hdfc report

Financial Analysis of HDFC Bank

ACKNOWLEDGEMENT

It is our duty to acknowledge with gratitude the generous help that I have received from Mr .

D. Gopala Krishna Branch manager, HDFC BANK LTD.We have had the advantages of

his critical advice from his profound knowledge in Finance Sector. He has indeed taken

personal interest in preparing an innovative Report on “Financial analysis &

Comparative Analysis” He has helped us a lot in preparing the questionnaire.

I also want to thank Mr. E.Dheeraj who is the Relationship Manager-Corporate Salary of

this branch, my company guide for his enduring patience, valuable guidance and constant

encouragement during the course of project work.

My sincere thanks are due to all the officers of HDFC Bank for their worthy help and

cooperation.

Finally, it’s my pleasure to acknowledge the kind help and cooperation of all the respondents

of NOIDA with whom I met throughout the duration of this project.

Head Of The Organization Mr. Gopala Krishna Branch manager, HDFC BANK

LTD.

K-Block,

Sector 18,

Noida - 201301

Uttar Pradesh

Tel 0120-4664301 / 328 / 335 /336

Fax 0120 - 2514534

Company Guide - Mr. E.Dheeraj-Relationship Manager-Corporate Salary

Faculty Guide – Dr. Sunita Bishnoi

(ISHA ARORA) PGDM III

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http://images.google.co.in/imgres?imgurl=http://www.americanexpress.com/india/images/img_hdfcbank.jpg&imgrefurl=http://www.americanexpress.com/india/customerservice/getinfo_pers.cgi&h=45&w=147&sz=3&hl=en&start=73&um=1&tbnid=yNiyPab52o0FkM:&tbnh=29&tbnw=95&prev=/images?q=hdfc+bank&start=60&ndsp=20&svnum=10&um=1&hl=en&sa=N


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Contents

Introduction.......................................................................................3

Financial Sector of India – An Overview..........................................5

HDFC Bank.......................................................................................9

Financial Statement analysis of HDFC Bank..................................15

Comparative Statement Analysis.....................................................15

Ratio Analysis of HDFC Bank........................................................23

Common Size Analysis of HDFC Bank..........................................38

Trend Analysis of HDFC Bank.......................................................40

Managers Perspective……………………………………………………………47

Introduction

4



Financial statement analysis is very helpful in spanning

bank’s internal operations and its relations with the

outside world. Therefore, the financial information must

be organized into an understandable, coherent and

sufficiently limited set of data. Data from the financial

statement analysis can be used to quickly calculate and

examine financial ratios. An attempt has been made

here to analyse the financial statements of HDFC Bank.

The investors rely on the financial statement to judge

the performance of the bank and ensure that these

statements are correct, complete, consistent and

comparable. The accuracy of the financial statement

can be identified from the report of the auditors. The

financial statement analysis can be used by investors

for deciding about their investments. The financial

institutions also use these statements while granting

loans to the banks. The debenture holders, creditors,

employees and government can also use the financial

statements for different purposes.

The bank itself and outside providers of capital –

creditors and investors – all undertake financial

statement analysis. The type of analysis varies

according to the specific interests of the party involved.

Creditors are primary interested in the liquidity of a

5



bank. The claims of bond holders, on the other hand,

are long term. Accordingly, bond holders are more

interested in the cash – flows ability of the bank to

service debt over a long period of time.

Inflation Rate

Inflation rate in double-digit and resulted in hike in

policy rates by 150 bps, which put the liquidity

situation under high stress. Although, further rate hike

is not imminent, but inflation would drive the monetary

policy further and interest rate expected to remain

high.

Headline inflation is always considered as a major

vexation for the India’s central bank. Since, inflation

was reading in a double-digit figure, it was a challenge

for the Reserve Bank of India to fix the inflation

problem under the condition of fragile global economic

recovery without denting the recovery process. In

6



response to that, RBI revised its policy rates by over

100 bps and now it does seem that the policy action is

working but the money supply is still at 20.34 per

cent. Both trend lines are now acting inversely, and

inflation is falling down to 8 per cent. According to VMW

Research, inflation is projected at 7.48 per cent for the

month of Nov, 2010. It is also evident that in the past

three months, schedule commercial banks and non-

banking financial companies have started

borrowing from the RBI’s window of Liquidity

Adjustment Facility (LAF) at the rate of 6.25 per cent.

