An Analytical Study on Risk-Return Tradeoff in Indian Banks

Abstract

An Analytical Study on Risk-Return Tradeoff in Indian Banks – Indian Banking Sectors is one of the major role in the country’s economy. It has always been playing a major key role in prevention of the economic disaster from reaching horrible situation in the country. Risk is a concept that shows a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. It has received huge appreciation for its strength, particularly in the wake of the latest worldwide economic disasters, which pressed its worldwide counterparts to the edge of fall down. The Indian Equity market’s are extremely volatile. Equity Markets are volatile across the world but India has a higher level of volatility. Stock market risk is the tendency of stock prices to decrease due to the change in value of the market risk factors. Value of units or shares is directly related to the market value of those investments held by the stock market. Though banking and financial services sector funds have accelerated on generating superior risk adjusted returns until now, they suffer from the risk of portfolio concentration as a single stock accounts for equity portfolio in some gear. The market value of those investments will go up and down depending on the financial performance of the issuers and general economic, political, tax and market conditions. Standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices Banks play an important role in supporting economic growth and have proved to be more volatile than the pure diversified equity funds which make some of them a high risk proposition. Usually Equity Investments includes high risk at the same time it earns higher return unusually high returns may not be maintainable. Because of this, there is a high instability in the share price that reduces the real investor’s interest. This research is focused to analyse the performance of the selected banks in the Indian Banking Sector to show the risk and return in a particular period of time.

Introduction

The risk of investing in the banking sector does not appear to be subsiding. Bank share prices remain exceptionally volatile and ongoing regulatory developments continue to weigh on the sector. One important measure of risk is the beta for a bank. This combines the volatility of bank shares and their correlation with the equity markets in general. It is a key risk measure because it helps to set banks cost of capital and therefore the appropriate level of returns they should be targeting. This may be surprising. Given the substantial recapitalization of the banks across the world and the implementation of a raft of regulatory reforms, we may have expected risk levels across the sector to begin to fall by now. However, offsetting impacts including the fallout from the Eurozone crisis (which impacts banks directly through holdings of Government bonds) and continued sector uncertainties have contributed to this continued elevated state. We must remember that the equity beta, by its calculation, is a lagging indicator of risk so it will take time for risk reductions to show in the empirical data, but the key questions remains of whether and by how much risk will reduce in the banking sector.

The future track of risk in the banking sector is of critical importance to banks, their shareholders and policy makers. Some envisage a “back to basics” world of low risk/low return utility banking. Others suggest that credit risk, interest rate risk and liquidity risk mean such a world is impossible to achieve – the fortunes of the banking sector will always be entwined with the broader economy.

Need for the Study

• The study covers the information related to the risk – return relationship of banking sector.
• The study shows the five year data of banking sector.
• The study includes the calculation of individual standard deviations.

Statement of the Problem

The severe global shutdown and recession has resulted in volatility of stock markets. There is no proper framework for the investors to analyse the risk profile of the stocks and the investors also not aware about the valuation of risk and return of stock.

This study will provide inputs to the investors about various aspects of analyzing the risk profile of the stocks which in turn will help the investors to take decisions on holding their stock in banking sector.

Objectives of the study

Primary Objective

To study about the risk and return of share prices in banking sector for ICICI Bank, HDFC Bank, Indian Overseas Bank, South Indian Bank, IDBI Bank, Canara Bank, Indian Bank.

Secondary Objective

1. To analyze the rate of return of various banking sector over the period of five year.
2. To find the variance and standard deviation (risk) on each banking sector over the period of five year.
3. To compare the risk and rate of return of different banking sector.
4. To compare the coefficient of variation and beta of the banking sector.
5. To identify the best investment from selected banks

Limitations of the Study

1. The research is based on the data for the period of five years only. Hence the changes taken place before and after these periods have not been taken into considerations.
2. The research is limited to selected companies only. Hence the overall risk and return of the market cannot be analyzed.

Components of a Project Report

A project report varies according to the MBA final year project course at top colleges, depending on the consequences and the requirements of the concerned project. But broadly, a project covers the following components:

• Title page
• Table of contents
• Introduction
• Background of the project
• Project objectives
• Methodology
• Results
• Discussion and Analysis
• Conclusion
• Bibliography or references
• Appendices

Project Report Pages : 80

Can be used in : Finance Final Year Project

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