BANKING OMBUDSMAN SCHEME, 2006 The Scheme is introduced with the object of enabling resolution of complaints relating to certain services rendered by banks and to facilitate the satisfaction or settlement of such complaints. Also to resolve the disputes between a bank and its constituents as well as amongst banks, through the process of conciliation, meditation and arbitration. BASEL II ACCORD: It is the bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The International Capital Accord, as it is called, will be fully effective by January 2008 for banks active in international markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital levels for individual banks above the 8% minimum when necessary. The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. The Accord in operation Basel II uses a "three pillars" concept – (1) Minimum capital requirements (addressing risk), (2) Supervisory review and (3) Market discipline – to promote greater stability in the financial system. THE THREE PILLARS OF BASEL II The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all. The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA. For market risk the preferred approach is VaR (value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move from standardized requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using one of three approaches 1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement (the percentage of risk weighted assets to be held as capital) remains at 8%. For those Banks that decide to adopt the standardized ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result. The Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. The Third Pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks’ risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. This is aimed at improving the transparency in banks and improves reporting. RBI’s policy review: In its policy review released on January 29, the RBI hiked the cash reserve repo (CRR), the percentage of net time and demand liabilities (NDTL) that the commercial banks are required to park in cash with it, by 75 bps to 5.75%. It left the policy rates, the repo and reverse repo unchanged at 4.75% and 3.25% respectively. The CRR hike, to be implemented in two tranches by February 27, 2010, will absorb around 36,000 crore of liquidity from the system. However, the move is unexpected to immediately impact the banking industry. Liquidity in the system will remain affluent despite the CRR hike. Banks have been parking a total of around Rs 1 lakh crore in the reverse repo window regularly in the December quarter and the figure has remained around Rs 70,000 crore in January 2010. Hence, even after the hike in CRR, there will be a surplus liquidity of more than Rs 30,000 crore. India: Macro Economic Scenario and Current Scenario of Banking in India India: Macro Economic Scenario 1. GDP: Central Statistical Organization (CSO) released the revised estimates of GDP for the FY 2009-10. As per the revised estimates, GDP growth rate was recorded at 7.4% in FY 2009-10 as compared to advance estimate of 7.2%. Indian economy has made quick recovery from financial sector meltdown. As per the Ministry of Finance, GDP growth rate is expected to be around 8.5% in FY 2010-11 while RBI pegs it at 8.0% with upward bias. 2. India’s Foreign Trade: India’s exports were recorded at US $16.89 bn in April 2010, registering a y-o-y growth of 36.2%. Imports were recorded at US $ 37.31 bn in April 2010, registering a y-o-y growth of 43.3%. Oil imports were valued at US $ 8.08 bn, registering a y-oy growth of 70.5%. Trade deficit was recorded at US $ 10.42 bn in April 2010 compared to US $ 6.65 bn in the corresponding period of previous year. 3. External Commercial Borrowings (ECB): ECB for the month of April 2010 was recorded at US $ 2.82 bn, of which US $ 2.12 bn is through approval route and US $ 0.70 bn through automatic route. 4. Foreign Direct Investment (FDI): FDI equity inflows into India were recorded at US $ 25.9 bn in FY 2009-10 as compared to US $ 27.3 bn in the previous year, registering a y-o-y growth of (-) 5.3%. 5. Inflation: WPI based headline inflation stood at 9.59% for the month of April 2010 compared to 9.90% in March 2010. Inflation for primary articles, fuel items and manufactured products were recorded at 13.88%, 12.55% and 6.70% respectively in April 2010. As per the latest weekly trends, it is observed that WPI inflation for primary articles & food articles have peaked and started moderating though at a slower pace. However, non-food manufacturing inflation has been on the uptrend due to transmission of food inflation into generalized inflation, particularly after from January 2010 onwards. Non-food manufacturing inflation has increased from 3.3% as of January 2010 to 6.1% as of April 2010. Though the headline inflation has attained its peak in the last 3 months period, there is no likelihood of inflationary