Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
A Study of Shareholders Value creation and measurement by
Economic Value Added in Indian private sector banks
Jyotindra Jani
The Goal of Financial Management is to maximize the shareholder’s value. The shareholder’s wealth is
measured by the returns they receive on their investment. Returns are in two parts. First part is in the
form of dividend declared by the organization and second part in the form of capital appreciation reflected
in the market value of shares of which market value is the dominant part. The market value of share is
influenced by number of factors, many, of which, may not be fully influenced by the management of firm.
However, one factor, which has a significant influence on the market value, is the expectation of
shareholders regarding the return on their investment. There exist very measures like return on capital
employed. Return on Equity, Earning per share. Net Profit and Operating Profit Margin evaluate the
performance of business. The problem with these measures is that have lack of proper benchmark for
comparison. The shareholders requires at least minimum rate of return on their investment depending on
the risk in the investment. To overcome these problems the concept of EVA was developed. The report
studies that profile of Indian bank 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 few have positively contributed to their wealth. With the help of EVA
(Economic Value Added) which shows what the institution is doing with investor’s hard earned money.
The report examines an appropriate way of evaluating bank’s performance and also find out which
IndianBanks havebeen able to create/ destroy shareholder’s wealth during research period in the present
study.
Key Word: ROIC; EVA; EPS; Ke; Indian Private Bank
(I) Introduction:
India is one of the top 10 economies of the world and has good potential for banking
industry to grow in coming days. This is the era of financial institutions and financial
market as the economic development of any economy depends on the banking
structure it has. Moreover, the RBI’s new norms will provide incentives to banks to take
corrective steps for bad loans. If we talk about the Indian banking structure, primarily
two matters are to be considered (i) operational efficiency of the banks and (ii) risk
management ability of top management in line with the RBI guidelines. The first matter
is related to internal management and customer satisfaction by providing the best
services. But the second matter is externally related and it focuses on balancing the
balance sheet as well as increasing and maximising the share prices. The two main
aspects than any bank has to focus are maintaining the capital adequacy requirements
and lowering down the level of nonperforming assets.
The primary objective of any organisation is to maximise the shareholder’s wealth. To
measure the shareholders wealth various tools are available like Economic Value
Added, Market Value Added, Total Shareholders return, Cash Value Added, Total
Business Returns etc. among them for this paper EVA has been used for the
measurement of shareholders value creation. Shareholder’s value means the value
_____________________________________________________________________
Shri Sadguru Mahila Home Science and Late M.J.Kundalia English, Medium Mahila Commerce CollegeSaurashtra University, jyotindra1319@gmail.com
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
delivered to the shareholders because of management’s ability to grow earnings,
dividends, and share prices. In other words shareholder’s value is sum of all strategic
decisions that affects the firm’s ability to efficiently increase the amount of free cash
flows over a time.
(II)What is Economic Value Added (EVA)? :
EVA is the profit earned by firm less cost of capital. This concept is similar to NPV; NPV
calculates total value added over a life of project while EVA calculates net value added
in a single period. If EVA is positive it means managements have increased the total
wealth of the company and if EVA is negative it means the cost of capital is higher than
the rate of return. The EVA concept has been registered by Stent Stewarts. The basic
idea behind this concept is, if there is perfect market no company would be earning
excess profit but because of imperfect market there may be advantage(s) of economies
scale, economies of scope, cost advantage, product differentiation, access to
distribution channel, government policy etc can be the cause of additional value to the
firm. EVA can be calculated as follows.
EVA = Net operating profit after tax – (WACC* capital employed)
WACC = Kd + Ke
The banks cost of debt is comprising of borrowing of the banks and large mounts funds
get blocked in borrowing for yea baked are used for the same and hence here only cost
of equity is considered for calculation weighted average cost of capital. cost of equity is
calculated by CAPM and beta was calculated by considering the five years Sensex
closing price.
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
(III) Literature Review:
Shawn Tully (1993):
A reporter of fortune magazine gives the concept of EVA and its effectiveness. He has
highlighted the results of big corporate like Coca Cola, AT&T, Quaker Oats etc by using
EVA concept given by Stern Stewart & Co. in titled “The real Key to Creating Wealth”
EVA”
Robbie Lewis & Hadely (1995):
In the paper titled “Economic Value Add”, the authors have focused on the concept and
need of EVA in coming days of global competition as measure of financial performance.
The research shows that adoption of EVA improves the financial performance of a
company.
