TOPIC-SECTORAL ANALYSIS-ON BANKING SECTOR & FMCG SECTOR List of sectors in india stock market?

1)Metals 2) Auto 3) Banking 4)Breweries and distilleries 5)Power 6)Telecom 7)Cement 8)Chemicals 9)Computers 10) IT 11)Construction 12) FMCG 13) Electronics 14)Engineering 15) Entertainment/Media 16)Finance and Investments 17) Hotel 18) Food processing 19) Healtcare 20) Pharma 21) Paint 22) paper 23) Petrochemicals 24) Plastic 25) Refineries 26) Sugar 27) Tea 28) Airlines

Definition of 'Sector Analysis'

A review and assessment of the current condition and future prospects of a given sector of the economy. Sector analysis serves to provide an investor with an idea of how well a given group of companies are expected to perform as a whole.

Definition of Sector Analysis Research

Sector Analysis Research relates the performance of common stocks and industry groups to the economy. The primary technique employed is a well-documented class of factor analytic methods known as Principal Components Analysis (PCA). Through PCA a set of domestic and international economic time series has been clustered into a set of 20 Factors. Each factor measures an important aspect of the economy such as long term interest rates or cost-of-energy. Each factor was first analyzed to determine its "normal" range under a variety of macro-economic conditions spanning a decade. A factor does not enter the analysis, e.g., does not influence the results, until it moves outside its own "normal" range. The effect of this is to remove economic "noise" and increase the stability of Sector Analysis techniques. The likelihood of detecting true signals is greatly increased. The result is a set of factors which truly influences the behavior of common stocks. Equations based on empirical relationships for each individual stock are created. By noting those factors outside their "normal" range that have a leading relationship with specific stocks a measure of the stock's attractiveness is developed. This measure is called Economic Preference. Preference ranks equities based on their relative attractiveness in the current economic environment.

A comparison of these rankings with other information developed by the money manager provides a powerful tool in selection of specific equities for inclusion in the portfolio or the elimination of existing holdings.

sector
Definition
A distinct subset of a market, society, industry, or economy, whose components share similar characteristics. Stocks are often grouped into different sectors depending upon the company's business. Standard & Poor's breaks the market into 11 sectors. Two of these sectors, utilities and consumer staples, are said to be defensive sectors, while the rest tend to be more cyclical in nature. The other nine sectors are: transportation, technology, health care, financial, energy, consumer cyclicals, basic materials, capital goods, and communications services. Other groups break up the market into different sector categorizations, and sometimes break them down further into subsectors.

ABSTRACT

Banking Sector in India is one of the growing sectors with great dynamics. There are various factors which affect the share prices of Banking Companies. This report is all about how various factors (Internal and External) affect the Banking Sector Share Prices. In this report a detailed analysis of the factors affecting the share prices is carried on and a model is developed to study the effect of various factors on the share prices. Here, various internal factors (Bank s Profitability, Income, Expenses, and News about the Bank.) and external factors (Government policies, CRR, Repo Rate, Reverse Repo Rate, Rules and Regulations.) are considered which affect the prices of the shares of Bank. Data s are collected for all the quantifiable factors and for the rest factors a theoretical explanation is given in detail. Using SPSS a model is developed which shows the regression and correlation co-efficient between the share prices and various factors affecting the same.

INTRODUCTION
MARKETS DEFINED
STOCK MARKET IN INDIA The Indian security market has become one
of the most dynamic and efficient security markets in Asia today. The Indian market now conforms to International Standards in terms of operating efficiency. During the latter half of 19th century, shares of companies used to be floated in India occasionally. There were share brokers in Bombay who assisted in the floatation of shares of companies. A small group of stock brokers in Bombay joined together in 1875 to form an association called Native Share & Stockbrokers Association. The association drew up codes of conduct for brokerage business and mobilizes private funds for investment in the corporate sector. It was this association which later became the Bombay Stock Exchange, Mumbai or BSE Later on in 1894 the brokers of Ahmedabad formed the Ahmedabad Stock Exchange, the second stock exchange of the country. During the 1900s Kolkata became another major center of share trading and as a result Kolkata Stock Exchange was formed in 1908. Later on Chennai Stock Exchange was started in 1920. However, by 1923, it ceased to exist. Then the Madras Stock Exchange was started in 1937. Three more stock exchanges were established before independence, at Indore in 1930, at Hyderabad in 1943 and at Delhi in 1947. Thus along with the increase in number of stock exchanges, the number of listed companies and the capital of listed companies grown tremendously after 1985 which results into growth and development of stock market in India.

ABOUT BSE SENSEX

BSE SENSEX or Bombay Stock Exchange Sensitive Index is a valueweighted index composed of 30 stocks started in 01 of January, 1986. It consists of the 30 largest and most actively traded stocks, representative of

various sectors, on the Bombay Stock Exchange. These companies account for around one-fifth of the market capitalization of the BSE. The base value of the SENSEX is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79. At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions. The index is calculated based on a free-float capitalization method; a variation of the market cap method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders. The index has increased by over ten times from June 1990 to the present. Using information from April 1979 onwards, the long-run rate of return on the BSE SENSEX works out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for inflation. There are five major indices in BSE, thirteen sector specific indices and a BSE Dollex Index for dollar prices and movements.

