hdfc financial statement analysis

PROJECT REPORT ON FINANCIALS OF HDFC BANK

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LIST OF TABLES

Table Number Description

Table 4.1 Table showing the balance sheet of HDFC BANK

Table 4.2 Table showing the Profit and loss statement of HDFC BANK

Table 4.3 Table showing the calculations of Current Ratios

Table 4.4 Table showing the calculations of Profitability Ratios

Table 4.5 Table showing the calculations of Solvency Ratio

Table 4.6 Table showing the calculations of Efficiency Ratio

Table 4.7 Table showing the calculations of Operating Ratio

Table 4.8 Table showing the calculations of Management Ratio

Table 4.9 Table showing the calculations Establishment Ratio

Table 4.10 Table showing the calculations DuPont Analysis

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ContentsACKNOWLEDGEMENT...............................................................................................................2

DECLARATION.............................................................................................................................3

LIST OF TABLES...........................................................................................................................4

CHAPTER – 1.................................................................................................................................6

Introduction..................................................................................................................................6

OBJECTIVE OF THE STUDY...................................................................................................7

METHODOLOGY......................................................................................................................7

DATA..........................................................................................................................................7

DATA SOURCES.......................................................................................................................7

DATA PERIOD...........................................................................................................................7

TOOLS USED.............................................................................................................................7

LIMITATIONS OF STUDY.......................................................................................................8

REVIEW OF LITERATURE......................................................................................................8

CHAPTER - 2................................................................................................................................10

INDUSTRY PROFILE – BANKING INDUSTRY..................................................................10

PROFILE OF THE ORGANISATION.....................................................................................18

SWOT ANALYSIS...................................................................................................................24

CHAPTER 3..................................................................................................................................25

THEORITICAL ASPECTS.......................................................................................................25

RATIO ANALYSIS..................................................................................................................25

LIMITATION OF RATIO ANALYSIS....................................................................................26

CLASSIFICATION OF RATIOS......................................................................................26

TYPES OF FINANCIAL ANALYSIS......................................................................................27

CHAPTER – 4...............................................................................................................................31

DATA ANALYSIS & INTERPRETATION............................................................................31

ANALYSIS:..............................................................................................................................33

CHAPTER – 5...............................................................................................................................52

RECOMMENDATIONS AND CONCLUSIONS:...................................................................52

BIBILIOGRAPHY........................................................................................................................53

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CHAPTER – 1

Introduction

Financial Statements are prepared primarily for decision-making. They play

a dominant role in setting the framework of managerial decisions. But the information in the

financial statement is not an end in itself as no meaningful can be drawn from these statements

alone.

The information provided in the financial statement is of immense use in

making decisions through analysis and interpretation of financial statements. The financial

analysis is the process of identifying the financial strength and weakness of the firm by properly

establishing relationship between the items of the balance sheet and P&L A/C.

There are various methods or techniques used in analysing financial

statement such as comparative statement, trend analysis, common size statement, schedule of

changes in working capital, fund flow and cash flow analysis, cost volume profit analysis and

“RATIO ANALYSIS”.

Ratio analysis is one of the most powerful tools of financial analysis. It is a

process of establishing and interpreting various ratios that the financial statements can be

analysed more clearly and decisions made from such analysis.

Just like a DOCTOR examines his patient by recording his body

temperature, blood pressure etc. before making his conclusion regarding the illness and before

giving his treatment, a financial analyst analysis the financial statement with various tools of

analysis before commenting upon the financial health or weaknesses of an enterprise.

A financial ratio is the relationship between two accounting figures

expressed mathematically ratio provide clues to the financial position of the concern. These are

the pointers and indicators of financial strength, soundness, position or weakness of an

enterprise. One can draw conclusions about the exact financial position of a concern with the

help of ratios.

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OBJECTIVE OF THE STUDY

The primary objective of the present study is to assess financial condition of the bank by using

ratios. The following are the other objectives of the study.

1. To know about HDFC bank and its operations with a specific reference to Ongole Branch.

2. To understand the technological services provided by HDFC Ongole branch.

METHODOLOGY

The present study has been carried with the help of following research methodology to achieve

above stated objectives.

DATA

The present study was done by using the secondary data.

DATA SOURCES

Secondary data has been collected from company web sites, records

http://www.hdfcbank.com/aboutus/cg/annual_reports.htm

http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/hdfcbank/HDF01

International Journal of Accounting and Financial Management Research (IJAFMR)

DATA PERIOD

This study has been carried with five years of data. The data period is from 2009 to 2013.

TOOLS USED

Ratio analysis is used to evaluate relationships among financial statement items. The ratios are

used to identify trends over time for one company or to compare two or more companies at one

point in time. Financial statement ratio analysis focuses on three key aspects of a business:

liquidity, profitability, and solvency.

DuPont Analysis It is used to compute the Return on Investment by considering the various

measures like Net Profit Ratio and Capital Turnover Ratio.

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http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/hdfcbank/HDF01

http://www.hdfcbank.com/aboutus/cg/annual_reports.htm

Forecasting Financial Statements is the process of estimating future business performance

(sales, costs, earnings).Corporations use forecasting to do financial planning, which includes

assessment of their future financial needs.

LIMITATIONS OF STUDY

The study considers financial ratio analysis Altman z-score other factors like CAGR,

Altman z-score and benchmarking to industry are ignored.

Findings are not confined to individual branch.

REVIEW OF LITERATURE

Hosamani (1995) used various ratios to evaluate the performance of Malaprabha Grameena

Bank in Karnataka. Profitability ratios were negative (-43%) due to higher burden ratio (3.11%)

compared to spread (2.96%).

Pathania and Sharma (1997) studied the working of Himachal Pradesh State Cooperative

Agricultural and Rural Development Bank, which lends money on a long term basis for a variety

of end users. The financial durability of the bank was measured and data were presented on the

long –term financial strength, debt to equity ratio, fixed assets to net worth ratio, the short- term

financial performance, and the current ratio. It was concluded that the financial position of the

bank was not sound, with liabilities exceeding equity.

Shekhar et al. (1999) employed financial ratio analysis for the Karimnagar District Central

Cooperative Bank in Andhra Pradesh, India. Financial ratios relating to solvency, liquidity,

profitability, efficiency and strength of the bank were analysed for the period 1985/86-1994/95.

Siddhanti (1999) used various financial ratios to analyse financial performance of Indian

Farmers Fertilizers Cooperative and opined that the current ratio of the institution between 1987-

88 and 1997-98 was ranging from 2.62 to 2.52 as against the standard norm of 2:1. The debt

equity ratio during the period was between 1.05 and 1.07 as against standard norm of 1:1.

Patil (2000) used various financial ratios to evaluate the performance of Primary Cooperative

Agricultural and Rural Development Banks in Dharwad district of Karnataka. The study revealed

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that the current ratio was more than unity and acid-test ratio was less than unity, while the net

worth and profitability ratios were negative for all the banks in all the periods except for

PCARDB, Dharwad.

ANIL KUMAR SONI & HARJINDER PAL SINGH SALUJA (2013) used financial ratios to

evaluate the performance of the District Central Cooperative Bank plays a vital role in the

agriculture and rural development of the Rajnandgaon. The study revealed that financial

position of this bank analyzed by ratio analysis techniques. It is found that the position

solvency, liquidity and profitability are satisfactory. The efficiency ratios indicated a

medium level of the expenditure over the gross income. Profitability of the bank was very

low due to the heavy over dues and low rate of recovery.

At the end we can conclude that the Financial Statement Analysis has a great effect on the

future prospects of the any organization.

