A Study of Banking Stocks in India to Develop a Model for Prudent Investment

Abstract

Investments in stock markets are often volatile, uncertain, complex and ambiguous (VUCA). Can we overcome an investment decision impasse, by adopting suitable research in a particular industry with the probable risk and uncertainty embedded? This critical thinking has triggered the analysis described in this paper; the fast growing banking sector has been chosen for the study. The financial result published by the various banks up to the year ending December 2014 has been taken for our scrutiny. Furthermore, a sample of forty commercial banks listed in the schedule of Reserve Bank of India and listed with National Stock Exchange (NSE) has been taken for analysis. A non-linear portfolio optimization model has been developed that can be used by investors to park their surplus funds in Indian banking stock. This model variant allows selection of various financial ratios such as Net Interest Margin (NIM) and Non-Performing Assets (NPA) to serve as a proxy for the expected return. In addition, statistical comparisons between public sector banks and private sector banks have been conducted across important financial ratios. These tests show that private sector banks are more efficient than public sector banks when considering Return on Assets (ROA) and Net Interest Margin (NIM), but are comparable on Return on Equity (ROE).