pressure coming down immediately. WPI inflation still lies at an elevated level and much above RBI’s comfort level. The headline inflation is expected to moderate only after June 2010 and RBI’s projection for headline inflation at 5.0-5.5% is achievable by March 2011, if monsoon is normal and world commodity & oil prices do not become too volatile. Considering risk of inflation also emerging from demand side as economy gains momentum, we may expect RBI’s gradual monetary tightening to continue during the year. 6. Business Confidence: India’s manufacturing Purchasing Managers’ Index increased to 59.0 (27-month high), showing sharp rise in manufacturing output during the month. The seasonally adjusted HSBC manufacturing PMI was 57.2 in April 2010. India’s manufacturing PMI has been above 55.0 since January 2010 and above 50.0 since April 2009. PMI Index of 50.0 & above indicates expansion in activity. CURRENT SCENERIO OF BANKING IN INDIA: The global banking sector influenced by the global financial turmoil and repercussion of the subprime crisis, has been witness to some of the largest and best known names succumb to multi-billion dollar write-offs and face near bankruptcy. However, the Indian banking sector has been well shielded by the central bank and has managed to sail through most of the crisis with relative ease. Further with the economic buoyancy the world over showing signs of cooling off, the investment cycle has also been wavering. Having said that, the latent demand for credit (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel II accord, the sector is also looking forward to consolidation and investments on the FDI front. The banking sector, which had performed well even in the downturn, stuck out as sore thumb in March 2010 quarter. It was a surprise because the credit growth had improved to 17% at the end of the quarter after slipping to 11% somewhere in the previous quarter. However, this growth is yet to reflect in the numbers. It was a sharp fall in other income, which led to a fall in net profit even though net interest income (NII) grew by 36%. Signs of NIM expansion were visible q-o-q due to bulk deposit repricing and higher CASA. Core operating profits improved across banks due to increase in net interest income while treasury gains declined q-o-q and y-o-y (rise in GSec yields). CASA ratio inched up q-o-q for almost all banks. However, overall, PAT growth (yo-y) for the sector was one of the lowest in the recent past due to modest growth in core earnings and lower treasury gains. Further, asset quality deteriorated as more than 30% of the gross slippages for FY10 came in Q4FY10. 1. Money Supply: As on May 7, 2010 money supply (M3) recorded Y-o-Y increase of 14.7% (PY: 21.3%). RBI’s indicative projection for money supply is pegged at 17.0% for March 2011 as announced in annual monetary policy. 2. Deposits: Aggregate deposits of Scheduled Commercial Banks (SCBs), as of May 21, 2010 recorded Y-o-Y increase of 14.2% compared to 22.5% during the previous year. RBI’s indicative projection for aggregate deposits for March 2011 is pegged at 18.0%. 3. Bank Credit: As on May 21, 2010 SCBs’ bank credit increased (y-o-y) by 18.0% compared to 15.9% during the previous year. RBI’s indicative projection for growth in credit for March 2011 is pegged at 20.0%. 4. Investments: SCBs’ investment in SLR securities increased (y-o-y) by 14.9% as of May 21, 2010. The effective SLR percentage maintained (our calculation) is around 29.3% of NDTL, well above the statutory requirement of 25%. 5. The growth in deposits and advances of the SCBs during the current fiscal so far has is as under: Growth Rate in Deposits & Credit (%) Aggregate Deposits 2009-10 (Full Year) SCBs 17.0% 2010-11 (Fiscal so far)r) 0.88% 2009-10 (Full Year) 16.7% Bank Credit 2010-11 (Fiscal so far) -0.32% 7. Future landscape of Indian Banking FUTURE LANDSCAPE OF INDIAN BANKING: Liberalization and de-regulation process started in 1991-92 has made a sea change in the banking system. From a totally regulated environment, we have gradually moved into a market driven competitive system. Our move towards global benchmarks has been, by and large, calibrated and regulator driven. The pace of changes gained momentum in the last few years. Globalization would gain greater speed in the coming years particularly on account of expected opening up of financial services under WTO. Four trends change the banking industry world over, viz. ➢ Consolidation of players through mergers and acquisitions, ➢ Globalization of operations, ➢ Development of new technology and ➢ Universalisation of banking. With technology acting as a catalyst, we expect to see great changes in the banking scene in the coming years. The competitive environment in the banking sector is likely to result in individual players working out differentiated strategies based on their strengths and market niches. For