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International Journal of Contemporary Business Studies Vol: 3, No: 1. January, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com A study of Indian Private Sector banks Prof. Ritesh Patel Assistant Professor, Department of Management, S.V.Institute of Management, Kadi, Gujarat Technological University, Gujarat, India. Prof. Mitesh Patel Assistant Professor, Department of Management, S.V.Institute of Management, Kadi,Gujarat Technological University, Gujarat, India. ABSTRACT Many Indian banks are discovering the key to their long-term growth does not lie in products and services alone but in assets that can never be replicated, that is, their unique relationship with customers, employees, suppliers and distributors, investors and the communities they serve. The objective of this study was to determine shareholders value (in terms of economic value added) of selected private sector banks during the last five years. I.e. since 2004-05 to 2009-2010. From study it was found that in year 2010, ICICI Bank has maximum NOPAT. The value of EVA was ranging from 14.48% to 91.14% during 2010. A coefficient of determination of 17.37% was highest in Induslnd bank, which indicates that about 17.37% of the variation in stock price of Indulsand (the independent variable) can be explained by the relationship to EVA of Induslnd bank (the dependent variable). Only Kotak Mahindra bank has positive correlation between Kotak Mahindra Bank EVA & Kotak Mahindra Bank share prices. Rest of banks, has negative relation between their respective EVA & share price. Hypotheses were developed to test significant impact of EVA on stock price of bank & that hypothesis was tested by using ANOVAs. For none of the bank EVA has Impact on share price, except EVA by Kotak Mahindra bank did have significant impact on stock price of Kotak Mahindra bank. Key Words: Economic value added, Share Price, Net operating profit after tax, Return on invested capital, weighted average cost of capital 1. INTRODUCTION 1 Indian banking has seen many changes in the last decade like imposition of prudential standards, greater competition among banks, etc. This paradigm shift in the Indian banking sector can be seen in terms of two dimensions: One relates to operational aspect especially performance and risk-management system and the second dimension relate to structural and external environment. Is evaluating Indian bank’s performance a rather straight forward issue The answer is no. One might say that like a corporate, even banks can be judged from the behavior of their stock prices. However, as bank stocks have not been very active on exchanges, barring few on few occasions, we should conclude that Indian banks have by and large failed to add values to their shareholders’ wealth. 1 The IUP Journal of Accounting Research and Audit Practices, 2009, vol. VIII, issue 3-4, pages 52-60 http://www.rbi.org.in “An study on EVA by pubic and privet bank” research done by uday and jay (2009) 24 Copyright © 2012. Academy of Knowledge Process
International Journal of Contemporary Business Studies Vol: 3, No: 1. January, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com 2. LITERATURE REVIEW 2 Lenn, K., Makhiija, A.K. (1996), has done a study on title “EVA and MVA as performance measures and signals for strategic change”. The study used data from 241 firms for time slap of 1987-96, showed that EVA and MVA effectively measured the quality of strategic decisions and served as signals of strategic change. They were found to be significantly correlated with stock price performance and inversely related to turnover. Firms having greater focus in their business activities had higher MVA than less focused counterparts. 3 Kramer, K. Jonathan and Pushner, George (1997), has done a study on title “An Empirical Analysis of Economic Value Added as a Proxy for Market Value Added”. They had tested the hypothesis that EVA is highly correlated with MVA. The study concluded that no clear evidence to support the contention that EVA is the best internal measure of corporate success in adding value to shareholder investments. 4 Banerjee, Ashok (1997) has done a study on title, “Economic Value Added (EVA): a better performance measure”. Ten industries have been chosen and each industry is represented by four/five companies. They have conducted an empirical research to find the superiority of EVA over other traditional financial performance measures. ROI and EVA have been calculated for sample companies and a 92 comparison of both has been undertaken, showing the superiority of EVA over ROI. Indian companies are gradually recognizing the importance of EVA. Some of such companies are Ranbaxy Laboratories, Samtel India Ltd and Infosys Technologies Ltd. 5 Pattanayak, J.K., Mukherjee, K. (1998), under took a study on title “Adding Value to Money”. They has Discussed that there are traditional methods to measure corporate income or known as accounting concept and there is also a modern method to measure corporate income or known as economic concept. EVA, which is based on economic concept, is professed to be a superior technique to identify whether the organization’s NOPAT (Net Operating Profit after Tax) during a period is covering its WACC (Weighted Average Cost of Capital) & generating value for its owners. But it is very tricky to calculate EVA. 6 Banerjee, Ashok and Jain (1999), under gone through a study on title “Economic Value Added and Shareholder Wealth: An Empirical Study of Relationship”. They have carried out a research based on empirical data. Among the selected independent variables (EPS, EVA, Kp, Lp and ARONW), EVA has proved to be the most explanatory variable, when MVA was taken as the dependent variable and Backward Elimination method was applied to find the most explanatory independent variable. For this purpose, the time frame was of eight years and all the variables were calculated over this period for the sample companies. 7 Anand, Manoj, Garg, Ajay, Arora and Asha (1999), has done a study on title “Economic Value Added: Business performance measure of shareholders’ value”. They found that EVA, REVA (Refined Economic Value Added) and MVA are better measures of business performance than NOPAT and EPS in terms of shareholders’ value creation and competitive advantage of a firm. 2 Lenn, K., Makhiija, A.K. (1996), “EVA and MVA as performance measures and signals for strategic change”, Strategy and Leadership, Vol.24, May/June, 1996, pp. 34 - 38. 3 Kramer, K. Jonathan and Pushner, George (1997), “An Empirical Analysis of Economic Value Added as a Proxy for Market Value Added”, Financial Practice and Education, Spring / Summer 1997, pp. 41-49 4 Banerjee, Ashok (1997), “Economic Value Added (EVA): a better performance measure”, The Management Accountant, December 1997, pp. 886 – 888. 5 Pattanayak, J.K., Mukherjee, K. (1998), “Adding Value to Money”, The Chartered Accountant, February 1998, pp. 8-12. 6 Banerjee, Ashok and Jain (1999), “Economic Value Added and Shareholder Wealth: An Empirical Study of Relationship”, Paradigm, Vol. 3, No. 1, January-June, 1999, pp. 99-133 7 Anand, Manoj, Garg, Ajay, and Arora, Asha (1999), “Economic Value Added: Business performance measure of shareholders’ value”, The Management Accountant, May 1999, pp. 351-356. 25 Copyright © 2012. Academy of Knowledge Process
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