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CHAPTER - 2

INDUSTRY PROFILE – BANKING INDUSTRY

INTRODUCTION OF BANKING

Banking Means "Accepting Deposits for the purpose of lending or Investment of deposits of

money from the public, repayable on demand or otherwise and withdraw by cheque, draft or

otherwise."

-Banking Companies (Regulation) Act,1949

"A banker of bank is a person, a firm, or a company having a place of business where credits are

opened by deposits or collection of money or currency or where money is advanced and waned.

-By Findlay Sheras

"Banking in the most general sense, is meant the business of receiving, conserving & utilizing

the funds of community or of any special section of it."

-By H.Wills & J. Boga

The concise oxford dictionary has defined a bank as "Establishment for custody of money

which it pays out on customers order." Infact this is the function which the bank performed when

banking originated. Thus

A Bank

Accept deposits of money from public,

Pays interest on money deposited with it.

Lends or invests money

Repays the amount on demand,

Allow the money deposited to be withdrawn by cheque or draft.

ORIGIN OF WORD BANK

The origin of the word bank is shrouded in mystery. According to one view point the

Italian business house carrying on crude from of banking were called banchi bancheri"

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According to another viewpoint banking is derived from German word "Branck" which mean

heap or mound. In England, the issue of paper money by the government was referred to as a

raising a bank.

ORIGIN OF BANKING

Its origin in the simplest form can be traced to the origin of authentic history. After

recognizing the benefit of money as a medium of exchange, the importance of banking was

developed as it provides the safer place to store the money. This safe place ultimately evolved in

to financial institutions that accepts deposits and make loans i.e., modern commercial banks.

HISTORY OF BANKING IN INDIA

The first bank in India, though conservative, was established in 1786. From 1786 till today, the

journey of Indian Banking System can be segregated into three distinct phases:

Early phase of Indian banks, from 1786 to 1969

Nationalization of banks and the banking sector reforms, from 1969 to 1991

New phase of Indian banking system, with the reforms after 1991-2004

Phase IV- Period of Increased Liberalization (2004 onwards)

Phase1

The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and

Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency

banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of

private shareholders, mostly Europeans, was established. Allahabad Bank was established,

exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in

Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara

Bank, Indian Bank, and Bank of Mysore were set up. The Reserve Bank of India came in 1935.

During the first phase, the growth was very slow and banks also experienced periodic failures

between 1913 and 1948. There were approximately 1,100 banks, mostly small. To streamline the

functioning and activities of commercial banks, the Government of India came up with the

Banking Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949 as

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per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested

with extensive powers for the supervision of banking in India as the Central banking authority.

During those days, the general public had lesser confidence in banks. As an aftermath, deposit

mobilization was slow. Moreover, the savings bank facility provided by the Postal department

was comparatively safer, and funds were largely given to traders.

Phase2

The government took major initiatives in banking sector reforms after Independence. In 1955, it

nationalized the Imperial Bank of India and started offering extensive banking facilities,

especially in rural and semi-urban areas. The government constituted the State Bank of India to

act as the principal agent of the RBI and to handle banking transactions of the Union government

and state governments all over the country. Seven banks owned by the Princely states were

nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14

commercial banks in the country were nationalized. In the second phase of banking sector

reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector

in India came under the government ownership.

Phase3

This phase has introduced many more products and facilities in the banking sector as part of the

reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up,

which worked for the liberalization of banking practices. Now, the country is flooded with

foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to

customers. Phone banking and net banking are introduced. The entire system became more

convenient and swift. Time is given importance in all money transactions.

The financial system of India has shown a great deal of resilience. It is sheltered from crises

triggered by external macroeconomic shocks, which other East Asian countries often suffered.

This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet

fully convertible capital account, and the limited foreign exchange exposure of banks and their

customers.

Phase4

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FDI ceiling for the banking sector increased to 74% from 49%. Road map for inclusion of

foreign banks declared and more liberal branch licensing policies followed.

FUNCTIONS OF BANKS

PRIMARY FUNCTIONS

Acceptance of Deposits

Making loans & advances

Loans

Overdraft

Cash Credit

Discounting of bills of exchange

SECONDARY FUNCTIONS

Agency functions

Collection of cheques & Bills etc.

Collection of interest and dividends.

Making payment on behalf of customers

Purchase & sale of securities

Facility of transfer of funds

To act as trustee & executor.

UTILITY FUNCTIONS

Safe custody of customer’s valuable articles & securities.

Underwriting facility

Issuing of travelers cheque letter of credit

Facility of foreign exchanges

Providing trade information

Provide information regarding credit worthiness of their customer.

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STRUCTURE OF INDIAN BANKING SYSTEM

Organizational Structure

The entire organized banking system comprises of scheduled and non-scheduled banks. Largely,

this segment comprises of the scheduled banks, with the unscheduled ones forming a very small

component. Banking needs of the financially excluded population is catered to by other

unorganized entities distinct from banks, such as, moneylenders, pawnbrokers and indigenous

bankers.

Scheduled Banks

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A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In

order to be included under this schedule of the RBI Act, banks have to fulfil certain conditions

such as having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve

Bank that its affairs are not being conducted in a manner prejudicial to the interests of its

depositors. Scheduled banks are further classified into commercial and cooperative banks. The

basic difference between scheduled commercial banks and scheduled cooperative banks is in

their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are

registered under the Cooperative Societies Act. These banks work according to the cooperative

principles of mutual assistance.

Scheduled Commercial Banks (SCBs)

Scheduled commercial banks (SCBs) account for a major proportion of the business of the

scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are

categorized into the five groups based on their ownership and/or their nature of operations.

State Bank of India and its six associates (excluding State Bank of Saurashtra, which has been

merged with the SBI with effect from August 13, 2008) are recognized as a separate category

of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959)

that govern them. Nationalized banks (10) and SBI and associates (7), together form the public

sector banks group and control around 70% of the total credit and deposits businesses in India.

IDBI ltd. has been included in the nationalized banks group since December 2004. Private

sector banks include the old private sector banks and the new generation private sector banks-

which were incorporated according to the revised guidelines issued by the RBI regarding the

entry of private sector banks in 1993. As at end-March 2009, there were 15 old and 7 new

generation private sector banks operating in India.

Foreign banks are present in the country either through complete branch/subsidiary route

presence or through their representative offices. At end-June 2009, 32 foreign banks were

operating in India with 293 branches. Besides, 43 foreign banks were also operating in India

through representative offices.

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Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural

economy by providing banking services in such areas by combining the cooperative specialty of

local orientation and the sound resource base which is the characteristic of commercial banks.

RRBs have a unique structure, in the sense that their equity holding is jointly held by the central

government, the concerned state government and the sponsor bank (in the ratio 50:15:35),

which is responsible for assisting the RRB by providing financial, managerial and training aid

and also subscribing to its share capital. Between 1975 and 1987, 196 RRBs were established.

RRBs have grown in geographical coverage, reaching out to increasing number of rural

clientele. At the end of June 2008, they covered 585 out of the 622 districts of the country.

Despite growing in geographical coverage, the number of RRBs operational in the country has

been declining over the past five years due to rapid consolidation among them. As a result of

state wise amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs

fell to 86 by end March 2009.

Scheduled Cooperative Banks

Scheduled cooperative banks in India can be broadly classified into urban credit cooperative

institutions and rural cooperative credit institutions. Rural cooperative banks undertake long

term as well as short term lending. Credit cooperatives in most states have a three tier structure

(primary, district and state level).