example, some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor. International trade International trade is an area where India’s presence is expected to show appreciable increase. Presently, Indian share in the global trade is just about 0.8%. The long term projections for growth in international trade are placed at an average of 6% per annum. With the growth in IT sector and other IT Enabled Services, there is tremendous potential for business opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period ending with 2010. This again will offer enormous scope to Banks in India to increase their forex business and international presence. Retail lending Retail lending will receive greater focus. Banks would compete with one another to provide full range of financial services to this segment. Banks would use multiple delivery channels to suit the requirements and tastes of customers. While some customers might value relationship banking (conventional branch banking), others might prefer convenience banking (e-banking). Ownership pattern Structure and ownership pattern would undergo changes. There would be greater presence of international players in the Indian financial system. Similarly, some of the Indian banks would become global players. Government is taking steps to reduce its holdings in Public sector banks to 33%. However the indications are that their PSB character may still be retained. Mergers and Acquisitions: Mergers and acquisitions would gather momentum as managements will strive to meet the expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks. As Banks seek niche areas, we could see emergence of some national banks of global scale and a number of regional players. 8. CANSLIM Analysis of Indian Banking Stocks What is the CAN SLIM system? CANSLIM is a philosophy of screening, purchasing and selling common stock. Developed by William O'Neil, the co-founder of Investor's Business Daily, it is described in his highly recommended book "How to Make Money in Stocks". The name may suggest some boring government agency, but this acronym actually stands for a very successful investment strategy. What makes CANSLIM different is its attention to tangibles such as earnings, as well as intangibles like a company's overall strength and ideas. The best thing about this strategy is that there's evidence that it works: there are countless examples of companies that, over the last half of the 20th century, met CANSLIM criteria before increasing enormously in price. In this section we explore each of the seven components of the CANSLIM system. The CAN SLIM system is based on a simple concept: To find tomorrow’s winning companies, it helps to know what all past exceptional winners looked like before they surged. Investor’s Business Daily (IBD) has analyzed, in great detail, every market cycle and topperforming stock going back more than 120 years. It found year after year, decade after decade, top-performing stocks display 7 common traits just before they make their biggest price gains. Each letter of “CAN SLIM” stands for one of those traits, providing a checklist that helps investors identify which stocks today are displaying those same characteristics. IBD has also studied what happens to leading stocks after they’ve had a big run, and how the overall market direction affects individual stocks. Just as stock market leaders share certain traits before they surge, they also flash similar warning signs when they finally top and decline substantially. The CAN SLIM system shows you how to spot those facts – as well as major changes in general market trends. IBD founder and chairman, William J. O’Neil conducted the original studies and his landmark research has helped generate better performance for both individual and professional investors. “We’re on a mission to help more people learn to better protect and build their investments. No matter what anyone tells you, it is possible to invest successfully if you are willing to study hard and learn from history.” Below are the seven basic facets to the trading methodology. ➢ C = Current quarterly earnings ➢ A = Annual earnings ➢ N = New products, management, or conditions ➢ S = Supply and demand ➢ L = Leaders over laggards ➢ I = Institutional Sponsorship ➢ M = Market Direction C = CURRENT QUARTERLY EARNINGS The CAN SLIM approach focuses on companies with proven records of earnings growth that are still in a stage of earnings acceleration. O’Neil’s study of winning stocks revealed that these securities generally had strong quarterly earnings per share performance prior to their significant price run ups. O’Neil recommends looking for stocks with a minimum increase in quarterly earnings of 18% to 20% over the same quarterly period one year ago. When screening for quarterly earnings increases, it is important to compare a quarter to the equivalent quarter last year. Many firms have seasonal patterns to their earnings, and comparing similar quarters helps to