ABOUT NSE AND NIFTY 50

The National Stock Exchange of India Limited (NSE) is a Mumbai-based stock exchange. It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalization. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. In October 2007, the equity market capitalization of the companies listed on the NSE was US$ 1.46 trillion, making it the second largest stock exchange in South Asia. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%

The Standard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty nicknamed Nifty 50 or simply Nifty, is the leading index for large companies on the National Stock Exchange of India. The Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. There are seven major Indices in NSE and fifteen sector specific Indices. CNX BANK INDEX or BANK NIFTY is the index which has 17 banks listed on it and is a separate index to look upon price movements of bank s share prices. A brief account of the same is given below.

CNX Bank Index The Indian banking Industry has been undergoing
major changes, reflecting a number of underlying developments. Advancement in communication and information technology has facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick dissemination of information. Structural reforms in the banking sector have improved the health of the banking sector. The reforms recently introduced include the enactment of the Securitization Act to step up loan recoveries, establishment of asset reconstruction companies, initiatives on improving recoveries from Non-performing Assets (NPAs) and change in the basis of income recognition has raised transparency and efficiency in the banking system. Spurt in treasury income and improvement in loan recoveries has helped Indian Banks to record better profitability. In order to have a good benchmark of the Indian banking sector, India Index Service and Product Limited (IISL) has developed the CNX Bank Index. CNX Bank Index is an index comprised of the most liquid and large capitalized Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. The index will have 12 stocks from the banking sector which trade on the National Stock Exchange. The average total traded value for the last six months of CNX Bank Index stocks is approximately 95.85% of the traded value of the banking sector. CNX Bank Index stocks represent about 86.06% of the total market capitalization of the banking sector as on

January 30, 2009. The average total traded value for the last six months of all the CNX Bank Index constituents is approximately 14.86% of the traded value of all stocks on the NSE. CNX Bank Index constituents represent about 8.63% of the total market capitalization on January 30, 2009.

OBJECTIVE OF THE STUDY

The objective of the project is to identify, understand and analyze the impact of various factors that affect the Indian Equity Market (BANKING SECTOR). The main focus will be on understanding, analyzing and providing a valid explanation both theoretically and technically, that how various factors affect the share prices of BNAKING SECTOR. By undertaking this study I would like to keep my first step in the field of research. This project will help me in enhancing my analytical skills and will give me a better understanding of how things move on and are to be studied. At the same time with this study I will be providing the organization a list of factors that affect the market, so that they can keep a watch on the same and use the same for the benefit of clients and company and also increase their accuracy and profits. This will be my contribution to this huge company

PURPOSE, SCOPE AND LIMITATIONS

The PURPOSE of the report is to analyze how various factors affect the prices of a bank s share. The share prices are highly affected by various internal and external factors. It is of great importance to understand, learn and analyze the same. Thus, this report is a move in path of understanding those factors and analyzing the impact of the same. Banks are a major part of any economic system. They provide a strong base to Indian economy too. Even in share markets, the performance of bank shares is of great importance. This is justified by the proof that in both BSE and NSE we haveseparate index for Banking Sector Shares. But for our study we have taken only Bank Nifty which is a part of NSE. Thus, the performance of share market, the rise Page | and the fall of market is greatly affected by the performance of Banking Sector Shares and this report revolves around all those factors, their understanding and a theoretical and technical analysis of the same.

SCOPE OF STUDY
It gave me an opportunity to study the banking sector in a detailed manner. I got knowledge of prevailing Market Scenario. It helped me in learning the market dynamics, study the movement of share prices and to give a proper justification for the same, theoretically and technically.

It helped me in understanding and learning the corporate culture And above all, the concerned organization can get some valuable recommendations, which can definitely improve the performance of the organization.

LIMITATIONS OF THE STUDY

Though the resources seem sufficient enough to achieve high standard for this research, still we foresee the following limitations of study. The Sector is very vast and it was not possible to cover every nook and corner of this sector. The variability and availability of data was also a limitation. The data were linear and possessed multi collinearity, so each and every data was not considered for analysis. The objective which we want to fulfill in this project is really good, but the major demerit to our study is the availability of time for our search and analysis, but then also, I have tried my level best to show a glimpse of my Research in tune with the objectives.

