Fundamental analysis can be done on the basis of following areas.

• Leading indicators - growth, monsoon, stock market.

• Lagging indicators – GDP

Supply Liquidity is controlled by the Reserve Bank of India (RBI).

Demand India is a growing economy and demand for credit is high though it could be cyclical.

Barriers to entry Licensing requirement, investment in technology and branch network.

Bargaining power of suppliers High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall.

Economic features of banking industry

The liquidity crisis that swept the heavyweights of global financial sector off their feet in FY09 did affect the entities in Indian banking sector as well, albeit marginally. Other than the temporary crunch after bankruptcy of Lehman Brothers, the global financial meltdown was weathered by banks in India with relative ease. The monetary stimuli (reduction in repo rate, cash reserve ratio (CRR) and statutory liquidity ratio (SLR)) offered to the banks by the RBI made things easier. Despite the severe liquidity pressure and poor credit appetite at the retail and corporate levels, Indian banks managed to grow their advances and deposits by 24% YoY and 22% YoY respectively in FY09. The growth was mainly driven by a sharp expansion in term deposits and growth in agricultural and large corporate credit. Having said that, higher delinquency levels in retail credit and debt restructuring took its toll on the sector. Repo rate 4.75%, RRR 3.25%, CRR 5.5% recently.

Indian Banks : Marginal signs of stress

FY08 FY09 ChangeNo. of banks (nos.) 79 78 -1.3%Branches (nos.) 776 825 6.3%Networth (Rs m) 39,940 47,080 17.9%Deposits (Rs m) 420,260 519,700 23.7%Advances (Rs m) 313,540 383,890 22.4%NIM (%) 4.1 4.4 7.3%RoA (%) 1.1 1.1 0.0%CAR (%) 13.0 14.0 7.7%Net NPA / advances (%) 1.0 1.1 5.0%

However, even as the opportunities increase, there are some issues and challenges that Indian banks will have to contend with if they are to emerge successful in the medium to long term. This analysis discusses these issues and challenges -- both intrinsic and external, such as

• Risk management • Consolidation • Overseas expansion• Technology • Government reforms • Non Performing Assets (NPAs) • Skilled manpower• Consumer protection

The report concludes with thrust areas for future growth.

Banking in India Issues and Challenges for the Future

 Foreign banks          

Assets          

           

  2008-09:Q3 2008-09:Q2 2008-09:Q1 2007-08:Q4 2007-08:Q3

Cash Funds and Balances with other Banks 42,666.97 41,250.84 42,232.47 41,932.70 38,094.49

Fixed Assets 4,126.99 4,042.45 3,994.92 3,966.91 3,620.94

Investments 109,902.77 105,189.78 96,094.21 100,218.41 101,250.25

Loans and Advances (net) 172,047.82 185,623.89 171,658.90 161,132.63 145,543.46

Other Assets 121,382.63 123,415.83 114,889.68 57,915.22 59,418.88

Total Assets 450,127.18 459,522.79 428,870.18 365,165.87 347,928.02

           

Liabilities          

           

  2008-09:Q3 2008-09:Q2 2008-09:Q1 2007-08:Q4 2007-08:Q3

Capital and Reserves 57,188.84 55,051.38 52,496.38 49,157.97 41,415.87

Other Liabilities and provisions 128,094.37 132,955.96 122,077.30 66,733.69 68,535.95

Total Borrowings 47,988.53 60,084.09 55,353.87 58,079.07 47,993.81

Total Deposits 216,855.44 211,431.36 198,942.63 191,195.14 189,982.39

Total Liabilities and Capital 450,127.18 459,522.79 428,870.18 365,165.87 347,928.02

Nationalised Banks          

           

Assets          

           

  2008-09:Q3 2008-09:Q2 2008-09:Q1 2007-08:Q4 2007-08:Q3

Cash Funds and Balances with other Banks 153,026.19 204,765.11 185,217.19 187,343.00 164,772.22

Fixed Assets 27,128.87 24,662.59 23,645.44 23,704.32 18,977.14

Investments 593,165.38 530,940.57 557,114.25 528,891.92 516,638.19

Loans and Advances (net) 1,316,599.00 1,246,985.84 1,145,719.41 1,137,078.52 1,004,564.86

Other Assets 76,436.39 62,358.15 67,268.39 56,126.36 53,994.25

Total Assets 2,166,355.83 2,069,712.26 1,978,964.68 1,933,144.12 1,758,946.66

           

Liabilities          

           

  2008-09:Q3 2008-09:Q2 2008-09:Q1 2007-08:Q4 2007-08:Q3

Capital and Reserves 135,820.45 126,167.64 119,315.94 116,405.02 113,002.15

Other Liabilities and provisions 152,741.99 146,374.95 143,489.32 141,669.61 128,564.46

Total Borrowings 70,185.57 69,568.82 76,091.57 69,440.09 58,304.49

Total Deposits 1,807,607.82 1,727,600.85 1,640,067.85 1,605,629.40 1,459,075.56

Total Liabilities and Capital 2,166,355.83 2,069,712.26 1,978,964.68 1,933,144.12 1,758,946.66

Profitability ratios 18.44333Operating margin (%) 16.06333

Gross profit margin (%) 12.09Net profit margin (%) 14.43

Adjusted cash margin (%) 12.57333

Adjusted return on net worth (%) 12.56667

Reported return on net worth (%) 69.28667

Return on long term funds (%) 0.47LIQUIDITY RATIO 0.166667Current ratio 4.133333

Current ratio (inc. st loans) 7.123333Quick ratio

P = [D + (E - D) x ROI / Kc] / Kc

P= Market price per share E= Earnings per share D = Dividend per share Kc= Cost of Capital (Capitalisation rate)ROI = Return on Investment (also called return on internal retention)

P= ??E= RS. 50.55 D = RS.10.00Kc= 6%ROI = 13%

P=[10+(50.55-10)*.13/.06]/.06 = 1811 RS