take this into account. Whenever we are working with earnings, the issue of how to handle extraordinary earnings comes into play. One-time events can distort the actual trend in earnings and make the company performance look better or worse than a comparison against a firm without special charges. O’Neil recommends excluding these non-recurring items from the analysis. The first two screens require quarterly earnings growth greater than or equal to 20% and positive earnings per share from continuing operations for the current quarter. O’Neil used Stock Investor Pro, with data as of March 14, 2003, for the screen. Only 2,343 stocks out of an initial universe of 8,428 met these two criteria. Beyond looking for strong quarterly growth, O’Neil likes to see an increasing rate of growth. An increasing rate of growth in quarterly earnings per share is so important in the CAN SLIM system that O’Neil warns shareholders to consider selling holdings of companies that show a slowing rate of growth for two quarters in row. The next screen specified that the earnings growth rate from the quarter one year ago compared to the latest quarter be higher than a similar quarter one year earlier. This reduced the number of passing companies to 1,556. As a confirmation of the quarterly earnings screen, O’Neil likes to see same-quarter growth in sales greater than 25% or at least accelerating over the last three quarters. This new screening requirement was added to the third edition of O’Neil’s book and seeks to help confirm the quality of a firm’s earnings. Independently, 3,647 stocks have a current quarterly sales growth greater than or equal to 25%, but combined with the other filters the number of passing companies was reduced to 393. We can precisely tell the factors as following, C= Current Quarterly Earnings Per Share- The Higher, The Better Should show a major percentage increase (18% or 20%) in the current quarter EPS when compared to prior year's same quarter. Omit a company's one time extraordinary gains Look for accelerating quarterly earnings growth Look for quarterly sales growth of 25% or atleast an acceleration in rate of sales percentage improvements over the last 3 quarters. Primary factors Secondary factors The public and private banks which are listed in the share market are taken for the CANSLIM analysis. The first step is to check its current quarterly EPS percentage change. Here I have taken March’10 quarter results for the analysis. The banking stock which passes these criteria enters the next stages. A = ANNUAL EARNINGS INCREASE Winning stocks in O’Neil’s study had a steady and significant record of annual earnings in addition to a strong record of current earnings. O’Neil’s primary screen for annual earning increases requires that earnings per share show an increase in each of the last three years. In applying this screen in Stock Investor Pro, O’Neil specified that earnings per share from continuing operations be higher for each year when compared against the previous year. To help guard against any recent reversal in trend, a criterion was included requiring that earnings over the last 12 months be greater than or equal to earnings from the latest fiscal year. When screened by itself, 795 companies passed this filter compared to the 469 companies that passed the second edition’s tighter filter. Adding the filter requiring a year-by-year earnings increase for each of the last three years to the current growth filters reduced the passing number of companies to just 60 stocks. This is not surprising given the economic environment over the last few years. O’Neil also recommends screening for companies showing a strong annual growth rate of 25% over the last three years. This filter only cut an additional six stocks, which is to be expected given the strict consistent year-by-year growth requirement. Optimally, the consensus earnings estimate for the next year should be higher than the latest reported year. Adding this filter reduced the number of passing companies to 39. When working with consensus earnings estimates it is important to remember that only the larger and more active firms will have analysts tracking them and providing estimates. About half of the stocks in Stock Investor Pro have consensus earnings estimates, so this filter will also tend to screen out micro-cap stocks. Another potential addition to the CAN SLIM screen is a requirement for high return on equity (ROE: net income divided by shareholder’s equity). O’Neil’s studies showed that the greatest winning stocks had ROEs of at least 17%. O’Neil uses this measure to separate well-managed companies from poorly managed ones. Adding this filter would have reduced the number of passing companies to 19 from 39. This testing over the last five years revealed that this requirement often led to a very small number of passing stocks and hurt performance since 2001. A= Annual Earnings increases : Look for