Non-Scheduled Banks

Non-scheduled banks also function in the Indian banking space, in the form of Local Area

Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India. Local area

banks are banks that are set up under the scheme announced by the government of India in

1996, for the establishment of new private banks of a local nature; with jurisdiction over a

maximum of three contiguous districts. LABs aid in the mobilization of funds of rural and semi

urban districts. Six LABs were originally licensed, but the license of one of them was cancelled

due to irregularities in operations, and the other was amalgamated with Bank of Baroda in 2004

due to its weak financial position.

Business Segmentation

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The entire range of banking operations are segmented into four broad heads- retail banking

businesses, wholesale banking businesses, treasury operations and other banking activities.

Banks have dedicated business units and branches for retail banking, wholesale banking

(divided again into large corporate, mid corporate) etc.

Retail banking

It includes exposures to individuals or small businesses. Retail banking activities are identified

based on four criteria of orientation, granularity, product criterion and low value of individual

exposures. In essence, these qualifiers imply that retail exposures should be to individuals or

small businesses (whose annual turnover is limited to Rs. 0.50 billion) and could take any form

of credit like cash credit, overdrafts etc. Retail banking exposures to one entity is limited to the

extent of 0.2% of the total retail portfolio of the bank or the absolute limit of Rs. 50 million.

Retail banking products on the liability side includes all types of deposit accounts and

mortgages and loans (personal, housing, educational etc.) on the assets side of banks. It also

includes other ancillary products and services like credit cards, demat accounts etc.

Wholesale banking

Wholesale banking includes high ticket exposures primarily to corporates. Internal processes of

most banks classify wholesale banking into mid corporates and large corporates according to the

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size of exposure to the clients. A large portion of wholesale banking clients also account for off

balance sheet businesses. Hedging solutions form a significant portion of exposures coming

from corporates. Hence, wholesale banking clients are strategic for the banks with the view to

gain other business from them. Various forms of financing, like project finance, leasing finance,

finance for working capital, term finance etc form part of wholesale banking transactions.

Syndication services and merchant banking services are also provided to wholesale clients in

addition to the variety of products and services offered.

Treasury Operations

Treasury operations include investments in debt market (sovereign and corporate), equity

market, mutual funds, derivatives, and trading and forex operations. These functions can be

proprietary activities, or can be undertaken on customer’s account. Treasury operations are

important for managing the funding of the bank. Apart from core banking activities, which

comprises primarily of lending, deposit taking functions and services; treasury income is a

significant component of the earnings of banks. Treasury deals with the entire investment

portfolio of banks (categories of HTM, AFS and HFT) and provides a range of products and

services that deal primarily with foreign exchange, derivatives and securities. Treasury involves

the front office (dealing room), mid office (risk management including independent reporting to

the asset liability committee) and back office (settlement of deals executed, statutory funds

management etc.).

Other Banking Businesses

This is considered as a residual category which includes all those businesses of banks that do

not fall under any of the aforesaid categories. This category includes Para banking activities like

hire purchase activities, leasing business, merchant banking, factoring activities etc.

PROFILE OF THE ORGANISATION

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HDFC BANK

INTRODUCTION

The housing development finance corporation limited (HDFC) was amongst the first to receive

an “in-principle" approval from the reserve bank of India (RBI) to set up a bank in the Private

sector, as part of RBI liberalization of Indian banking industry in 1994. The bank was in

Corporate in August 1994 in the name of HDFC Bank Ltd. With its registered office in Mumbai,

India, HDFC Bank commenced operations as scheduled commercial bank in January 1995.

PROMOTOR

HDFC is India's premier housing finance company and enjoys an excellent track record in India

as well as in international markets. Since its inception in 1977, the Corporation has maintained a

consistent and healthy growth in its operations to remain the market leader in mortgages. Its

outstanding loan portfolio covers well over a million dwelling units. HDFC has developed

significant expertise in retail mortgage loans to different market segments and also has a large

corporate client base for its housing related credit facilities. With its experience in the financial

markets, a strong market reputation, large shareholder base and unique consumer franchise,

HDFC was ideally positioned to promote a bank in the Indian environment.

BUSINESS FOCUS

HDFC bank's mission is to be a world class Indian bank. The bank has aim to build sound

customer franchises across district business so as to be the prefer provider of banking services in

the segment that the bank operates in and to achieve healthy growth in profitability, consistent

with the bank's risk appetite. The bank is committed to maintain the highest level of ethical

standards, professional integrity and regulatory compliance. HDFC bank's business philosophy is

based on four core values:

1. Operational Excellence

2. Customer Focus

3. Product Leadership

4. People.

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CAPITAL STRUCTURE

As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crores. The paid-up

capital as on the said date is Rs. 469, 33, 76,540 (234, 66, 88, 270 equity shares of Rs. 2/- each).

The HDFC Group holds 23.15% of the Bank's equity and about 17.29 % of the equity is held by

the ADS / GDR Depositories (in respect of the bank's American Depository Shares (ADS) and

Global Depository Receipts (GDR) Issues). 30.68 % of the equity is held by Foreign Institutional

Investors (FIIs) and the Bank has 4, 47, 924 shareholders.

AMALGAMATION OF TIMES BANK AND CENTURION BANK OF PUNJAB

On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was

formally approved by Reserve Bank of India to complete the statutory and regulatory approval

process. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC

Bank for every 29 shares of CBoP. The amalgamation added significant value to HDFC Bank in

terms of increased branch network, geographic reach, and customer base, and a bigger pool of

skilled man power. In a milestone transaction in the Indian banking industry, Times Bank

Limited (another new private sector bank promoted by Bennett, Coleman & Co. / Times Group)

was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of

two private banks in the New Generation Private Sector Banks. As per the scheme of

amalgamation approved by the shareholders of both banks and the Reserve Bank of India,

shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times

Bank.

DISTRIBUTION NETWORK

HDFC Bank is headquartered in Mumbai. As on March 31, 2013, the Bank has a network of

3062 branches in 1845 cities across India. All branches are linked on an online real-time basis.

Customers in over 1397 locations are also serviced through Telephone Banking. The Bank's

expansion plans take into account the need to have a presence in all major industrial and

commercial centers, where its corporate customers are located, as well as the need to build a

strong retail customer base for both deposits and loan products. Being a clearing / settlement

bank to various leading stock exchanges, the Bank has branches in centers where the NSE / BSE

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have a strong and active member base. The Bank also has a network of 10743 ATMs across

India. HDFC Bank's ATM network can be accessed by all domestic and international Visa /

MasterCard, Visa Electron / Maestro, Plus / Cirrus and American Express Credit / Charge card

holders.

TECHNOLOGY

HDFC Bank operates in a highly automated environment in terms of information technology and

communication systems. All the bank’s branches have online connectivity, which enables the

bank to offer speedy funds transfer facilities to its customers. Multi-branch access is also

provided to retail customers through the branch network and Automated Teller Machines

(ATMs).

The Bank has made substantial efforts and investments in acquiring the best technology

available internationally, to build the infrastructure for a world class bank. In terms of core

banking software, the Corporate Banking business is supported by Flex cube, while the Retail

Banking business by Finware, both from i-flex Solutions Ltd. The systems are open, scalable and

web-enabled. The Bank has prioritized its engagement in technology and the internet as one of

its key goals and has already made significant progress in web-enabling its core businesses. In

each of its businesses, the Bank has succeeded in leveraging its market position, expertise and

technology to create a competitive advantage and build market share.