Since, banks are now left with the limited amount of

liquidity; they’re again focusing on deposits from

customers. Several banks have revised their deposit

rates between 50 bps and 150 bps to attract funds,

however, going forward, banks will see a

narrow interest rate spread, resulted in lower earnings.

Discomfort levels of inflation and money supply will

keep interest rates higher for the next few months.

Moreover, to reduce the impact of tight liquidity, RBI

has already started the Open Market Operation

(OMO) to infuse liquidity by way of purchasing

government bonds in exchange of money.

7



Financial Sector of India – An Overview

Financial Sector of India is intrinsically strong,

operationally sundry and exhibits competence and

flexibility besides being sensitive to India’s economic

aims of developing a market oriented, industrious and

viable economy. An established financial sector assists

greater standards of endowments and endorses

expansion in the economy with its intensity and

exposure. The fiscal sector in India entails banks,

financial organization, markets and services.

Fiscal transactions in an organized industry are

executed by a number of financial organizations which

are commercial in nature and offer monetary services

to the society. Further classification includes banking

and non-banking enterprises, often recognized as

activities that are client specific. The chief controller of

the finance in India is the Reserve Bank of India (RBI)

and is regarded as the supreme organization in the

fiscal structure. Other significant fiscal organizations

are business banks, domestic rural banks, cooperative

banks and development banks. Non-banking fiscal

organizations entail credit and charter firms and other

8



organizations like Unit Trust of India, Provident Funds,

Life Insurance Corporation, Mutual funds, GIC, etc.

Indian Banking Sector

After a difficult FY09 Indian banks managed to

grow their balance sheets in FY10 albeit at a lower

average rate than that projected by the RBI. The

monetary stimuli (reduction in repo rate, cash reserve

ratio (CRR) and statutory liquidity ratio (SLR) offered to

the banks by the RBI early in the fiscal made it easier to

sustain margins But what really helped was the

accretion of low cost deposits (CASA). Indian banks

grew their advances and deposits by 16.9% YoY and

17.2% YoY respectively in FY10. The growth was mainly

driven by a expansion in low cost deposits and growth

in agricultural and large corporate credit.

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With lesser avenues of credit disbursal, banks had

to park most of the liquidity available with them with

the RBI. In the retail portfolio, while home loans grew

by 11% YoY, personal loans enjoyed a much smaller

growth of 6% YoY due to bank's reluctance towards

uncollateralized credit. Credit card outstanding in fact

dropped by 27% YoY.

Indian banks, however, enjoyed higher levels of

money supply, credit and deposits as a percentage of

GDP in FY10 as compared to that in FY09 showing

improved maturity in the financial sector.

10



Despite poor pricing power lower cost of funds

helped Indian banks grow their net interest margins in

FY10. While few like ICICI Bank chose to reduce their

balance sheet size, most entities chose to reasonably

grow their franchise as well as assets. Public sector

banks outdid their private sector counterparts in terms

of growth and franchise expansion in the last fiscal.

Improved capital adequacy also helped banks to

comfortably comply with Basel II. The higher efficiency

levels were the hallmarks of better performance of

Indian banks last year.

11



HDFC Bank

In August, 1994 the Housing Development Finance

Corporation Limited (HDFC) was incorporated in the

name of HDFC Bank Limited. The Reserve Bank of India

has approved in principle to set up private banks. HDFC

was one of the first organizations to receive in principle

approval from RBI. The HDFC

Bank has its registered office in Mumbai. In January

1995, the operations of HDFC Bank as a commercial

bank has commenced. IN India and in international

markets HDFC has an impeccable track record. HDFC

has maintained a healthy growth and a consistency in

its operations and remained as a leader in market of

mortgages. The portfolio of HDFC’s outstanding loan

has a million dwelling units. HDFC has a large corporate

client base for housing related credit facilities. HDFC

was ideally positioned to promote a bank in the Indian

market with its experience and strong reputation in

market of finance.HDFC Bank has 1,725 branches in

India.

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Objective:

HDFC Bank is a young and dynamic bank, with a youthful and

enthusiastic team determined to accomplish the vision of becoming

a world-class Indian bank.

Bank’s business philosophy is based on four core values- Customer

Focus, Operational Excellence, Product Leadership and People.

Bank believes that the ultimate identity and success of bank will

reside in the exceptional quality of our people and their

extraordinary efforts. For this reason, bank is committed to hiring,

developing, motivating and retaining the best people in the

industry.