significant growth Primary factors The annual compounded growth rate for EPS should be at least 25% Significant growth in EPS for each of the last three years Return on Equity of 17% or more Secondary factors Look for annual cash flow per share greater than actual EPS by at least 20% List of banks taken for CANSLIM analysis QoQ Allahabad bank -14.98% 2007 6.19% 2008 29.95% 2009 21.12 % 2010 56.94% Andhra bank Axis bank B.O.rajasthan Bank of India BOB Canara bank Central bank india Corporation B Dena B Dhanalakshmi Federal bank HDFC BANK LTD ICICI IDBI Indian bank Indusind Ing vysya IOB J & K bank K.Mahindra K.Vysya Karnataka Bank Lakshmi vilas OBOC 19.28% 16.54% 100.00 % -47.17% 20.40% -30.00% 172.90 % 19.88% 23.20% -74.93% 2.25% 23.26% 35.03% 1.39% 4.03% 68.31% 18.16% -60.47% 52.56% 95.96% 16.92% -19.15% -82.40% 61.76% 10.79% 34.41% 56.44% 60.12% 24.14% 5.77% 570.74 % 20.62% 176.77 % 69.36% 29.99% 28.51% 21.12% 12.26% 160.77 % 67.72% 878.00 % 28.72% 55.22% 13.35% 57.05% 0.48% 295.19 % - 7.03% 27.95% 623.94 % 66.05% 39.85% 10.16% 11.39% 37.08% 78.38% 76.54% 37.08% 25.55% 8.07% 15.63% 32.75% 10.33% 36.30% 19.23% 31.14% 97.00% 19.46% 36.53% 68.00% 2.93% 13.40 % 68.90 % 16.63 % 49.65 % 55.16 % 32.43 % 3.82% 21.47 % 17.54 % 0.90% 35.97 % 17.63 % -9.66% 17.79 % 23.48 % 77.87 % 38.03 % 10.29 % 13.85 % -6.33% 13.18 % 10.14 % 40.76 % 1.73% 60.18% 22.72% -14.82% -42.09% 37.32% 45.78% 85.28% 31.09% 20.90% -59.49% -7.18% 22.05% 6.93% 20.08% 24.84% 104.07 % 9.73% -46.67% 25.02% 101.75 % 41.20% -43.16% 99.03% 7.66% of 18.86% PNB SBI South Indian Bank Syndicate Bank UBI UCO Union india VIJAYA Yes bank of 65.91% 27.97% 52.59% 31.15% -31.93% -23.15% -18.69% 27.58% 269.52 % 6.99% 3.06% 104.56 % 33.46% 25.21% 60.57% 23.56% 160.75 % 64.39% 33.05% 23.49% 15.16% 18.44% 64.04% 30.63% 16.34% 9.03% 100.59 % 50.86 % 34.83 % 0.94% 7.63% 24.47 % 96.71 % 50.00 % 27.37 % 51.33 % 26.35% 0.49% 20.02% -10.92% 20.19% 81.48% 879.81 % 93.39% 37.44% Among the 34 banks listed above, only 8 banks passed the criteria of Current quarterly earnings growth of 18% and Annual earnings growth of 20%. List of banks passed through C&A of CANSLIM QoQ Axis bank BOB Corporation B HDFC BANK LTD PNB UBI UCO Bank Yes Bank 16.54% 20.40% 19.88% 23.26% 31.15% 27.58% 269.52 % 52.59% 2007 34.41 % 24.14 % 20.62 % 28.51 % 6.99 % 25.21 % 60.57 % 64.39 % 2008 27.95 % 39.85 % 37.08 % 25.55 % 33.05 % 64.04 % 30.63 % 100.59 % 2009 68.90 % 55.16 % 21.47 % 17.63 % 50.86 % 24.47 % 96.71 % 51.33 % 2010 22.72 % 37.32 % 31.09 % 22.05 % 26.35 % 20.19 % 81.48 % 37.44 % EPS Quality High-quality EPS means that the number is a relatively true representation of what the company actually earned (i.e. cash generated). The word is used is 'relatively' because while evaluating EPS cuts through a lot of the accounting gimmicks, it does not totally eliminate the risk that the financial statements are misrepresented. While it is becoming harder to manipulate the statement of cash flows, it can still be done. A low-quality EPS number does not accurately portray what the company earned. GAAP EPS (earnings reported according to generally accepted accounting principles) may meet the letter of the law but may not truly reflect the earnings of the company. Sometimes GAAP requirements may be to blame for this discrepancy; other times it is due to choices made by management. In either case, a reported number that does not portray the real earnings of the company can mislead investors into making bad investment decisions. The best way to evaluate quality is to compare operating cash flow per share to reported EPS. To determine earnings quality, we can rely on operating cash flow. The company can show a positive earnings on the income statement while also bearing a negative cash flow. This is not a good situation to be in for a long time, because it means that the company has to borrow money to keep operating. And at some point, the bank will stop lending and want to be repaid. A negative cash flow also indicates that there is a fundamental operating problem: either inventory is not selling or receivables are not getting collected. 'Cash is king' is one of the few real truisms and companies that don't generate cash are not around for long. If operating cash flow per share (operating cash flow divided by the number of shares used to calculate EPS) is greater than reported EPS, earnings are of a high quality because the company is generating more cash than is reported on the income statement. Reported (GAAP) earnings, therefore, understate the profitability of the company. If operating cash flow per share is less than reported EPS, it means that the company is generating less cash than is represented by reported EPS. In this case, EPS is of low quality because it does not reflect the negative operating results of the company. Bank name Corporation bank UCO bank Union Bank of India Yes bank PNB BoB Cash flow share (Rs) 289.05 45.52 110.85 -10.73 66.77 30.9 per