Economic Value Addition by Indian Banks
Economic value addition by Indian Banks: A study
Abstract
This research paper studies Indian bank’s profile to demonstrate a direct correlation between the investment in stakeholder relationships and corporate performance. Many Indian banking seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of EVA (Economic Value Added) and MVA (Market Value Added) which tell what the institution is doing with investor’s hard earned money, the paper examines an appropriate way of evaluating bank’s performance and also finds out which Indian banks have been able to create (or destroy) shareholders wealth since 1996-1997 to 2000-2001. The overriding message of this paper is that banks must always strive to maximize shareholders value without which their stocks can never be fancied by the market. This analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is a prima facie case for using EVA as one of the range of performance measurement tools.
Economic value addition by Indian Banks: A study
Introduction Indian Banking has seen many changes in the last decade like imposition of prudential standards, greater competition among banks, entry of new private banks, etc. This paradigm shift in the Indian banking sector can be seen in terms of two dimensions: One relates to operational aspect especially performance and risk-management system and the second dimension relates to structural and external environment or exogenous aspects. Is evaluating Indian bank’s performance a rather straight forward issue? The answer is no. One might say that like a corporate, even banks can be judged from the behavior of their stock prices. However, as bank stocks have not been very active on exchanges, barring few on few occasions, should we conclude that Indian banks have by and large failed to add values to their shareholders’ wealth. The answer is
Abstract
This research paper studies Indian bank’s profile to demonstrate a direct correlation between the investment in stakeholder relationships and corporate performance. Many Indian banking seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of EVA (Economic Value Added) and MVA (Market Value Added) which tell what the institution is doing with investor’s hard earned money, the paper examines an appropriate way of evaluating bank’s performance and also finds out which Indian banks have been able to create (or destroy) shareholders wealth since 1996-1997 to 2000-2001. The overriding message of this paper is that banks must always strive to maximize shareholders value without which their stocks can never be fancied by the market. This analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is a prima facie case for using EVA as one of the range of performance measurement tools.
Economic value addition by Indian Banks: A study
Introduction Indian Banking has seen many changes in the last decade like imposition of prudential standards, greater competition among banks, entry of new private banks, etc. This paradigm shift in the Indian banking sector can be seen in terms of two dimensions: One relates to operational aspect especially performance and risk-management system and the second dimension relates to structural and external environment or exogenous aspects. Is evaluating Indian bank’s performance a rather straight forward issue? The answer is no. One might say that like a corporate, even banks can be judged from the behavior of their stock prices. However, as bank stocks have not been very active on exchanges, barring few on few occasions, should we conclude that Indian banks have by and large failed to add values to their shareholders’ wealth. The answer is
References: 1. 2. 3. 4. 5. 6. Arthur Andersen &Co., Accounting and Reporting Problems of the Accounting Profession, 5th ed. (Chicago Ill.: Arthur Andersen & Co., 1973), pp. 169 and 173-74 Benjamin Graham, david L. Dodd and Sidney Cottle, Secutity Analysis: Principles and Technique, 4th ed. (New York: MCGraw Hill, Inc., 1962), p 203 G. Bennett Stewart III, The quest for Value: A Guide for Senior Managers, (Harper Collins Publishers, Inc., 1991 Leopold A. Bernstein, Financial Statement Analysis: Theory, Application and Interpretation, rev. ed. (Homewood, Ill.: Richard D. Irwin, Inc., 1978), p 447 Roy A Foulke, Practical Financial Statement Analysis, 6 th ed. (New York: McGraw Hill, Inc. 1968), p. 71n T. O’Glove and R. Olstein, Quality Earnings Report, Financial Analysts Jounal, July-August 1982. P.41 Written by: Dr. B P Verma Associate Professor of Finance at UTI Institute of Capital Markets Address: UTI Institute of Capital Markets Sector- 17, Plot – 82 Vashi, Navi Mumbai – 400 705 Tel: 022 – 2789 2815 / 16 Fax: 022 – 2789 2824 E mail: bigyanverma@hotmail.com