1. what is Banking

Section 5(b) defines banking Accepting for the purpose of lending or investment of deposits or money repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise

Banks get affected by

y y y y Actions of Central Banks Actions of the Government Domestic and International Disturbances Inflation

Deregulation
y Banks are now operating in a fairly deregulated environment and are required to determine on their own, interest rates on deposits and advances Intense competition for business involving both the assets and liabilities

together with increasing volatility in the interest rates has brought pressure on the management of banks to maintain a good balance among spreads

Risks Faced by Banks

y y Credit Risk Market Risk o Liquidity Risk o Interest Rate Risk Operational Risk

Effects of Risk Factors

y y y Loss of Market Value Loss of Reserves Loss of stakeholders confidence

y BANKING SECTOR
y y Indian banks, the dominant financial intermediaries in India, have made good progress over the last five years, as is evident from several parameters, including annual credit growth, profitability, and trend in gross non-performing assets (NPAs). While the annual rate of credit growth clocked 23% during the last five years, profitability (average Return on Net Worth) was maintained at around 15% during the same period, and gross NPAs fell from 3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. Good internal capital generation, reasonably active capital markets, and governmental support ensured good capitalisation for most banks during the period under study, with overall capital adequacy touching 14% as on March 31, 2011. At the same time, high levels of public deposit ensured most banks had a comfortable liquidity profile. While banks have benefited from an overall good economic growth over the last decade, implementation of SARFAESI1, setting up of credit information bureaus, internal improvements such as upgrade of technology infrastructure, tightening of the appraisal and monitoring processes, and strengthening of the risk management platform have also contributed to the improvement. Significantly, the improvement in performance has been achieved despite several hurdles appearing on the way, such as temporary slowdown in economic activity (in the second half of 2008-09), a tightening liquidity situation, increases in wages following revision, and changes in regulations by the Reserve Bank of India (RBI), some of which prescribed higher credit provisions

y y

or higher capital allocations. Currently, Indian banks face several challenges, such as increase in interest rates on saving deposits, possible deregulation of interest rates on saving deposits, a tighter monetary policy, a large government deficit, increased stress in some sectors (such as, State utilities, airlines, and microfinance), restructured loan accounts, unamortised pension/gratuity liabilities, increasing infrastructure loans, and implementation of Basel III. 1 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ICRA Researcbbbbb bbbbbb y bah Backgro und y y ba nnnjhdiuy sduisydhs i

y y y y y y

The Indian financial sector (including banks, non-banking financial companies, or NBFCs, and housing finance companies, or HFCs) reported a compounded annual growth rate (CAGR) of 19% over the last three years and their credit portfolio stood at close to Rs. 49 trillion (around 62% of 2010-11 GDP) as on March 31, 2011. Banks accounted for nearly 86% of the total credit, NBFCs for around 10%, and HFCs for around 4%. Within banks, public sector banks (PSBs), on the strength of their countrywide presence, continued to be the leader, accounting for around 76% of the total credit portfolio, while within the NBFC sector, large infrastructure financing institutions2 accounted for more than half the total NBFC credit portfolio; NBFCs that are into retail

financing took up the rest. While the Indian banking sector features a large number of players competing against each other, the top 10 banks accounted for a significant 57% share of the total credit as on March 31, 2011

Key Players In Banking Sector

Name of Bank

State Bank of India Punjab National Bank Bank of Baroda ICICI Bank Bank of India Canara Bank HDFC Bank IDBI Bank Axis Bank Central Bank of India Total banking sector

Credit Portfolio as in March 2011 (Rs. billion) 7,567 2,421 2,287 2,164 2,131 2,125 1,600 1,571 1,424 1,297 42,874

Market Share (%)

NIMs (201011)

Tier I Capital % as in March 2011 7.8% 8.4% 10.0% 13.2% 8.3% 10.9% 12.2% 8.1% 9.4% 6.4% 9.7%

Return on Net Worth (2010-11) 13% 24% 24% 10% 17% 26% 17% 16% 19% 18% 17%

Gross NPA % as in March 2011 3.3% 1.8% 1.4% 4.5% 2.2% 1.5% 1.1% 1.8% 1.1% 2.2% 2.3%

18% 6% 5% 5% 5% 5% 4% 4% 3% 3% 100%

2.9% 3.5% 2.8% 2.3% 2.5% 2.6% 4.2% 1.8% 3.1% 2.7% 2.9%

Strong growth in infrastructure credit drives credit growth in 2010-11; pace of deposit growth slows Total banking credit4 stood at close to Rs. 39 trillion as on March 25, 2011 and reported a strong 21.4% growth in 2010-11, led by credit to the infrastructure sector and to NBFCs. In 2011-12, although the pace of credit growth has been subdued in the firsttwo months (up just 0.2% from March 2011 levels), it is in line with the pattern noticed in the previous years (0.1% in 2010-11 and 0.4% in 2009-10). According to ICRA s estimates, private banks reported a higheroverall credit growth of around 26% in201011 (10% in previous year) as compared with PSBs, which achieved around 22% (20% in previous year). Historically, the banking sector s credit portfolio has been growing at

over 20% per annum over the last several years (except in 2009-10, when the growth rate moderated to 17% mainly because of the decline in ICICI Bank s credit portfolio). Over the years, credit growth has outpaced deposits growth; the credit portfolio reported a CAGR of 24% over the last eight years, while deposits achieved a CAGR of 19% and the investment portfolio of 14% over the same period. The higher growth in credit could be achieved because of the slower growth in investments and the increase in capital. In 2010-11, while deposits growth for SCBs slowed down to 17%, credit growth was maintained at 21% with the growth in investments being just 13%. The higher credit growth versus deposits growth led to an increase in the credit deposits ratio (CD ratio) from 72.2% as in March 2010 to 75.7% as in March 2011, although the CD ratio moderated to 74.2% as on May 27, 2011, largely because of the slow credit growth in comparison with deposits during the first two months of 2011-12.