EPS 62.24 10.15 34.18 10.23 98.03 60.93 Pass/ Fail Passed Passed Passed Failed Positive cash flow Positive cash flow HDFC Bank Axis bank 220.74 260.42 52.78 50.57 Passed Passed N = NEW PRODUCTS, NEW MANAGEMENT, NEW HIGHS O’Neil feels that a stock needs a catalyst to start a strong price advance. In his study of winning stocks, he found that 95% of the winning stocks had some sort of fundamental spark to push the company ahead of the pack. This catalyst can be a new product or service, a new management team employed after a period of lackluster performance, or even a structural change in a company’s industry—such as a new technology. These are very qualitative factors that do not lend themselves easily to screening. A second consideration that O’Neil emphasizes is that investors should pursue stocks showing strong upward price movement. O’Neil says that stocks that seem too high-priced and risky most often go even higher, while stocks that seem cheap often go even lower. Stocks that are making the new high list while accompanied by a big increase in volume might be prospects worth checking. A stock making a new high after undergoing a period of price correction and consolidation is especially interesting. O’Neil’s newspaper, Investor’s Business Daily, highlights stocks within 10% of their 52-week high and this was the criterion established for the screen. One would expect many companies to pass during a strong market expansion, while a smaller number of companies would pass during a declining market. Given the weak market during the first few months of 2003, it is not surprising that adding this filter reduced the number of passing companies from 39 to four. As of March 14, 2003, a total of 1,037 stocks out of a universe of 8,428 were trading within 10% of N= New product, New Management, New Highs- Buying at the right time Primary factors Secondary factor Look for the companies with major new product or service, new management or a positive change in the industry Strong volumes on price move up. their 52-week high. In banking sector, business growth takes place in two ways. The first way is to increase the business with the existing branches and another way is starting new branches as the mode of expansion. In this criterion, we can take number of new branches opened in the financial year. Bank name Bank of Baroda Uco bank New branches 2008 127 112 2009 75 108 73 247 164 651 Overall change from % of change previous year branches 2007/2008 2772/2899 1849/1961 901/981 2361/2558 561/671 684/761 2008/2009 2899/2974 1961/2069 981/1054 2558/2805 671/835 761/1412 2008 4.58 6.06 8.88 8.34 19.61 11.26 2009 2.59 5.51 7.44 9.66 24.44 85.55 in Corporation bank 80 Union Bank of India 197 Axis Bank HDFC Bank 110 77 Bank of Baroda is the least scorer among the bank expansion in terms of number of branches. Its expansion level is very low compared to all other banks; rather the number of branches opened is less than its previous year. HDFC bank has opened 651 branches with its existing 761 branches. There is huge change in the percentage in the private banks compared to public banks as they are aggressive in nature. New Stock Price Highs: O’Neil discusses how it is human nature to steer away from stocks with new price highs - people often fear that a company at new highs will have to trade down from this level. But O’Neil uses compelling historical data to show that stocks that have just reached new highs often continue on an upward trend to even higher levels. All the banking stocks reached new price highs in the financial year 2008-09. This is observed from bar chart drawn from the data collected on daily basis. S = SUPPLY AND DEMAND The analysis of supply and demand in the CANSLIM method maintains that, all other things being equal, it is easier for a smaller firm, with a smaller number of shares outstanding, to show outstanding gains. The reasoning behind this is that a large-cap company requires much more demand than a smaller cap company to demonstrate the same gains. O’Neil explores this further and explains how the lack of liquidity of large institutional investors restricts them to buying only large-cap, blue-chip companies, leaving these large investors at a serious disadvantage that small individual investors can capitalize on. Because of supply and demand, the large transactions that institutional investors make can inadvertently affect share price, especially if the stock's market capitalization is smaller. Because individual investors invest a relatively small amount, they can get in or out of a smaller company without pushing share price in an unfavorable direction. In his study, O’Neil found that 95% of the companies displaying the largest gains in share price had fewer than 25 million shares outstanding when the gains were realized. S= Supply and Demand: Shares outstanding plus big volume demand Any size stock can be purchased under CANSLIM system The market will