Mission:

The Bank’s mission is to be “a World Class Indian

Bank”, benchmarking bank against international

standards and best practices in terms of product

offerings, technology, service levels, risk management

and audit & compliance. The objective is to build sound

customer franchises across distinct businesses so as to

be preferred provider of banking services for target

retail and wholesale customer segments, and to

13



achieve a healthy growth in profitability, consistent

with the Bank’s risk appetite. Bank is committed to do

this while ensuring the highest levels of ethical

standards, professional integrity, corporate governance

and regulatory compliance.HDFC Bank has been

recognized as 'Best Bank in India' in the magazine

rankings as well as surveys year on year. HDFC

Bank is the most preferred employer in banking

industry in India. Bank business strategy emphasizes

the following:

Increase bank’s market share in India’s expanding banking and financial services industry by following a disciplined growth strategy focusing on quality and not on quantity and delivering high quality customer service.

Leverage technology platform and open scalable systems to deliver more products to more customers and to control operating costs.

Maintain current high standards for asset quality through disciplined credit risk management.

Develop innovative products and services that attract targeted customers and address inefficiencies in the Indian financial sector.

14



Continue to develop products and services that reduce cost of funds.

Focus on high earnings growth with low volatility.

Capital Structure:

At present, HDFC Bank boasts of an authorized capital

of Rs.550 cores (Rs5.5 billion), of this the paid-up

amount is Rs 424.6 crore (Rs.4.2 billion). In terms of

equity share, the HDFC Group holds 19.4%. Foreign

Institutional Investors (FIIs) have around 28% of the

equity and about 17.6% is held by the ADS Depository

(in respect of the bank's American Depository Shares

15



(ADS) Issue). The bank has about 570,000

shareholders. Its shares find a listing on the Stock

Exchange, Mumbai and National Stock Exchange, while

its American Depository Shares are listed on the New

York Stock Exchange (NYSE), under the symbol 'HDB'

.

Capital Adequacy Ratio:

Bank’s total Capital Adequacy Ratio (CAR) calculated in

line with the Basel II framework stood at 17.4%, well

above the regulatory minimum of 9.0%. Of this, Tier I

CAR was 13.3%.

Financial Analysis:

Financial analysis is a study of relationship among the

various financial factors in a business. The process of

16



financial statement analysis can be described in various

ways depending on the objective to be obtained.

Financial analysis can be used as a preliminary

screening tool in the selection of the stock in the

primary and secondary market. It can be used as a

forecasting tool of future financial condition and result.

It may be used as a process of evolution and

diagnosis’s of managerial, operating or other problem

area. Financial analysis is an integral part of the

interpretation of result disclosed by financial

statements. It supplies to decision makers, crucial

financial information and points out the problem areas,

which can be investigated. Financial analysis reduce

reliance on institution guesses and thus narrows the

areas of uncertainty that is present in all decision

making process.

Tools of Financial Analysis:

Common Size Statement:

The statement is prepared to bring out the ratio of each

asset or liability to the total of balance sheet and the

ratio of each item of expense or revenue to interest

earned. These common size statements are often

called common measurement or component

17



percentage statement, since each statement is reduced

to the total of 100 and each individual component of

the statement is represented as a percentage of the

total of 100, which invariably serves as the base.

Comparative Financial Statement:

Comparative financial statements are statement of

financial position of a business so designed as to

facilitate comparison of different accounting variables

from drawing useful inferences.

Preparation of Comparative Financial Statement

These statements are prepared by placing the various

items in rows and years in the columns. This is done to

facilitate easy identification of their significant

differences. Columns may be drawn to accommodate

absolute changes as well as percentage changes side

by side. In order to calculate the percentage change,

the absolute change in the various account figures are

divided by their respective base year figures and

multiplied by 100.

Comparative Income Statement:

18



A comparative income statement shows the absolute

figures for two or more periods, and the absolute

change from one period to another since the figure are

shown side by side the user can quickly understand the

operation.

Comparative Balance Sheet:

Balance sheet as on two or more different dates is used

to compare the assets, liabilities and net worth of the

bank. Comparative balance sheet is useful to study the

trends in the financial position of a bank.

Ratio Analysis:

Ratio analysis is the method or process by which the

relationship or item or group of item in the financial

statement are computed determine and presented to

determine a particular aspect of organization or

company. Ratio analysis is an attempt to drive

quantities measure or guide concerning the financial

health and profitability of a business enterprise. Ratio

analysis can be used both in trends and static analysis.