During 2010-11, the infrastructure sector, particularly power, and NBFCs were the key drivers of the credit growth achieved by the banking sector. Credit to the power sector reported a growth of 43%, while other infrastructure credit grew by 34% during 2010-11, against an overall credit growth of 21%. As in March 2011, the infrastructure sector (including power) accounted for 14% of the total credit portfolio of banks. Within the power sector, historically banks have been taking exposure to State power utilities as well asindependent power producers (IPPs). Going forward, with many banks approaching the exposure cap on lending to the power sector and given the concerns hovering over the prospects of the sector itself, the pace of growth of credit to this

segment could slow down. However, in the short to medium term, the undisbursed sanctions to power projects are likely to provide for a moderate growth. As for bank credit to NBFCs, the same increased by 55% in 2010-11 and accounted for around 5% of the banks total credit portfolio as in March 2011. Moreover, around half of this went to infrastructure relatedentities, and the rest mainly to NBFCs engaged in retail financing. Most of the NBFCs are focused on secured assets classes, have reported low NPA percentages, and are well-capitalised. As for banks retail lending, this continued to lag overall credit growth during 2010-11. Retail credit grew by 17% in 2010-11 against the overall credit growth of 21%, although the 17% figure marked a significant increase over the 4.1% reported in 2009-10. Credit to commercial real estate also increased in 2010-11, reporting a 21% growth that year as against nil in 2009-10.

Large government borrowings may allow for just 17-18% credit growth in 201112
Since March 2010, the RBI has raised the repo rate by 275 basis points (bps), which in turn has been transmitted by the banking system via increases in the base and prime lending rates, besides deposit rates. Going forward, while the RBI s tight monetary stance may exert a downward pressure on the demand for credit, considering the anticipated GDP growth (around 8%), investments in infrastructure and lower funds flow from the capital markets, credit demand could still remain high. However, banks capacity to meet credit demand could get constrained by the volume of deposits they are able to mobilise and by the large amount of funds they would need to keep aside to fund the government deficit. In case the government deficit is in line with the Budget numbers, the net borrowing of the Government of India (GOI) and the State governments via bonds would reach an estimated Rs. 4.7 trillion in 2011-12 (Rs.4.1 trillion in 2010-11). As banks fund around 40% of these bonds, they would need to set aside Rs. 1.9 trillion for the purpose. If deposits were to grow by 17%, the balance funds (incremental deposits + internal capital generation + fresh external capital increase in investments in government bonds) would supportonly 17-18% credit growth. Any higher growth would require intervention from the RBI. Further, in case the government deficit is higher because of lower tax collection and underprovided fuel & food subsidies, the maximum possible credit growth would be still lower. At the same time, a higher-thanexpected deposit growth could allow banks expand their credit base.

On asset quality, PSBs report some deterioration while private banks show Improvement The Gross NPA percentage of SCBs did not increase by the extent that the stress in the Indian market during 2008-09 would warrant because of large loan restructuring over last 2-3 years (4-5% of total advances); Gross NPAs declined marginally from 2.4% as

in March 2010 to 2.3% as in March 2011.However, higher provisioning led to a reduction in Net NPAs from 1.1% as in March 2010 to 0.9% as in March 20

Higher interest rates could ensure better deposits growth in 2011-12

Higher interest rates could ensure better deposits growth in 2011-12

In the banking system, historically, there has

been a positive correlation between growth in deposits base and increase in interest rates; periods with high interest rates have seen relatively high deposits growth, as in high interest rate regime bank fixed deposits become more attractive than many other instruments. At present, it appears that given the outlook on interest rates, banks may be able to mobilise retail deposits at a higher pace in 2011-12 than in the previous year. In 2010-11, according to ICRA In 2010-11, according to ICRA s estimates, the overall deposits of private banks increased by 22%, while that of PSBs increased by 18%. Within deposits, low cost deposits (CASA, current and saving accounts) increased by 27% for private sector banks, and by 15% for PSBs. CASA deposits represented 41% of the total deposits for private banks, and for a lower 33% for PSBs. For banks, having significant low cost deposits (CASA) as a proportion of total deposits could help them keep their cost of funds under control even in a scenario of rising interest rates in the system. High proportion of certificates of deposits could impact NIM and liquidity negatively

ICRA s analysis of the current liquidity situation shows that Indian banks have been raising bulk funds in the form of certificates of deposit (CDs) and high-cost deposits from corporate entities mostly for short tenures. The share of CDs outstanding increased to 8.2% as in March 2011 from 7.2% as in September 2010 and 7.6% as in March 2010, with the total CDs outstanding increasing from Rs. 3.4 trillion to Rs. 4.2 trillion during this period. The high proportion of CDs (instead of retail deposits) could adversely impact the liquidity profile of banks and their NIMs in a scenario of rising interest rates.

