12. Calculation of Economic Value Added of company and its relationship with market – Ms. Payal Mogre
SBI Bank provides a range of products and services to personal, commercial enterprises, large corporates, public bodies and institutional customers. Its segments include Treasury, which includes the entire investment portfolio and trading in foreign exchange contracts and derivative contracts; Corporate/Wholesale Banking, which comprises the lending activities of Corporate Accounts Group, Mid Corporate Accounts Group and Stressed Assets Management Group; Retail Banking, which comprises branches in National Banking Group, which primarily includes Personal Banking activities, including lending activities to corporate customers having banking relations with branches in the National Banking Group, and Other Banking Business, which includes the operations of all the Non-Banking Subsidiaries/Joint Ventures other than Insurance Co. Ltd. The Company had approximately 22,500 branches and 58,000 ATMs.
Mr. Bajaj is shareholder in SBI. He came across the article on “Economic value added” in finance Magazine. The article stated that, “Banking sector in India is growing in leaps and bounds and so SBI is also approaching capital market for infusion of funds to escalate further growth in the banking sector. It is now predominantly significant for bankers to increase the shareholders wealth and encourage them for more investment in banks. To do this the banks have to measure their performance from shareholders perspective, bankers will have to follow wealth maximization as an objective to indicate that they are adding value to shareholders wealth and not deteriorating it. In order to determine this, bankers need to apply the Economic value added measure”.
Although the bank is earning good profits, Mr. Bajaj is unsure about his wealth creation at end of the year. He wants to evaluate the business strategies and managerial performance before investing capital in any new project. He wants to find the economic profit of the bank so that they know how much bank is charged for use of the capital invested by them.
Mr. Bajaj has approached KPGM consultancy Limited for their valuation. The analyst emphasizes on Economic value added technique better as CAMELS entirely ignores qualitative measure of performance. Analyst Mr. Iyer from KPGM, explains the Mr. Bajaj that “In order for bank to generate positive economic profit for you, bank should cover the cost using the invested capital.”
More Details: Thakur Institute of Management Studies & Research