BUSINESS PROFILE

HDFC Bank caters to wide range of banking services covering both commercial and investment

banking on the wholesale side and transactional branch banking on the retail side. The bank three

key business areas

WHOLESALE BANKING SERVICES

The Bank's target is primary large blue-chip manufacturing companies in the Indian corporate

sector and to a lesser extent, emerging mid-sized corporate. For these corporate the Bank

provides a wide range of commercial and transactional Banking services including working

capital finance trade services, transactional services, cash management etc. The Bank is also a

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leading provider of structure solution which combines cash management services with vendors

and distributor finance for facilitating superior supply chain management for its corporate

customers. Based on its superior product delivery service levels and strong customer orientation,

the Bank has made significant inroads into the Banking consortia of a number of leading India

corporate including Multinationals, Companies from the domestic business house and prime

public sector companies. It is recognized as a leading provider of cash management and

transactional Banking solutions to corporate customers, Mutual Funds, Stock Exchange

Members and Bank.

RETAIL BANKING SERVICES

The objective of retail bank is to provide its target market customer a full range of financial

products and banking service, giving the customer a one-stop window for all his/her banking

requirements. The products are backed by world-class services and delivered to the customers

through the growing branch network as well as though alternative delivery channels like ATMs,

phone banking, net banking and mobile banking. The HDFC bank preferred programs for high

net worth individuals, the HDFC bank plus and the investment advisory services program have

been designed keeping in mind heads of customers who seek distinct financial solutions

information and advice on various investment avenues. The also had a wide array of retail ban

products including auto loans, loans against marketable securities, personal loans and loans for

two wheelers. It is also a leading provider of depository service to retail customers offering

customers the facility to hold their investments in electronic form. HDFC Bank was the first

bank in India to launch an international debit card in association with VISA (Visa election) and

issue the master card Maestro debit card as well. The debit card allows the use to directly debit

his account at the point of purchase at a merchant establishment, in India and overseas. The bank

launches its credit card in association with VISA in November 2002. The bank is also one of the

leading players in the "merchant acquiring" business with 26,400 point of sale (pos) terminals

for debit/credit cards acceptance at merchant establishments. The bank is well positioned as a

leader in various net based B2C opportunities including a wide range of interest banking services

for fixed deposit, loans, bill payments etc.

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TREASURY OPERATIONS

Within this business the bank has three main product areas foreign exchange and derivative,

local currency, money market & debt securities and equities. With the liberalization of the

financial market in India, corporate need more sophisticated risk management information

advice and product structure. These and find pricing on various treasury product are provided

through the bank treasury team.

BOARD OF DIRECTOR

Mr. Jagdish kapoor, (Chairman)

Mr. Aditya Puri, (Managing Director)

Mr. Keki Mistry

Dr. Venkat Rao Gadwal

Dr. Vineet Jain

Mrs. Renu Karnad

Mr. Arvind Pande

Mr. Ranjan Kapoor (Resigned w.e.f. 29th March, 2006)

Mr. Bobby Parikh (w.e.f. Jan. 9, 2004)

Mr. Ashim Samanta

VICE PRESIDENT AND COMPANY SECRETARY

Mr. Sanjany Dongre

AUDITOR

M/s P.C Hansotia & Co.

Chartered Accountant

REGISTERED OFFICE

HDFC BANK HOUSE

Senapati Bapat Mart,

Lower Parel,

Mumbai 40013

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Tel. No. 66521000

Fax No. 24960737

Website : www. hdfcbank.com

SWOT ANALYSISSTRENGHTS

* It has an extensive distribution network comprising of 319 branches in 166 cities & one

international office in Dubai this provides a competitive edge over the competitions.

* The Bank has a strong retail depository base & has more than million customers.

* Bank boasts of strong brand equity.

* ISO 9001 certification for its depository & custody operations & for its backend

processing of retail operation & direct banking operations.

* The bank has a near competitive edge in area of operations.

* The bank has a market leader in cash settlement service for the major stock exchanges in

its country.

* HDFC Bank is one of the largest private sector bank working in India.

* It has a highly automated environment in terms of information technology &

communication system.

* Infrastructure is best.

* It has many innovative products like kids Advantage scheme, NRI services.

WEAKNESS

* Account opening and delivery of cheque book take comparatively more time.

* Lack of availability of different credit products like CC Limit, Bill discounting facilities.

OPPORTUNITY

* Branch expansion

* Door step services

* Greater liberalization in foreign ownership via FDI in Indian Pvt. Sector Banks.

* CC/ OF Facilities.

* Infrastructure improvements & better systems for trading & settlement in the govt.

securities & foreign exchange markets.

THREATS

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* The bank has started facing competition from players like SBI, PNB Bank in the finance

market itself. This reduces the profit margins in the future.

* Some Pvt. Banks have 7 days banking.

CHAPTER 3

THEORITICAL ASPECTS

RATIO ANALYSIS Absolute figures expressed in financial statements by themselves are meaningfulness. These

figures often do not convey much meaning unless expressed in relation to other figures. Thus, it

can be say that the relationship between two figures, expressed in arithmetical terms is called a

ratio.

“According to R.N. Anthony”. “A ration is simply one number expressed in terms of

another. It is found by dividing one number into the other.”

TYPES OF RATIOS

Proportion or Pure Ratio or Simple ratio.

Rate or so many Times.

Percentage

Fraction.

OBJECTS AND ADVANTAGES OR USES OF RATIO ANALYSIS

Helpful in analysis of financial statements.

Simplification of accounting data.

Helpful in comparative study.

Helpful in locating the weak spots of the business.

Helpful in forecasting

Estimate about the trend of the business

23

Fixation of ideal standards

Effective control

Study of financial soundness.

LIMITATION OF RATIO ANALYSIS

False accounting data gives false ratios

Comparisons not possible of different firms adopt different accounting policies.

Ratio analysis becomes less effective due to price level change

Ratios may be misleading in the absence of absolute data.

Limited use of a single Ratio.

Window-Dressing

Lack of proper standards.

Ratio alone are not adequate for proper conclusions

Effect of personal ability and bias of the analyst.

CLASSIFICATION OF RATIOS

In view of the financial management or according to the tests satisfied, various ratios have been

classified as below

I. Liquidity Ratios: These are the ratios which measure the short-term solvency or financial

position of a firm. These ratios are calculated to comment upon the short-term paying

capacity of a concern or the firm’s ability to meet its current obligations.

II. Long –Term Solvency and Leverage Ratios : Long-term solvency ratios convey a firm’s

ability to meet the interest cost and repayment schedules of its long-term obligation e.g.

Debit Equity Ratio and Interest Coverage Ration. Leverage Ratios.

III. Activity Ratios: Activity ratios are calculated to measure the efficiency with which the

resources of a firm have been employed. These ratios are also called turnover ratios because

they indicate the speed with which assets are being turned over into sales e.g. debtors

turnover ratio.

24

IV. Profitability Ratios: These ratios measure the results of business operations or overall

performance and effective of the firm e.g. gross profit ratio, operating ratio or capital

employed. Generally, two types of profitability ratios are calculated.

(a) In relation to Sales (b)In relation in Investment

TYPES OF FINANCIAL ANALYSIS: Financial statement analysis can be broadly classified

based on two types

Classification on the basis of natural used

a) External Analysis

Outsiders, who don’t have access to the detailed internal accounting records of the

business firm, do this analysis. These outsiders’ parties are potential investor, creditors,

government agencies, credit agencies & general public.

b) Internal Analysis :

The analysis conducted by person who has access to the internal accounting records of a

business firm is known as internal analysis.