Most banks may not require significant capital now

During 2010-11, the GOI infused Rs. 165 billion in PSBs to improve their Tier I capital to 8% and take up its stake in the PSBs to at least 58%. After this, the Tier I capital of most of the PSBs has improved. Therefore, these banks (apart from SBI) may not require significant Tier I capital in the short term. The GOI has budgeted for Rs. 60 billion capital for PSBs in 2011-12. As for SBI, it plans to raise significant capital through a rights issue, and therefore, under the current regulations and market valuations, the GOI may need to infuse substantial capital into it to maintain its stake in the bank at 58%. As for private banks, these are well capitalised, although some may need equity to fund their growth plans. Some banks may require capital to meet Basel III norms As can be seen in table 4 below, banks will need to maintain higher regulatory capital under BASEL-III norms versus the existing RBI norms.

FACTORS AFFECTING BANKING SECTOR

Starting off with the project, in the initial phase of SIP, I learnt the basics of the stock market. As I had to work here in this market for 3.5 months this was the basic necessity. In that phase I had a nice exposure of how to deal with clients, how to handle the queries of the investors, it was a practical exposure to learn the working of the market, how the market moves and all about the corporate culture. Also I had learnt what factors basically affect the equity market. Then I decided to limit my project to just Banking Sector, because it is one of the most dynamic sector and also availability of time was not permitting me to go beyond this. There are N number of factors which affect the share prices. They can be broadly classified into two:

INTERNAL FACTORS EXTERNAL FACTORS

INTERNAL FACTORS: As the name suggests, Internal Factors are those which
affect the share prices internally, i.e. they are internal to the company or more specifically bank. Some of the major internal factors that affect the share prices of a bank are as follows:

EARNINGS OF THE COMPANY:

How much Profit a company earns acts as a significant factor in price movements. If the quarterly results are good for a bank, then the price goes up, and if the results are not

good, the investors show no interest in such bank s share and thus price falls. Investors invest money in the companies who earn well and in turn give good
return on investment. Thus, a wealthy and a profitable company have gooinvestors and thus have positive price movements. Price/Earnings Ratio also gives us idea about the same.

MARKET CAPITALIZATION: Generally we commit one mistake that we guess the

company s worth from the price of its stock. It is the market capitalization of the company, rather than the stock price, that is more important when it comes to determining the worth of the company. We need to multiply the stock price with the total number of outstanding stocks in the market to get the market capitalization of a company and that is the worth of the company. Thus, a company or bank with high Market Capitalization turns out to be more popular among investors. For example, HDFC BANK, ICICI BANK and SBI are more popular among investors than other banks because they have huge market share and market capitalization. As market capitalization increases, the share price tends to increase and as market capitalization decreases, the share price tends to decrease

PRICE/EARNINGS RATIO: Price/Earnings ratio or the P/E ratio gives us a fair

idea of how a company's share price compares to its earnings. If the price of the share is too much lower than the earning of the company, the stock is undervalued and it has the potential to rise in the near future. On the other hand, if the price is way too much higher than the actual earning of the company and then the stock is said to overvalued and the price can fall at any point. The earnings also have a direct relation with price which is already explained above.

INTERNAL AFFAIRS OF THE COMPANY:

Any happening inside the company or any internal news does affect its share price. For example any key person moving out of the company, acquisition or takeover or merger news, share split, employee strike and any other thing internal to the affairsof the bank affects the share price. A positive note from the internal affairs takes the price to new highs and a negative does vice versa.

INTERST RATES: Interest rates play a major role in determining stock market
trends. Bull markets (those in an upward market) are usually associated with low

interest rates and high Capital Gains, and bear markets (those in a downward trend) with high interest rates and low Capital gains. Interest rates are determined by the demand for capital pushes them up and normally indicates that the economy is thriving and that shares probably expensive. Low interest indicate low demand for capital, thus liquidity builds up on the economy, driving share price down. Other interest rates like that of on Deposits and Borrowings also have impact on share prices.

OTHER FACTORS: Other factors like Growth of the company, figures of deposits,
advances, balance sheet, Profit and Loss Account, etc.. also affect the share prices drastically. A discussion for the same is done in later part of the report

EXTERNAL FACTORS: After studying the internal factors, lets take a look at some External Factors which affect the Share Prices. SENTIMENTS:
Investor sentiment is almost impossible to predict and can be infuriating if, for example, you have bought shares in a company that you think is a good buy but the price remains flat. Investor sentiment is influenced by a wide variety of factors. Share prices can, for example, be flat during the summer simply because so manmajor investors are on holiday or attending major sporting events such as Royal Ascot and Wimbledon, hence the adage sell in May and go away . Investor sentiment can lead to irrational buying or selling of shares and result in bull and bear markets. A bull market is when share prices rise while a bear market is when they fall. In the technology boom of the late 1990s, for example, investors paid extremely high prices for shares and ignored traditional valuation measures, such as P/E ratios. This carried on until 2000 when investors belatedly realized these shares has risen too far and resulted in a three year bear market in shares. Thus, Sentiments of investors affect the share prices a lot and this is something unpredictable and immeasurable factor, but still the most important one.