Dennis G. Uyemura, Charles Kantor, Justin M Pettit (1996):
In their paper titled “EVA for Banks: Value creation, Risk Management, and Profitability
Measurement, ranked America’s 100 largest bank holding companies according to their
shareholder value added. It correlated market value of banks and EVA. They also
provided a framework for calculating EVA at all level of organisation.
Michael Durant (1999):
He has given the concept of EVA and its uses. He has focused how EVA can be
calculated and interpreted. According to the paper titled “EVA : invisible Hands at work”
it changes the way managers run the business.
Andrew Worthington & Tracy West (2001)
The paper gives basic idea about EVA, its calculation, accounting adjustments and
theoretical and empirical literature.
Pablo Fernandez (2001):
He analysed 582 American companies for 10 years using EVA, MVA, NOPAT and
WACC. 210 companies have shown negative correlation between NOPAT and EVA. So
according to this paper accounting based measures cannot measure value
creation?And hence EVA, economic profit, and cash value added do not measure
shareholder’s value.
Raji George (2005):
He calculated EVA for 21 public and private sector banks. he concluded that when there
is positive EVA, productivity increases and NPA decreases in both type of banks.
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
R. K. Mittal, Neena Sinha, Archana Singh (2008):
This paper focuses on the linkage between economic value added and corporate social
responsibilities. It focuses on the ethical commitment and financial performance of
Indian companies over the four years data using correlation and regression analysis. It
was found that companies implementing CSR policy had higher EVA and MVA.
Nikhil Chandra Shil (2009):
In this study the author has focused on why EVA should be implemented, advantages,
disadvantages, step wise calculation and superiority of EVA over other conventional
financial performance measures.
Jagdish Raiyani & Nilesh Joshi (2011):
The study focuses on the performance measurement based in EVA as a case study of
SBI & HDFC. EVA was higher in public sector banks compare to private sector banks
due to higher rate of return on capital.
Pratapsinh Chauhan (2012):
This study examines the shareholder’s value creation in the Indian Petroleum industry.
It was found high positive correlation between EVA and NOPAT for both public sector
and private sector firms.
George ray (2014):
The traditional measures do not motivate internal management and employees to
increase the value. EVA is an economic metric for performance. Sharing economic
profit as an incentive is the first step in aligning employee action to shareholders
interest. A plan base on increased economic profit will stimulate improvement.
The detailed review of literature shows that very few research work has been done
about effect of EVA as a financial performance measure on private sector banks in
India. At present in India banking sector is one of the fastest growing sector and this
industry will become more competitive because of entry of new private sector banks.
The Indian banking industry may be classified into broadly two categories i.e.
commercial banks and cooperative banks. Commercial banks are further classified as
public sector and private sector and private sector is further classified as old private
sector banks and new private sector banks. The private sector banks play very crucial
role in providing services to the customers and its is more competition intensive
industry. So the researcher has focused on the effect of EVA on private sector banks of
India for this paper.
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
(IV) Objective of the Study:
The primary objectives of the study are as under.




To understand the concept of shareholders value creation and value base
management
To analyse the growth of shareholders value in private sector banks in India
To know the average EVA among the private sector banks
To analyse the standard deviations of EVA, ROIC and EPS
(V)Sources Data:
The research is based on the secondary data. To analyse the EVA required financial
data is collected from the annual report of selected banks.
(VI)Sample Design:
For this research work all the new private sector banks have been considered. It
includes EVA analysis of ICICI bank, Axis Bank, HDFC bank, Yes bank, DCB, IndusInd
Bank and Kotak Mahindra bank.
(VII)Tools of Data Analysis:
For analysing trend in shareholders’ value, EVA, OP, NOPAT and EPS has been
considered while mean, standard deviation have been considered as a statistical tools.
(VIII)Data Analysis:
The following table shows the Return on Invested Capital (ROIC), Cost of equity (Ke),
Economic Value Added (EVA), Earning per Share (EPS) for sample selected for five
years from 2009-10 to 2013-14.