Classification on the basis of modus operand:

a) Horizontal Analysis:

Horizontal analysis refers to the comparison of financial data of a company for several

years. The figures of this type of analysis are presented horizontally over a no. of columns.

This type of analysis is also called “Dynamic Analysis”.

b) Vertical Analysis:

This analysis refers to the study of relationship of the various items in the financial

statements, of one accounting period. It is also known as “Static analysis”.

FUNCTIONS OF FINANCE DEPARTMENT

The functions of finance department include the following areas:

1) Effective management of financial resources of the company.

2) Coordinates & Monitors the functions of accounts activities in the units/marketing offers.

25

3) Establish and maintain systems of financial control, internal check and render advice on financial & accounting matters including examination of feasibility report and detailed project reports.

4) Establish and maintain proper system of budgetary control, cost control and management reporting.

5) Maintain financial accounts and compile annual periodical accounts in accordance with the companies Act, 1956, ensuring the audit of accounts as per law/Govt. directions.

6) Looks after overall funds management and arranges funds required for the capital schemes and working capital form govt., banks and financial institutions etc.

7) Timely payment of all taxes, levies & duties under the Law, Maintenance of records and filing returns statements connected with such taxes, levies and duties with the appropriate authorities, as per law.

All the power involving financial implications are to e exercised in prior consultation with head

of concerned finance department. In the event of any difference of opinion between the General

Manger and the Head of Finance Dept., the matter shall be referred to Managing Director who

after consulting Director (Finance) shall issue appropriate instruction after following the

prescribed procedures.

METHODS OF FINANCIAL ANALYSIS

A number of methods can be used for the purpose of analysis of financial statements. These are

also termed as techniques or tools of financial analysis. Out of these, and enterprise can choose

those techniques which are suitable to its requirements. The principal techniques of financial

analysis are:

1. Comparative Financial Statements.

2. Common – size Statements

3. Trend Analysis

COMPARATIVE FINANCIAL STATEMENTS

When financial statements figures for two or more years are placed side-side to facilitate

comparison, these are called ‘comparative Financial Statements’. Such statements not only show

the absolute figures of various years but also provide for columns to indicate to increase or

26

decrease in these figures from one year to another. In addition, these statements may also show

the change from one year to another on percentage form. Such cooperative statements are of

great value in forming the opinion regarding the progress of the enterprise.

IMPORTANCE OF COMPARATIVE STATEMENTS

1. To make the Data simpler and more understandable

2. To indicate the Trend

3. To indicate the strong points weak points of the concern

4. To compare the firms performance with the average performance of the industry

5. To help in forecasting

FORMS OF PRESENTING COMPARATIVE STATEMENTS

1. To show only the absolute data of various items or in other words to show only rupee amounts of various items.

2. To show the increases and decreases in data in terms of money values

3. To show the increases and decreases in data in terms of percentages

4. Comparison expressed in ratios

5. Use of cumulative figures and averages

COMPARATIVE BALANCE SHEET

The Comparative Balance Sheet as on two or more different dates can be prepared to show the

increase or decrease in various assets, liabilities and capital. Such a comparative Balance Sheet is

very useful in studying the trends in a business enterprise.

ADVANTAGES OF COMPARATIVE BALANCE SHEET

1. Helpful for comparison.

27

2. Helpful in knowing changing in the size of items.

3. Helpful in knowing trends.

4. Link between income statement and Balance sheet

COMPARATIVE PROFIT & LOSS ACCOUNT

Profit and loss account shows the net profit or net loss of a particular year whereas comparative

profit and loss account for a number of years provides the following information

1. Rate of increase or decrease in gross profit.

2. Rate of increase or decrease in operating profit.

3. Rate of increase or decrease in cost of goods sales

4. Rate of increase or decrease in net profit

5. Rate of increase or decrease in sales.

TREND ANALYSIS

Trend percentage are very useful is making comparative study of the financial statements

for a number of years. These indicate the direction of movement over a long time and help an

analyst of financial statements to form an opinion as to whether favorable or unfavorable

tendencies have developed. This helps in future forecasts of various items.

For calculating trend percentages any year may be taken as the ‘base year’. Each item of

base year is assumed to be equal to 100 and on that basis the percentage of item of each year

calculated.

28

CHAPTER – 4

DATA ANALYSIS & INTERPRETATIONFor calculating the ratios we need to have the particulars of HDFC bank like Balance sheet and

income statement as follows.

Table: 4.1Table showing the particulars of balance sheet for five years

Mar '13 Mar '12 Mar '11 Mar '10 Mar '09

Capital and Liabilities:Total Share Capital 475.88 469.34 465.23 457.74 425.38Equity Share Capital 475.88 469.34 465.23 457.74 425.38Share Application Money 0 0.3 0 0 400.92Preference Share Capital 0 0 0 0 0Reserves 35,738.26 29,455.04 24,914.04 21,064.75 14,226.43Revaluation Reserves 0 0 0 0 0Net Worth 36,214.14 29,924.68 25,379.27 21,522.49 15,052.73Deposits 296,246.98 246,706.45 208,586.41 167,404.44 142,811.58Borrowings 33,006.60 23,846.51 14,394.06 12,915.69 2,685.84Total Debt 329,253.58 270,552.96 222,980.47 180,320.13 145,497.42Other Liabilities & Provisions 34,864.17 37,431.87 28,992.86 20,615.94 22,720.62Total Liabilities 400,331.89 337,909.51 277,352.60 222,458.56 183,270.77

AssetsCash & Balances with RBI 14,627.40 14,991.09 25,100.82 15,483.28 13,527.21Balance with Banks, Money at Call 12,652.77 5,946.63 4,568.02 14,459.11 3,979.41Advances 239,720.64 195,420.03 159,982.67 125,830.59 98,883.05Investments 111,613.60 97,482.91 70,929.37 58,607.62 58,817.55Gross Block 6,865.45 5,930.24 5,244.21 4,707.97 3,956.63Accumulated Depreciation 4,162.37 3,583.05 3,073.56 2,585.16 2,249.90Net Block 2,703.08 2,347.19 2,170.65 2,122.81 1,706.73

29

Capital Work In Progress 0 0 0 0 0Other Assets 19,014.41 21,721.64 14,601.08 5,955.15 6,356.83

Total Assets400,331.90 337,909.49 277,352.61 222,458.56 183,270.78

Contingent Liabilities 698,062.89 844,374.61 559,681.87 466,236.24 396,594.31Bills for collection 48,163.51 39,610.71 28,869.10 20,940.13 17,939.62Book Value (Rs) 152.2 127.52 545.53 470.19 344.44

Table 4.2Table showing the particulars of income statement for five years

HDFC Bank

------------------- in Rs. Cr. -------------------

Mar '13 Mar '12 Mar '11 Mar '10 Mar '09

IncomeInterest Earned 35,064.87 27,286.35 19,928.21 16,172.90 16,332.26Other Income 6,852.62 5,243.69 4,335.15 3,983.10 3,470.63Total Income 41,917.49 32,530.04 24,263.36 20,156.00 19,802.89ExpenditureInterest expended 19,253.75 14,989.58 9,385.08 7,786.30 8,911.10Employee Cost 3,965.38 3,399.91 2,836.04 2,289.18 2,238.20Selling and Admin Expenses 0 2,647.25 2,510.82 3,395.83 2,851.26

Depreciation 651.67 542.52 497.41 394.39 359.91Miscellaneous Expenses 11,320.41 5,873.42 5,205.97 3,169.12 3,197.49Preoperative Exp Capitalised 0 0 0 0 0