COMPANY NEWS and OTHER NEWS: The way investors interpret news
coming out of companies is also a major influence on share prices. If, for example, a company puts out a warning that business conditions are tough, shares will often drop in value. If, however, a director buys shares in the firm, it may be a signal that the company s prospects are improving. Companies put out a great deal of news and most of the major announcements are covered by the financial press. But some announcements not regarded as so important and sometimes, particularly among smaller firms that are monitored less by investors and financial journalists, indicators of

the company s health can be missed. Takeovers or even rumors of takeovers also have a big influence on prices. This is because investors expect the bidder to pay a premium to shareholders. Also any other news or speculation about factors like change in Repo Rate, Cash Reserve Ratio, Reverse Repo Rate, any change or likely change in the policies of government or RBI or SEBI, any new guidelines issued by the concerned authority, etc. affect the price of the share. A positive news in any of these respects leads to a rise in must always remember that often times, despite amazingly good news, a stock can show least movement. It is the overall performance of the company that matters more than news. It is always wise to take a wait and watch policy in a volatile market or when there is mixed reaction about a particular stock.

DEMAND AND SUPPLY: This fundamental rule of economics holds good for the
equity market as well. The price is directly affected by the trend of stock market trading. When more people are buying a certain stock, the price of that stock increases and when more people are selling the stock, the price of that particular stock falls. Now it is difficult to predict the trend. Thus, we should be very careful while dealing in stocks as buying or selling pressure may lead to steep rise or fall in price of the shares. Thus, news in any respect is undoubtedly a huge factor when it comes to stock price. Positive news about a company can increase buying interest in the market while a negative press release can ruin the prospect of a stock. Having said that, we

CAPITAL ADEQUACY & CALCULATIONS

Summary Capital adequacy ratios are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures. An international standard which recommends minimum capital adequacy ratios has been developed to ensure banks can absorb a reasonable level of losses before becoming insolvent. Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system. Two types of capital are measured - tier one capital which can absorb losses without a bank being required to cease trading, e.g. ordinary share capital, 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, e.g. subordinated debt. Measuring credit exposures requires adjustments to be made to the amount of assets shown on a bank's balance sheet. The loans a bank has made are weighted, in a broad brush manner, according to their degree of riskiness, e.g. loans to Governments are given a 0 percent weighting whereas loans to individuals are weighted at 100 percent. Off-balance sheet contracts, such as guarantees and foreign exchange contracts, also carry credit risks. These exposures are converted to credit equivalent amounts which are also weighted in the same way as on-balance sheet credit exposures. On-balance sheet and offbalance sheet credit exposures are added to get total risk weighted credit exposures. The minimum capital adequacy ratios that apply are: y tier one capital to total risk weighted credit exposures to be not less than 4 percent; y total capital (tier one plus tier two less certain deductions) to total risk weighted credit exposures to be not less than 8 percent. Introduction Banks registered in Our country are required to publish quarterly disclosure statements which include a range of financial and prudential information. (For an explanation of the disclosure arrangements, see the Reserve Bank Bulletin of March 1996). A key part of these statements is the disclosure of the banks' "capital adequacy ratios". These ratios are a measure of the amount of a bank's capital in relation to the amount of its credit exposures. They are usually expressed as a percentage, e.g. a capital adequacy ratio of 8 percent means that a bank's capital is 8 percent of the size of its credit exposures. Capital and credit exposures are both defined and measured in a specific manner which is explained in this article. An international standard has been developed which recommends minimum capital adequacy ratios for international banks. The purpose of having minimum capital adequacy ratios is to ensure that banks can absorb a reasonable level of losses before becoming insolvent, and before depositors funds are lost.

Applying minimum capital adequacy ratios serves to promote the stability and efficiency of the financial system by reducing the likelihood of banks becoming insolvent. When a bank becomes insolvent this may lead to a loss of confidence in the financial system, causing financial problems for other banks and perhaps threatening the smooth functioning of financial markets. Accordingly applying minimum capital adequacy ratios in Banks assists in maintaining a sound and efficient financial system. It also gives some protection to depositors. In the event of a winding-up, depositors' funds rank in priority before capital, so depositors would only lose money if the bank makes a loss which exceeds the amount of capital it has. The higher the capital adequacy ratio, the higher the level of protection available to depositors. This article provides an explanation of the capital adequacy ratios applied by the Reserve Bank and a guide to their calculation. For more detail, the Reserve Bank policy document Capital Adequacy Framework, issued in January 1996, available from the Reserve Bank Library, should be consulted. Development of Minimum Capital Adequacy Ratios The "Basle Committee" (centred in the Bank for International Settlements), which was originally established in 1974, is a committee that represents central banks and financial supervisory authorities of the major industrialised countries (the G10 countries). The committee concerns itself with ensuring the effective supervision of banks on a global basis by setting and promoting international standards. Its principal interest has been in the area of capital adequacy ratios. In 1988 the committee issued a statement of principles dealing with capital adequacy ratios. This statement is known as the "Basle Capital Accord". It contains a recommended approach for calculating capital adequacy ratios and recommended minimum capital adequacy ratios for international banks. The Accord was developed in order to improve capital adequacy ratios (which were considered to be too low in some banks) and to help standardise international regulatory practice. It has been adopted by the OECD countries and many developing countries. The Reserve Bank applies the principles of the Basle Capital Accord in Our country. Capital The calculation of capital (for use in capital adequacy ratios) requires some adjustments to be made to the amount of capital shown on the balance sheet. Two types of capital are measured in Our country - called tier one capital and tier two capital. Tier one capital is capital which is permanently and freely available to absorb losses without the bank being obliged to cease trading. An example of tier one capital is the ordinary share capital of the bank. Tier one capital is important because it safeguards both the survival of the bank and the stability of the financial system. Tier two capital is capital which generally absorbs losses only in the event of a winding-up of a bank, and so provides a lower level of protection for depositors and other creditors. It comes into play in absorbing losses after tier one capital has been lost by the bank. Tier two capital is sub-divided into upper and lower tier two capital. Upper tier two capital has no fixed maturity, while lower tier two capital has a limited life span, which makes it less effective in providing a buffer against losses by the bank. An example of tier two capital is subordinated debt. This is debt which ranks in priority behind all creditors except