Banks
Axis
Bank
ICICI
Bank
DCB
Particulars
ROIC (%)
Ke (%)
EVA
EPS
ROIC(%)
Ke
EVA
EPS
ROIC(%)
Ke
2013-14
16.27
16.59
(1231.12)
132.33
13.40
16.84
(33960.21)
84.95
13.15
18.67
2012-13
15.64
Years
2011-12
18.60
2010-11
17.84
2009-10
15.67
(3131.61)
110.68
12.48
4582.68
102.67
10.70
2365.85
82.54
9.35
(1472.41)
62.06
7.80
(37074.73) (44314.18) (47869.76) (52869.70)
72.22
56.09
44.73
36.10
10.21
6.42
3.46
(13.10)
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
EVA
EPS
ROIC(%)
Ke
EVA
EPS
ROIC(%)
Ke
EVA
EPS
(635.30)
6.05
19.50
14.27
22739.97
35.34
12.24
16.09
(4725.42)
19.51
(846.45)
4.08
18.57
(1052.13)
2.29
17.27
(940.78)
1.07
15.47
(1902.80)
(3.92)
13.70
15585.22
28.27
14.40
8968.61
22.02
13.66
3051.83
84.40
12.04
(1221.55)
64.42
12.51
(1592.98)
18.23
(1934.49)
14.65
(2573.70)
11.10
(1605.49)
16.12
IndusInd ROIC(%)
Bank
Ke
EVA
EPS
Yes
ROIC(%)
Banks
Ke
EVA
EPS
15.59
16.84
(1129.57)
26.80
22.72
18.54
2974.09
44.86
13.93
16.97
14.28
14.63
(2219.48)
20.30
22.40
59.52
17.17
20.89
(1033.87)
12.39
19.17
(530.16)
8.53
15.46
2239.39
36.27
1099.50
27.68
237.16
20.95
(950.63)
14.06
HDFC
Bank
Kotak
Bank
The following table shows the mean and standard deviations of EVA, ROIC and EPS for
the selected banks.
Parameter
Mea
n
S.D.
Axis
ICICI
DCB
Banks
HDFC
EVA
222.68
ROI
C
(%)
EPS
EVA
16.80
(33960.21
)
10.75
(1075.49
)
4.02
9824.8
2
16.90
98.06
3155.9
8
13.44
58.82
7736.96
1.91
487.18
2.27
26.89
19.90
ROI
C
(%)
EPS
Kotak
Yes
(2522.42
)
12.97
IndusIn
d
(970.70
)
15.08
15.92
1318.80
17.04
843.22
10.26
46.89
9599.6
4
2.34
1.02
1.22
28.86
1561.8
9
2.96
3.76
26.51
3.28
7.07
12.18
1119.9
0
20.13
(IX)Data Interpretation:
The calculation shows that only HDFC bank and Yes have been able to generate
positive EVA for most of the years while remaining all banks have failed to generate the
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
positive EVA for almost four years out of five years. All the banks have shown upward
trend for the EPS for all the years. Return on invested capital also shows the positive
trends for all the banks for all the years. Cost of equity was highest for the Development
credit bank at 18.67% while lowest for the HDFC bank at 14.27%. HDFC bank has the
highest average EVA of Rs. 9824.82 while ICICI bank has the lowest EVA of
Rs.(33960.21). The average rate of return on invested capital is highest for HDFC bank
at 16.90% whiles it lowest for Development Credit bank of just 4.02%. Among all the
new private sector bank Axis bank has the highest average EPS of Rs. 98.06. The
standard deviation of EVA was found to be highest in case of HDFC bank at Rs.
9599.64 while lowest in case of DCB at Rs. 487.18.
(X) Conclusion:
The new private sector banks have shown increase in return on invested capital and
EPS but not the same in case of EVA. There is no much increase in shareholders
wealth by new private sector banks. The private sector banks need to focus on
increasing EVA by increasing the NOPAT and decreasing the cost of capital. EVA
shows the overall profitability of the firm and hence the bank should try to keep their
standard deviation of EVA low as much as possible.
References:
Alfred Rapport 1986, “Creating Shareholder value, The new standard for Business
Performance”; The Free Press
Banerjee, A. 1997. Economic Value Added: A Better Performance Measures. The
Management Accountant, December 1997, 886-88
Fernadez Pablo 2003, “EVA, Economic Profit and Cash Value Added Do Not Measure
Share Holder Value Creation”, The IUP Journal ofApplied Finance, Vol. 9, No. 3
(May), pp. 74-94.
Ramachandra Reddy, B. and Yuvaraja Reddy, B, 2007, “Financial Performance through
Market Value Added (MVA) Approach”, The Management Accountant, January 2007,
pp. 56-59.
Raiyani, J. R., & Joshi, N. K. 2012 Eva Based Performance Measurement: A Case
Study of SBI and HDFC Bank. Management Insight, 71
Sura Javir and Lather Anju 2013, “Indian Banking Information content of EVA and
Traditional Measures”, IOSR Journal of Economic and Finance, May-June 2013, 48-61
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Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
Thampy Ashok and Rajiv Baheti, “Economic Value Added in Banks and Development
Financial Institution” ; The IUP Journal of Applied Finance, Vol. 1 (January) pp. 44-45
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