The IUP Journal of Bank Management
Application of Excess Return Model in Valuing Public Sector Banks of India: An Empirical Study

Article Details
Pub. Date :Nov, 2018
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJIT31809
Author Name : Bhargav Pandya
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 12



The main purpose of the paper is to empirically estimate the value of equity in the case of public sector banks of India using excess return model. The paper also attempts to identify the key driver of value of equity among these banks. A sample of 11 public sector banks included in NIFTY PSU Bank Index was selected for the study. The study covered a time period of ten years ranging from 2007 to 2016. All the financial data pertaining to the banks was culled from CMIE Prowess software. One sample t-test and F-test were applied to test the significance of the value of equity of each bank and the entire sample, respectively. To identify the key driver of value of equity, a stepwise multiple regression was run between the dependent variable and a set of independent variables. The results of the study highlight that none of the 11 banks registered positive mean value of equity during the study period. The results are same for the entire sample. The study reveals that return on net worth is the positively significant predictor of the value of equity. On the contrary, stock beta, shareholder return, and operating profit to working funds ratio are negatively significant. The chief implication of the study is that higher return on net worth leads to increase in the value of equity of the banks.


Valuing banks is typically different from that of manufacturing units. Banks primarily do not carry any inventories as they are involved in providing services. This reduces the investment in fixed assets, which otherwise, generally accounts for a significant chunk of total investments made in the manufacturing firms. In order to value a firm, we require an estimate of future cash flows, growth in future cash flows, and risk attached to these cash flows. All these inputs are not easily traceable in the case of banks. Therefore, all conventional models of valuation are not equally applicable to valuing banks.


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