shareholders. In the event of a winding-up, subordinated debt holders will only be repaid if all other creditors (including depositors) have already been repaid. The Basle Capital Accord also defines a third type of capital, referred to as tier three capital. Tier three capital consists of short term subordinated debt. It can be used to provide a buffer against losses caused by market risks if tier one and tier two capital are insufficient for this. Market risks are risks of losses on foreign exchange and interest rate contracts caused by changes in foreign exchange rates and interest rates. The Reserve Bank does not require capital to be held against market risk, so does not have any requirements for the holding of tier three capital. The composition and calculation of capital are illustrated by the first step of the capital adequacy ratio calculation example shown later in this article. Credit Exposures Credit exposures arise when a bank lends money to a customer, or buys a financial asset (e.g. a commercial bill issued by a company or another bank), or has any other arrangement with another party that requires that party to pay money to the bank (e.g. under a foreign exchange contract). A credit risk is a risk that the bank will not be able to recover the money it is owed. The risks inherent in a credit exposure are affected by the financial strength of the party owing money to the bank. The greater this is, the more likely it is that the debt will be paid or that the bank can, if necessary, enforce repayment. Credit risk is also affected by market factors that impact on the value or cash flow of assets that are used as security for loans. For example, if a bank has made a loan to a person to buy a house, and taken a mortgage on the house as security, movements in the property market have an influence on the likelihood of the bank recovering all money owed to it. Even for unsecured loans or contracts, market factors which affect the debtor's ability to pay the bank can impact on credit risk. The calculation of credit exposures recognises and adjusts for two factors: y On-balance sheet credit exposures differ in their degree of riskiness (e.g. Government Stock compared to personal loans). Capital adequacy ratio calculations recognise these differences by requiring more capital to be held against more risky exposures. This is done by weighting credit exposures according to their degree of riskiness. Abroad brush approach is taken to defining degrees of riskiness. The type of debtor and the type of credit exposures serve as proxies for degree of riskiness (e.g. Governments are assumed to be more creditworthy than individuals, and residential mortgages are assumed to be less risky than loans to companies). The Reserve Bank defines seven credit exposure categories into which credit exposures must be assigned for capital adequacy ratio calculation purposes. y Off-balance sheet contracts (e.g. guarantees, foreign exchange and interest rate contracts) also carry credit risks. As the amount at risk is not always equal to the nominal principal amount of the contract, off-balance sheet credit exposures are first converted to a "credit equivalent amount". This is done by multiplying the nominal principal amount by a factor which recognises the amount of risk inherent in particular types of off-balance sheet credit exposures. After deriving credit equivalent amounts for off-balance sheet credit exposures, these are weighted according to the riskiness of the counterparty, in the same way as on-balance sheet credit exposures. Nine credit exposure categories are defined to cover all types of off-balance sheet credit exposures. The credit exposure categories and

the risk weighting process are illustrated by the second step of the calculation example. Minimum Capital Adequacy Ratios The Basle Capital Accord sets minimum capital adequacy ratios that supervisory authorities are encouraged to apply. These are: y tier one capital to total risk weighted credit exposures to be not less than 4 percent; y total capital (i.e. tier one plus tier two less certain deductions) to total risk weighted credit exposures to be not less than 8 percent; There y y y are some further standards applicable to tier two capital: tier two capital may not exceed 100 percent of tier one capital; lower tier two capital may not exceed 50 percent of tier one capital; lower tier two capital is amortised on a straight line basis over the last five years of its life.