Operating Expenses 11,236.12 9,241.64 8,045.36 7,703.41 7,290.66Provisions & Contingencies 4,701.34 3,221.46 3,004.88 1,545.11 1,356.20Total Expenses 35,191.21 27,452.68 20,435.32 17,034.82 17,557.96

Net Profit for the Year6,726.28 5,167.09 3,926.40 2,948.70 2,244.94

Extraordionary Items -4.47 -2.12 -2.65 -0.93 -0.59Profit brought forward 8,399.65 6,174.24 4,532.79 3,455.57 2,574.63Total 15,121.46 11,339.21 8,456.54 6,403.34 4,818.98Preference Dividend 0 0 0 0 0Equity Dividend 1,309.08 1,009.08 767.62 549.29 425.38Corporate Dividend Tax 222.48 163.7 124.53 91.23 72.29Per share data (annualised)Earning Per Share (Rs) 28.27 22.02 84.4 64.42 52.77Equity Dividend (%) 275 215 165 120 100

30

Book Value (Rs) 152.2 127.52 545.53 470.19 344.44AppropriationsTransfer to Statutory Reserves1,785.08 1,250.08 997.52 935.15 641.25

Transfer to Other Reserves 672.63 516.7 392.64 294.87 224.5Proposed Dividend/Transfer to Govt

1,531.56 1,172.78 892.15 640.52 497.67

Balance c/f to Balance Sheet 11,132.18 8,399.65 6,174.24 4,532.79 3,455.57

Total 15,121.45 11,339.21 8,456.55 6,403.33 4,818.99

CURRENT RATIO'S

1current ratio=current assets /current liabilities

0.78 0.08 0.06 0.03 0.04

2Liquid Assets to Total Assets Ratio = Liquid Assets / Total Assets

0.07 0.06 0.11 0.13 0.10

3Acid Test Ratio = Quick Assets / Current Liabilities

7.97 6.2 6.79 7.03 5.15

4Credit Deposit Ratio = Total Loan and Advances / Total Deposit

35.99 78.06 76.02 72.44 66.64

ANALYSIS:Table: 4.3 Table showing the calculations of Current Ratios

CURRENT RATIO:

This ratio measures the degree of short term liquidity of the bank. It indicates whether the current

assets are sufficient to meet the current liabilities. It is generally believed that a good current

ratio should be between 1.5:1 and 2:1.

Generally, higher the value of this ratio, greater will be the margin and financial solvency of the

bank.

Current Ratio = Current Assets / Current Liabilities

The current assets included in this study were cash in hand, balance with other banks (current

account only), short term loan-advances and bills receivables, interest receivable, sundry debtors.

31

The current liabilities included deposit (current account only), short term borrowings (cash credit

overdraft), interest payable, sundry creditors, bills payables and other short term liabilities.

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090

0.20.40.60.8

1

current ratio=current assets /current liabilities

current ratio=current assets /current liabilities

INTERPRETATION: Current ratio is gradually improving. It is very low (0.03) in the year

2010 and high (0.78) in the year 2013. This is because the bank raised more current account

deposits (current liabilities) during the year 2010 which results in the lower current ratio. Even

though the current ratio is improving it is not up to the mark (1.5:1 to 2:1) indicating the lower

capacity to meet its short term liabilities.

LIQUID ASSETS TO TOTAL ASSETS RATIO

The degree of liquidity performance adopted by the bank is depicted by this ratio.

Liquid Assets to Total Assets Ratio = Liquid Assets / Total Assets

The liquid assets included cash in hand and balance with other banks (current account only).

Total assets included cash in hand, balance with other banks, investment, loan and advances,

fixed assets and other assets.

32

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.000.020.040.060.080.100.120.140.16



INTERPRETATION: Liquid Assets to Total Assets ratio increased from the year 2009 to 2011

and it was high (0.13) during 2010 because of the increase in money at call and short notice

during that period and it gradually decreases and was very low (0.06) in the year 2012 because of

decrease in the maintenance of money with RBI and very low maintenance of money at call and

short term notice.

ACID TEST RATIO

This ratio is called quick ratio or near money ratio. This represents the ratio between quick assets

and current liabilities and computed as follows

Acid Test Ratio = Quick Assets / Current Liabilities

The quick assets included cash in hand and balance with other banks (current account only). The

current liabilities included deposit (current account only), interest payable, sundry creditors, bills

payables and other short term liabilities. Excluded short term borrowings (cash credit overdraft)

33


10

Acid Test Ratio = Quick Assets / Current Liabili-ties

Acid Test Ratio = Quick Assets / Current Liabilities

INTERPRETATION: Acid test ratio is increased from the year 2009 to 2010 and again

decreases during 2011 and 2012 and again increased in 2013.This is because of increase in

liquid assets(money at call and short notice) and decrease in current liabilities( interest accrued)

in 2010. It again decreases during 2011 and 2012 because of decrease in money at call and short

notice with other institutions.

CREDIT DEPOSIT RATIO

This ratio is the difference between the total loan-advances and total deposits.

Credit Deposit Ratio = Total Loan and Advances / Total Deposit


20406080

100



INTERPRETATION: Credit Deposit Ratio is increasing over the period of time indicating that

the bank is giving more loans from the deposited amount which means that banks might not have

enough liquidity to cover any unforeseen fund requirements. This is because the bank is

34

increasing its cash credits, over drafts, loans repayable on demand components which may block

the availability of fund.

SOLVENCY RATIOS

These ratios indicate banks involvement in the total resources and provide basis for measuring

leverage ratio.

These ratios indicate the ability of the bank to meet its medium as well as long term obligations

and also provide the basis for measuring the leverage effect on the bank. The various ratios

employed were as follows:

Table: 4.4

Table showing the calculations of Solvency ratios

SOLVENCY RATIO'S

1Debt Equity Ratio = Long Term Liabilities / Net Worth

8.18 8.24 8.22 7.78 9.49

2Indebtedness Ratio = Total Liabilities / Net Worth

11.05 11.29 10.93 10.34 12.18

3Fixed Assets to Net-Worth Ratio = Fixed Assets / Net Worth

9.90 9.93 9.22 8.69 10.64

35

4Net Worth = Total Assets – Total liabilities (Outside/ External)

362141373 299246800 253792700 215224900 150527300

5

Net Capital Ratio = Total Assets / Total liabilities (Outside/ External)

1.099 1.097 1.101 1.107 1.089

DEBT-EQUITY RATIO

This ratio is called ‘leverage ratio’. This compares the banks stake in the business with outside

term liabilities.

Lower value of the ratio indicates that the leverage effect will be restricted to the minor role of

debt and major capital being equity, the bank is supposed to be trading on thick equity.

Debt Equity Ratio = Long Term Liabilities / Net Worth

In the above ratio, debt represents only long term liabilities and not current liabilities (deposit-

fixed, saving), while equity refers to net worth after deducting intangible assets. Net worth

includes statutory reserves, capital reserves, profits and other reserves and share capital.

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.002.004.006.008.00

10.00



INTERPRETATION: Debt Equity Ratio is low (7.78) in the year 2010 and then again

increased gradually because of high increase in capital reserve (additions during the year and

opening balance).In 2011, 2012 change in capital reserve is very less but liabilities are increasing

36

and in 2013 the company increased its capital reserve which results in the decrement (8.18), a

good sign.

INDEBTEDNESS RATIO

The ratio indicates the amount owed by the bank to creditors. The ratio reflects the solvency

position of the bank in a better way. The lower the ratio, the better is the solvency position.