shift its emphasis between small- and large-cap stocks overtime. When choosing between two stocks, the stocks with lower number of shares should perform better to the upside, but can come down just as fast. Stocks with large percentage of ownership by top management are generally good prospects. Look for companies with lower Debt/equity ratio and companies reducing their debt to equity ratios over the last few years. Primary factors Secondary factors From the table above, only corporation bank has lesser number of shares comparing to all other banks. The other banks have huge number of shares which makes them to react slowly than that of corporation bank. The institutional holding is important factor when we consider immediate price ups and downs in the market, because FIIs plays a crucial role in the share market by investing in huge amount. The traded volume out of the free float also decides up/down movement of the share price. When high volume of share trades, demand increases results in increase in share price. There should be strong volume trade to avoid a lack of liquidity as well as for the movement of the share price. From the table above, UCO bank and Axis bank have high volume trade compared to other banks. Even UCO bank is least in market capitalization, so it is easy for the share to move quickly to the new highs when demand increases. Debt/equity ratio Bank name UCO bank Union Bank of India PNB Corporation bank BoB Axis bank HDFC Bank 2009 36.11 19.31 15.96 15.11 14.99 11.49 9.75 2008 32.16 19.66 15.44 13.11 13.77 9.99 8.76 2007 29.33 18.47 13.79 11.25 14.44 17.28 10.62 2006 27.45 18 13.19 9.74 11.94 13.97 10.53 All the banks except HDFC and Axis bank are public banks, so their promoter holding is more than 50% which is the good sign. The banks usually have high Debt-equity ratio and this is least considered factor in this analysis because CAN SLIM model suggests to choose the company with less D/E ratio which is not applicable in banks. L = Leader or Laggard In this part of CANSLIM analysis, distinguishing between market leaders and market laggards is of key importance. In each industry, there are always those that lead, providing great gains to shareholders, and those that lag behind, providing returns that are mediocre at best. The idea is to separate the contenders from the pretenders. L= Leader or Laggard : which is your Stock? Buy among the top two or three stocks in a strong industry group. Primary factors Use Relative Price Strength to separate the leaders from the laggards- as stock with a relative strength rank below 70% is lagging and should be avoided. Look for the companies with a relative strength rank of 80% or higher that are in a chart base pattern. Don't buy stocks with weaker than average performance during a market correction. Secondary factors Relative Price Strength The relative price strength of a stock can range from 1 to 99, where a rank of 75 means the company, over a given period of time, has outperformed 75% of the stocks in its market group. CANSLIM requires a stock to have relative price strength of at least 70. However, O’Neil states that stocks with relative price strength in the 80–90 range are more likely to be the major gainers. All the selected banks outperformed the index performance. I = Institutional Sponsorship CANSLIM recognizes the importance of companies having some institutional sponsorship. Basically, this criterion is based on the idea that if a company has no institutional sponsorship, I = Institutional sponsors : Follow the leaders Look for the stocks to have several institutional owners. Primary factors Secondary factors Look for the stocks with an increasing, not decreasing, number of sponsors. Avoid stocks that are over-owned- excessive insitutional ownership all of the thousands of institutional money managers have passed over the company. CANSLIM suggests that a stock worth investing in has at least three to 10 institutional owners. However, be wary if a very large portion of the company’s stock is owned by institutions. CANSLIM acknowledges that a company can be institutionally over-owned and, when this happens, it is too late to buy into the company. If a stock has too much institutional ownership, any kind of bad news could spark a spiraling sell-off. O’Neil also explores all the factors that should be considered when determining whether a company’s institutional ownership is of high quality. Even though institutions are labeled "smart money", some are a lot smarter than others. Financia l Instituti ons /Banks Insuran ce Compan ies 15.32% 0.18% 0.11% 1.94% 0.25% 7.84% 27.54% 13.30% 9.58% Foreign Instituti onal Investor s 25.12% 25.70% 4.23% 19.10% 13.53% INSTITUTIO NAL HOLDING (TO.NO.OF SHARES) % OF INSTITUTIO NAL HOLDING Bank name Axis HDFC Corporati on bank PNB BoB Union Bank India MUTU AL FUNDS 11.26% 5.84% 6.07% 3.03% 12.29% of 8.76% 0.08% TO.NO.O F SHARES 209475019 .5 168281953 .5 54423007 