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 Place:

MR.VINAY KUMAR MAHIPAL 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
 Pg.n
Index o
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
Introduction to the study:
This study aims at equity analysis of Indian Banking stocks using CANSLIM method. A crisis-
proof 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 high-
powered Board for Financial Supervision (BFS), constituted in 1994, exercise the powers of
supervision and inspection in relation to the banking companies, financial institutions and non-
banking 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 public-
sector 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 sub-
section(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-o-
y 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 G-
Sec yields). CASA ratio inched up q-o-q for almost all banks. However, overall, PAT growth (y-
o-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 Bank Credit
2009-10 2009-10 2010-11
2010-11
(Full Year) (Full Year) (Fiscal so far)
(Fiscal so far)r)

SCBs 17.0% 0.88% 16.7% -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 top-
performing 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.
Primary factors
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
Secondary factors
rate of sales percentage improvements over the last 3 quarters.
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

The annual compounded growth rate for EPS should be at least 25%
Primary factors
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 2007 2008 2009 2010
-
21.12
Allahabad bank -14.98% 6.19% 29.95% % 56.94%
 13.40
Andhra bank 19.28% 10.79% 7.03% % 60.18%
68.90
Axis bank 16.54% 34.41% 27.95% % 22.72%
- -
100.00 - 623.94 16.63
B.O.rajasthan % 56.44% % % -14.82%
49.65
Bank of India -47.17% 60.12% 66.05% % -42.09%
55.16
BOB 20.40% 24.14% 39.85% % 37.32%
32.43
Canara bank -30.00% 5.77% 10.16% % 45.78%
Central bank of 172.90 570.74 -
india % % 11.39% 3.82% 85.28%
21.47
Corporation B 19.88% 20.62% 37.08% % 31.09%
176.77 17.54
Dena B 23.20% % 78.38% % 20.90%
Dhanalakshmi -74.93% 69.36% 76.54% 0.90% -59.49%
- 35.97
Federal bank 2.25% 29.99% 37.08% % -7.18%
17.63
HDFC BANK LTD 23.26% 28.51% 25.55% % 22.05%
ICICI 35.03% 21.12% 8.07% -9.66% 6.93%
17.79
IDBI 1.39% 12.26% 15.63% % 20.08%
160.77 23.48
Indian bank 4.03% % 32.75% % 24.84%
77.87 104.07
Indusind 68.31% 67.72% 10.33% % %
878.00 38.03
Ing vysya 18.16% % 36.30% % 9.73%
10.29
IOB -60.47% 28.72% 19.23% % -46.67%
13.85
J & K bank 52.56% 55.22% 31.14% % 25.02%
101.75
K.Mahindra 95.96% 13.35% 97.00% -6.33% %
- 13.18
K.Vysya 16.92% 57.05% 19.46% % 41.20%
10.14
Karnataka Bank -19.15% 0.48% 36.53% % -43.16%
295.19 - 40.76
Lakshmi vilas -82.40% % 68.00% % 99.03%
OBOC 61.76% - 2.93% 1.73% 7.66%
 18.86%
50.86
PNB 31.15% 6.99% 33.05% % 26.35%
34.83
SBI -31.93% 3.06% 23.49% % 0.49%
104.56
South Indian Bank -23.15% % 15.16% 0.94% 20.02%
Syndicate Bank -18.69% 33.46% 18.44% 7.63% -10.92%
24.47
UBI 27.58% 25.21% 64.04% % 20.19%
269.52 96.71
UCO % 60.57% 30.63% % 81.48%
-
Union bank of - - 50.00 879.81
india 65.91% 23.56% 16.34% % %
-
160.75 27.37
VIJAYA 27.97% % 9.03% % 93.39%
100.59 51.33
Yes 52.59% 64.39% % % 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 2007 2008 2009 2010
34.41 27.95 68.90 22.72
Axis bank 16.54% % % % %
24.14 39.85 55.16 37.32
BOB 20.40% % % % %
20.62 37.08 21.47 31.09
Corporation B 19.88% % % % %
HDFC BANK 28.51 25.55 17.63 22.05
LTD 23.26% % % % %
6.99 33.05 50.86 26.35
PNB 31.15% % % % %
25.21 64.04 24.47 20.19
UBI 27.58% % % % %
269.52 60.57 30.63 96.71 81.48
UCO Bank % % % % %
64.39 100.59 51.33 37.44
Yes Bank 52.59% % % % %
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.
Cash flow per
Bank name share (Rs) EPS Pass/ Fail
Corporation bank 289.05 62.24 Passed
UCO bank 45.52 10.15 Passed
Union Bank of
India 110.85 34.18 Passed
Yes bank -10.73 10.23 Failed
PNB 66.77 98.03 Positive cash flow
BoB 30.9 60.93 Positive cash flow
 HDFC Bank 220.74 52.78 Passed
Axis bank 260.42 50.57 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

Look for the companies with major new product or service, new
Primary factors
management or a positive change in the industry

Secondary factor 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.
Overall change from % of change in
Bank name New branches previous year branches
2008 2009 2007/2008 2008/2009 2008 2009
Bank of Baroda 127 75 2772/2899 2899/2974 4.58 2.59
Uco bank 112 108 1849/1961 1961/2069 6.06 5.51
Corporation bank 80 73 901/981 981/1054 8.88 7.44
Union Bank of
India 197 247 2361/2558 2558/2805 8.34 9.66
Axis Bank 110 164 561/671 671/835 19.61 24.44
HDFC Bank 77 651 684/761 761/1412 11.26 85.55

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.
Primary factors

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.
Secondary factors
Look for companies with lower Debt/equity ratio and companies reducing
their debt to equity ratios over the last few years.

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 2009 2008 2007 2006
UCO bank 36.11 32.16 29.33 27.45
Union Bank of India 19.31 19.66 18.47 18
PNB 15.96 15.44 13.79 13.19
Corporation bank 15.11 13.11 11.25 9.74
BoB 14.99 13.77 14.44 11.94
Axis bank 11.49 9.99 17.28 13.97
HDFC Bank 9.75 8.76 10.62 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.
Secondary factors
Don't buy stocks with weaker than average performance during a market
correction.
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
Look for the stocks with an increasing, not decreasing, number of sponsors.
Secondary factors 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 Foreign
INSTITUTIO
l Insuran Instituti NAL % OF
MUTU Instituti ce onal HOLDING TO.NO.O INSTITUTIO
Bank AL ons Compan Investor (TO.NO.OF F NAL
name FUNDS /Banks ies s SHARES) SHARES HOLDING
209475019 4051741
Axis 11.26% 15.32% 25.12% .5 19 51.70%
168281953 4253841
HDFC 5.84% 0.18% 7.84% 25.70% .5 09 39.56%
Corporati 1434400
on bank 6.07% 0.11% 27.54% 4.23% 54423007 00 37.94%
117828544 3153025
PNB 3.03% 1.94% 13.30% 19.10% .3 00 37.37%
129861007 3642665
BoB 12.29% 0.25% 9.58% 13.53% .3 00 35.65%
Union
Bank of 5051179
India 8.76% 3.92% 0 17.42% 152057868 00 30.10%
5493600
UCO bank 0.08% 0.07% 9.54% 2.44% 66623693 00 12.13%

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

Primary factor 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.

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