Indebtedness Ratio = Total Liabilities / Net Worth

The total liabilities included statutory reserves, capital reserves, revenue reserves, deposit,

borrowings, contingent liabilities, other liabilities and share capital.

Mar-13 Mar-12 Mar-11 Mar-10 Mar-099.009.50

10.0010.5011.0011.5012.0012.50

Indebtedness Ratio = Total Liabilities / Net Worth

Indebtedness Ratio = Total Liabili-ties / Net Worth

INTERPRETATION: Indebtedness ratio is also low in 2010 and again increased in 2011 and

2012 and decreased in the 2013 because of change in capital reserve and increase in liabilities.

FIXED ASSETS TO NET-WORTH RATIO

Fixed Assets to Net-Worth Ratio = Fixed Assets / Net Worth

37

The fixed assets included balance with other banks (Fixed deposit account only), investment,

long-term loan and advance, building and furniture. Fixed assets are considered at their book

values (cost less depreciation).

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.002.004.006.008.00

10.0012.00



INTERPRETATION: Fixed asset turn to net worth ratio is showing that Net worth is frozen in

the form of fixed assets in the year 2009. Later in the year 2011 & 2012 the bank opened 558

new branches and 3400 new ATM’s which required high infrastructure and staffing expenses.

These all shows that the bank is expanding more and it is resulting in more assets and at the same

time it also indicates the actual amount of fixed assets the bank hold.

TESTS OF STRENGTH

This test provides a basis to know the real worth of the Bank. The term net worth refers to the

owned funds employed in the business.

NET WORTH

It indicates what the bank owes to the owners of the business. It measures the excess of assets

over outside liabilities, which indicates the soundness of the bank.

Net Worth = Total Assets – Total liabilities (Outside/ External).

38


50000000100000000150000000200000000250000000300000000350000000400000000

Net Worth = Total Assets – Total liabilities (Outside/ External)

Net Worth = Total Assets – Total liabilities (Outside/ External)

INTERPRETATION: Net worth of the bank is increasing year to year which indicates the

soundness of the bank. Even though there is a positive sign in equity, the strength of the net

worth is frozen in the form of fixed assets in the year 2009 resulting in high (10.64) and

decreased in 2010 and increased in the year 2011 and 2012 because of increase in fixed assets (as

the bank opened 558 new branches and 3400 new ATM’s which required high infrastructure and

staffing expenses).

NET CAPITAL RATIO:

The ratio indicates the degree of liquidity of the bank in the long run. It measures the degree of

availability of assets to pay off the long term liabilities. This ratio indicates the relationship

between total assets and liabilities of the bank.

This ratio would throw light on the real financial strength of the bank.

Net Capital Ratio = Total Assets / Total liabilities (Outside/ External).

39

Mar-13 Mar-12 Mar-11 Mar-10 Mar-091.0801.0851.0901.0951.1001.1051.110

Net Capital Ratio = Total Assets / Total liabili-ties (Outside/ External)

Net Capital Ratio = Total Assets / Total liabilities (Outside/ External)

INTERPRETATION: Net Capital Ratio is high (1.107, 1.101) in 2010 and 2011 because of

increase in assets during these two years and is decreased in 2012(1.097) and again increased in

2013(1.099) indicating the increase in external and outside liabilities.

PROFITABILITY RATIOS

These ratios were used to compare the return to the investment. Following were the important

ratios computed. This ratio provides a fairly sound method of diagnosis of the financial status

and overall efficiency of the Bank. It indicates the profitability of the investment and credit given

by the bank.

Table: 4.5

Table showing the calculations of Profitability ratios

PROFITABILITY RATIO'S

1 Return on Equity (ROE) = net profit/ total equity. 18.57% 17.27% 15.47% 13.70% 14.91%

2Net profit to Total Assets Ratio = Net Profit / Total Assets

0.017 0.015 0.014 0.013 0.012

3Net Profit to Net Worth Ratio = Net Profit / Net Worth

0.186 0.173 0.155 0.137 0.149

40

4Net Profit to Fixed Assets Ratio = Net Profit / Fixed Assets

1.875E-06

1.73916E-06

1.6775E-06

1.5773E-06

1.402E-06

NET PROFIT TO TOTAL ASSETS RATIO

This is ratio of profit on total assets of the bank and their employment. An increasing trend over

the years indicates the overall efficiency of the bank.

Net profit to Total Assets Ratio = Net Profit / Total Assets.

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.000

0.005

0.010

0.015

0.020

Net profit to Total Assets Ratio = Net Profit / Total Assets

Net profit to Total Assets Ratio = Net Profit / Total Assets

INTERPRETATION: Net Profit to total asset ratio in indicating the increasing trend which

reveals that the company is using its assets efficiently for generating the profits.

NET PROFIT TO NET WORTH RATIO

The ratio of net profit to net worth shows whether profitability is being maintained or not.

Net Profit to Net Worth Ratio = Net Profit / Net Worth.

41

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.0000.0200.0400.0600.0800.1000.1200.1400.1600.1800.200

Net Profit to Net Worth Ratio = Net Profit / Net Worth

Net Profit to Net Worth Ra-tio = Net Profit / Net Worth

INTERPRETATION: Return On Equity is low (13.70) in 2010 because of high capital reserves

and less change in net profit from 2009 and it is increasing from 2010 because of less change in

capital reserve and high increase in net profits.

NET PROFIT TO FIXED ASSETS RATIO

The ratio indicates whether the fixed assets are being used profitability. A decline in the ratio

shows that either the assets are being kept idle or the business conditions are bad.

Net Profit to Fixed Assets Ratio = Net Profit / Fixed Assets

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.000E+00

5.000E-07

1.000E-06

1.500E-06

2.000E-06



42

INTERPRETATION: Net profit to fixed assets indicates the positive trend showing that the

company is utilizing the assets effectively.

EFFICIENCY RATIOS

This test provides a clear picture of financial efficiency of the bank. It indicates the profits for

every rupee spent.

Four ratios were adopted to assess the efficiency of the bank, viz., Gross Ratio, Operating Ratio,

Management Ratio and Establishment Ratio.

GROSS RATIO

This ratio helps to ascertain how efficiently the gross income of the bank was earned. The ratio

was computed as follows.

Gross Ratio = Total Expenses / Gross Income

The gross income included interest and discount, commission and brokerage and other income.

The total expenses included interest, salary, allowance, rent, legal expenses, audit expenses and

other provisions.

Table: 4.6

Table showing the calculation of Efficiency ratio

EFFICIENCY RATIO

1Gross Ratio = Total Expenses / Gross Income

0.840 0.842 0.839 0.852 0.887

43

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.800

0.820

0.840

0.860

0.880

0.900



INTERPRETATION: Gross ratio is high(0.887) in the year 2009 due to higher expansion in

the branch network and amalgamation of centurion bank which results in the large amount of

expenses and the ratio increased again in 2012(0.844) because of expansion of network from

2544 to 3062 branches and increase in ATM’s from 8,913 to 10,743.

OPERATING RATIO

This ratio indicates the proportion of gross income being used for meeting the operating

expenses. An increase in the ratio indicates a decline in the efficiency of the bank.

Operating Ratio = Operating Expenses / Gross Income

The operating expenses included interest, salary; allowances, provident fund contribution, rent,

legal expenses, audit expenses and other expenses (excluded provisions).

Table: 4.7

Table showing the calculations of operating ratio

OPERATING RATIO

1 Operating Ratio = Operating Expenses / Gross Income

0.268 0.283 0.330 0.385 0.368

44

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.0000.0500.1000.1500.2000.2500.3000.3500.4000.450



INTERPRETATION: Operating Ratio is high during 2010 (0.382) because of increase in

payments and provisions to employees, stationary items, advertisement and publicity during the

year and it is decreased to 0.268 in 2013 due to less change in expenses and higher increase of

gross income.