117828544 .3 129861007 .3 4051741 19 4253841 09 1434400 00 3153025 00 3642665 00 5051179 00 5493600 00 51.70% 39.56% 37.94% 37.37% 35.65% 3.92% 0.07% 0 9.54% 17.42% 2.44% 152057868 66623693 30.10% 12.13% UCO bank All Public Banks have limited institutional holdings or in the moderate proportion. The private banks have high institutional holdings which is more risky for the investors. The reason being is they can withdraw the money at anytime from the holdings which will drastically bring down the share price. Both HDFC and Axis bank have around 25% of FII’s holdings which may cause more volatility in worse market conditions. The corporation bank and UCO bank have very less FII holding which is good sign for less volatility. As overall, UCO bank has very less institutional holding but the promoter’s holding is 63.59%. M = MARKET DECISION The last and crucial factor of the CAN SLIM model looks at the overall market direction. While it does not impact the selection of specific stocks, the trend of the overall market will have a tremendous impact on the performance of our portfolio. O’Neil tends to focus on technical measures when determining the overall direction of the marketplace. M= Market direction It is difficult to fight the trend, so it is important to determine if we are in a bull or bear market Apart from CANSLIM analysis, certain other factors which has to be taken into account for analysis of banking stocks. Primary factor The performance metric that examines how successful a firm’s investment decisions compared to its debt situation. A negative value denotes that the firm didn’t make an optimal decision, because interest rate expenses were greater than the amount of returns generated by investments. NIM = (Investment returns- Interest expenses) Average earning assets. Non-performing assets are bad loans. Any asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. As per the guidelines issued by the Reserve Bank of India (RBI), banks classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. CR AR is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Capital Adequacy Ratio= (Tier I capital + Tier II capital) Risk weighted assets The proportion of loan-assets created by banks from the deposits received is called Credit-Deposit ratio. Findings and suggestions of the study In this study, I have identified high growth stocks of Indian Banking sector by using CANSLIM method for investing in long term. This method also insists to invest in the right time by looking at the trend of the overall market as it might have greater impact on the performance of the stocks. I found all the criterion of the method cannot be adopted in banking stocks, so I have taken other necessary factors which we want to look for banks. The CAN SLIM Stocks found in Indian banking sector are        Corporation bank Union Bank of India HDFC bank PNB Axis bank UCO bank Bank of Baroda. Conclusion: Since the financial reforms of 1991, there have been significant favourable changes in India’s highly regulated banking sector, which improved the bank’s performance and profitability. The banking scenario has changed drastically. The changes which have taken place in the last ten years are more than the changes took place in last fifty years because of the institutionalization, liberalization, globalization and automation in the banking industry. Today banking sector is marked by high customer expectations and technological innovations. Technology is playing a crucial role in the day to day functioning of the banks. In the annual international ranking conducted by UK-based Brand Finance Plc, 20 Indian banks have been included in the Brand Finance® Global Banking 500. In fact, the State Bank of India (SBI) has become the first Indian bank to be ranked among the Top 50 banks in the world, capturing the 36th rank, as per the Brand Finance study. There are areas yet to be improved in our banking system as we discussed in future landscape of Indian Banking. As far as analysis of banking stocks concerned, performance of the banks will be reflected in the stock prices and it will give promise returns in the future compared to other sectors in the share market. Bibliography ➢ Websites of selected banks ➢ Financial statements of selected banks. ➢ www.indiaearnings.com ➢ www.rbi.org.in ➢ ‘Indian banking: recent reforms and regulations’- edited by Katuri Nageshwara Rao ➢ Legal aspects of banking operations- Indian institute of banking and finance ➢ Management of banking and financial services – Justin Paul and Padmalatha Suresh ➢ “The Indian Banking System – Challenges Ahead” – speech by Dr. C. Rangarajan Chairman, Economic Advisory Council to the Prime Minister & Former Governor, Reserve Bank of India. ➢ Assessment of India’s banking sector reforms from the perspective of the Governance of the banking system - Sayuri Shirai, Associate Professor of Keio University and Visiting Scholar to the ADB Institute