The Reserve Bank will not register banks in Our country that do not meet these standards - and maintaining the minimum standards is always made a condition of registration. y If the registered bank is incorporated in Our country, then the minimum standards apply to the financial reporting group of the bank. y If the registered bank is a branch of an overseas bank, then it is the capital adequacy ratios of the whole overseas bank (and not the branch) which are relevant. Overseas banks which operate as branches are registered in Our country on the condition that they comply with the capital adequacy ratio requirements imposed by the financial authorities in their home country and that these requirements are no less than those recommended by the Basle Capital Accord. When a registered bank falls below the minimum requirements it must present a plan to the Reserve Bank (which is publicly disclosed) aimed at restoring capital adequacy ratios to at least the minimum level required. Even though a bank may have capital adequacy ratios above the minimum levels recommended by the Basle Capital Accord, this is no guarantee that the bank is "safe". Capital adequacy ratios are concerned primarily with credit risks. There are also other types of risks which are not recognised by capital adequacy ratios e.g.. inadequate internal control systems could lead to large losses by fraud, or losses could be made on the trading of foreign exchange and other types of financial instruments. Also capital adequacy ratios are only as good as the information on which they are based, e.g. if inadequate provisions have been made against problem loans, then the capital adequacy ratios will overstate the amount of losses that the bank is able to absorb. Capital adequacy ratios should not be interpreted as the only indicators necessary to judge a bank's financial soundness. Calculation Example Because off-balance sheet credit exposures are included in calculations, capital adequacy ratios cannot be calculated by reference to the balance sheet alone. Even the calculation of capital adequacy ratios to cover on-balance sheet credit exposures usually cannot be done by using published balance sheets, as these will probably not provide sufficient detail about who the bank has lent to, or the issuers of securities held by the bank. However, the disclosure

statements of the bank should contain the information necessary to confirm the bank's capital adequacy ratio calculations. To illustrate the process a bank goes through in calculating its capital adequacy ratios, a simple worked example is contained in Figures 1 to 5. The steps in the calculation are explained below. The balance sheet information and the off-balance sheet credit exposures on which the calculations are based are set out in Figures 1 and 2.

First Step - Calculation of Capital The composition of the categories of capital is as follows: Tier One Capital In general, this comprises: y the ordinary share capital (or equity) of the bank; and y audited revenue reserves e.g.. retained earnings; less y current year's losses; y future tax benefits; and y intangible assets, e.g. goodwill. Upper Tier Two Capital In general, this comprises: y unaudited retained earnings; y revaluation reserves; y general provisions for bad debts; y perpetual cumulative preference shares (i.e. preference shares with no maturity date whose dividends accrue for future payment even if the bank's financial condition does not support immediate payment); y perpetual subordinated debt (i.e. debt with no maturity date which ranks in priority behind all creditors except shareholders). Lower Tier Two Capital In general, this comprises: y subordinated debt with a term of at least 5 years; y redeemable preference shares which may not be redeemed for at least 5 years. Total Capital This is the sum of tier 1 and tier 2 capital less the following deductions: y equity investments in subsidiaries; y shareholdings in other banks that exceed 10 percent of that bank's capital; y unrealised revaluation losses on securities holdings. Figure 3 shows an example of a calculation of capital.

Figure 3

Second

Step

Calculation

of

Credit

Exposures

On-Balance Sheet Exposures The categories into which all credit exposures are assigned for capital adequacy ratio purposes, and the percentages the balance sheet numbers are weighted by, are as follows:

Off-Balance

Sheet

Credit

Exposures

(1) Calculation of Credit Equivalents

Listed below are the categories of credit exposures, and their associated "credit conversion factor". The nominal principal amounts in each category are multiplied by the credit conversion factor to get a "credit equivalent amount":

The final category of off-balance sheet credit exposures, market related contracts (i.e. interest rate and foreign exchange rate contracts), is treated differently from the other categories. Credit equivalent amounts are calculated by adding the following: (a) current exposure - this is the market value of a contract i.e.. the amount the bank could get by selling its rights under the contract to another party (counted as zero for contracts with a negative value); and (b) potential exposure i.e.. an allowance for further changes in the market value, which is calculated as a percentage of the nominal principal amount as follows:

Although the nominal principal amount of market related contracts may be large, the credit equivalent amounts are usually small, and so may add very little to the amount of credit exposures to be risk weighted. (2) Calculation of Risk Weighted Credit Exposures The credit equivalent amounts of all off-balance sheet exposures are multiplied by the same risk weightings that apply to on-balance sheet exposures (i.e. the weighting used depends on

the type of counterparty), except that market related contracts that would otherwise be weighted at 100 percent are weighted at 50 percent. Figure 4 shows an example of a calculation of risk weighted assets.

Figure 4 (Contd.)

Third Step - Calculation of Capital Adequacy Ratios Capital adequacy ratios are calculated by dividing tier one capital and total capital by risk weighted credit exposures. Figure 5 shows an example of a calculation of capital adequacy ratios.

Conclusions Capital adequacy ratios measure the amount of a bank's capital in relation to the amount of its risk weighted credit exposures. The risk weighting process takes into account, in a stylised way, the relative riskiness of various types of credit exposures that banks have, and incorporates the effect of off-balance sheet contracts on credit risk. The higher the capital adequacy ratios a bank has, the greater the level of unexpected losses it can absorb before becoming insolvent. The Basle Capital Accord is an international standard for the calculation of capital adequacy ratios. The Accord recommends minimum capital adequacy ratios that banks should meet. The Reserve Bank applies the minimum standards specified in the Accord to banks registered in Our country. This helps to promote stability and efficiency in the financial system, and ensures that Our country banks comply with generally accepted international standards.