MANAGEMENT RATIO

This ratio indicates the proportion of gross income being used for meeting the management


Management Ratio = Management Expenses / Gross Income

The management expenses included salary; allowances, provident fund contribution, rent, legal

expenses, audit expenses and other expenses (excluded provisions).

Table: 4.8

Table showing the calculation of Management ratio

MANAGEMENT RATIO

1 Management Ratio = Management Expenses / Gross Income

0.116 0.128 0.144 0.144 0.141

45

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.0000.0200.0400.0600.0800.1000.1200.1400.160



INTERPRETATION: Management ratio is high (0.144) in 2010 and 2011 because of increase

in salary expense as the employees increased due to the expansion of the branches to semi urban

areas. It gradually decreased as the company maintained its expenses and increased its gross

income.

ESTABLISHMENT RATIO

This ratio indicates the proportion of gross income being used for meeting the establishment


Establishment Ratio = Establishment Expenses / Gross Income.

Table: 4.9

Table showing the calculation of Establishment Ratio

ESTABLISHMENT RATIO

1 Establishment Ratio = Establishment Expenses / Gross Income

0.095 0.105 0.117 0.115 0.114

46

Mar-13 Mar-12 Mar-11 Mar-10 Mar-090.0000.0200.0400.0600.0800.1000.1200.140

Establishment Ratio = Establishment Expenses / Gross Income

Establishment Ratio = Establishment Expenses / Gross Income

INTERPRETATION: Establishment ratio is high during the years 2010 2011 and 2012 because

of huge expansion of the bank increase in costs like employee salaries and others but the bank is

gradually decreasing the expenses by generating more income in 2013.

DUPONT ANALYSIS

DuPont analysis tells us that ROE is affected by three things:

- Operating efficiency, which is measured by profit margin.

- Asset use efficiency, which is measured by total asset turnover.

- Financial leverage, which is measured by the equity multiplier.

47

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity

Multiplier (Assets/Equity)

DuPont Financial Analysis Model is a rather straightforward method for assessing the factors

that influence a firm’s financial performance.

4.10 Table showing the calculations of DuPont Analysis

1 Average Assets 400,331.90 337,909.49 277,352.61 222,458.56 183,270.78

2 Average Equity 36,214.14 29,924.68 25,379.27 21,522.49 15,052.73

3 Interest Revenue 35,064.87 27,286.35 19,928.21 16,172.90 16,332.26

4 Noninterest

Revenue

6,852.62 5,243.69 4,335.15 3,983.10 3,470.63

5 Net Income 6,726.28 5,167.09 3,926.40 2,948.70 2,244.94

Return On Average Equity (5/2) ROE 0.1857 0.172 0.154 0.137 0.149

Return On Average Assets (5/1) ROA 0.0168 0.015 0.014 0.013 0.012

Equity Multiplier (1/2) EM 11.054

6

11.29 10.92 10.33 12.17

Net Profit Margin (5/ NPM 0.1605 0.158 0.161 0.146 0.113

48

(3+4))

Average Total Asset Turn

Over

((3+4)/

1)

ATAT 0.1047 0.096 0.087 0.090 0.108

Return on Equity (ROE): measures overall profitability of the FI per rupee of equity

Return on Assets (ROA): measures profit generated relative to the FI’s assets.

Equity Multiplier (EM): measures the extent to which assets of the FI are funded with equity

relative to debt.

Profit Margin (PM): measures the ability to pay expenses and generate net income from interest

and noninterest income.

Asset Utilization (AU): measures the amount of interest and noninterest income generated per

dollar of total assets.

Return on Equity and Its Components

ROE is defined as:

ROE= Net income

Total equity capital

It measures the amount of net income after taxes earned for each Rupee of equity capital

contributed by the bank’s stockholders. Taking these data from the financial statements of HDFC

bank , We have ROE as mentioned above in the table.

Generally, bank stockholders prefer ROE to be high. It is possible; however, that an increase in

ROE indicates increased risk. For example, ROE increases if total equity capital decreases

relative to net income. A large drop in equity capital may result in a violation of minimum

regulatory capital standards and an increased risk of insolvency for the bank. An increase in ROE

may simply result from an increase in a bank’s leverage—an increase in its debt-to-equity ratio.

Generally, bank stockholders prefer ROE to be high.

ROE can be decomposed into two components as

ROE = ROA x EM

49

ROA = Net Income X Total Assets

Total Assets Equity Capital

High values for these ratios produce high ROEs, but, as noted, managers should be concerned

about the source of high ROEs. For example, an increase in ROE due to an increase in the EM

means that the bank’s leverage, and therefore its solvency risk, has increased. A further

breakdown of a bank’s profitability is that of dividing ROA) into its profit margin (PM) and asset

utilization (AU) ratio components

ROA= Net income X Total operating income

Total operating income Total assets

ROA= PM X AU

PM measures the bank’s ability to control the expenses. AU measures the bank’s ability to

generate the income from assets.

INTERPRETATION: The overall ROE of the bank is increasing which is a good sign. In 2009

ROE is 14.9% gradually it increases and recorded highest in the year 2013(18.57). At the same

time EM is fluctuating and decreased from 2009(12.17) to 2010(10.33) and again it increased in

the year 2013 (11.054). This indicates that because of high expansion bank has experienced some

decrease during those years and now it is able to have control over the assets. All the other

components are indicating the soundness of the bank.

50

CHAPTER – 5

RECOMMENDATIONS AND CONCLUSIONS:

The bank has been growing good from the last five years indicating the positive sign to

the shareholders and the stake holders.

Bank’s capital adequacy ratio is good and it is maintaining more than the BASEL-iii

requirements

Amalgamation of centurion bank of Punjab in 2008 has some impact in its functions and

assets but it takes less time for the bank to regain its profits

The bank has been expanding its branches with less costs and expenses by managing its

human power and assets efficiently

Profitability and solvency ratios are indicating good soundness of the bank.

Efficiency ratios like management ,operating, operating and gross ratios are indicating

that the bank is effectively managing the employee costs and other administrative costs

Current Ratios shows some negative indications regarding the maintenance of current

assets for current liabilities but actually banks maintain the capital to risk free assets

known as capital adequacy ratio for fulfilling the obligations which was good for the

bank.

The overall performance of the bank was good showing a positive sign to the stakeholders.

51

BIBILIOGRAPHY

Hosamani, S.B. (1995). Performance and impact of Regional Rural Banks. A case study of

Malaprabha Grameena Bank in Karnataka. (Unpublished Ph.D. Thesis). University of

Agricultural Science Dharwad.

Kulwantsingh Pathania and Yoginder Singh (1998) A study of the performance of the

Himachal Pradesh cooperative banks. Indian Cooperative Review. 36 (2) 178-182.

Enugandula C S. (1999). Performance of KDCC bank in Andhra Pradesh. Indian Economic

Review Jan 227- 232.

Siddhanti, S.A. (1999). Financial performance of Indian Farmers Fertilizers Cooperative.

Cooperative Perspective 34 (1) 43-46.

Patil, S.M. (2000) Performance of Primary Cooperative Agricultural and Rural Development

Bank in Dharwad district, Karnataka. (Unpublished Ph.D. Thesis) University of Agricultural

Science, Dharwad.

52

hdfc financial statement analysis

Documents

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financial analysis27chapter

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