There are several ratios at the disposal of an analysis

19



but the group of the ratio would prefer depends on the

purpose and the objective of analysis.

Types of Financial Ratios:

1. Liquidity Ratios:2. Profitability Ratios:3. Solvency Ratios:4. Capital Market Ratio

Financial Statement analysis of HDFC Bank

Comparative Statement Analysis

Here we analyse the comparative financial

statements of HDFC Bank as at 31st March 2008, 2009,

2010. Analysis with respect to its competitors namely

ICICI Bank, Axis Bank and the public sector giant State

Bank of India all of which fall among the top banks in

India is also done.

20



Comparative Balance Sheet of HDFC Ltd as at 31st March 2008, 2009 and 2010 (in Rs Cr.)

Capital & Liabilities

Mar'08 Inc./Dec

% Mar'09 Inc./Dec % Mar'10

Total Share Capital

354.43 70.95 20.02 425.38 32.36 7.61 457.74

Equity Share Capital

354.43 70.95 20.02 425.38 32.36 7.61 457.74

Share Application Money

0 400.92 0 400.92 -400.92 -100 0

Preference Share Capital

0 0 0 0 0 0 0

Reserves 11,142.80 3083.63 27.67 14,226.43 6838.32 48.07 21,064.75

Revaluation Reserves 0 0 0 0 0 0 0

Net Worth 11,497.23 3555.5 30.9 15,052.73 6469.76 42.98 21,522.49

Deposits 1,00,768.60 42042.98 41.7 1,42,811.58 24592.86 17.22 1,67,404.44

Borrowings 4,478.86 -1793.02 -40.03 2,685.84 10229.85 380.88 12,915.69

Total Debt 1,05,247.46 40249.96 38.24 1,45,497.42 34822.71 23.93 1,80,320.13

Other Liabilities & Provisions

16,431.91 6288.71 38.27 22,720.62 -2104.68 -9.26 20,615.94

Total Liabilities

1,33,176.60 50094.17 37.61 1,83,270.77 39187.79 21.38 2,22,458.56

21



Assets Mar'08 Inc./Dec % Mar'09 Inc./Dec % Mar’10

Cash &

Balances

with RBI

12,553.18 974.03 7.76 13,527.21 1,956.07 14.46 15,483.28

Balance

with Banks,

Money at

Call

2,225.16 1,754.25 78.84 3,979.4110,479.7

0263.35 14,459.11

Advances 63,426.90 35,456.15 55.9 98,883.0526,947.5

427.25

1,25,830.5

9

Investments 49,393.54 9,424.01 19.08 58,817.55 -209.93 -0.35 58,607.62

Gross Block 2,386.99 1,569.64 65.76 3,956.63 751.34 18.99 4,707.97

Accumulate

d

Depreciatio

n

1,211.86 1,038.04 85.66 2,249.90 335.26 14.9 2,585.16

Net Block 1,175.13 531.6 45.24 1,706.73 416.08 24.37 2,122.81

Capital

Work In

Progress

0 0 0 0 0 0 0

Other

Assets4,402.69 1,954.14 44.39 6,356.83 -401.68 -6.32 5,955.15

Total Assets1,33,176.6

050,094.18 37.61

1,83,270.7

8

39,187.7

821.38

2,22,458.5

6

Contingent

Liabilities

5,82,835.9

4

-

1,86,241.6

3

-31.953,96,594.3

1

69,641.9

317.56

4,66,236.2

4

Bills for

collection17,092.85 846.77 4.95 17,939.62 3,000.51 16.73 20,940.13

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Book Value

(Rs)324.38 20.06 6.18 344.44 125.75 36.51 470.19

Comparative Income Statement of HDFC Ltd for the periods 31st March 2008, 2009 and 2010 (in Rs. Cr)

Income Mar '08 % Mar '09 % Mar '10

Interest Earned10,115.0

061.47 16,332.26 -0.98 16,172.90

Other Income 2,205.38 57.37 3,470.63 9.8 3,810.62

Total Income12,320.3

860.73 19,802.89 0.91 19,983.52

Expenditure

Interest expended 4,887.12 82.34 8,911.10 -12.62 7,786.30

Employee Cost 1,301.35 71.99 2,238.20 2.28 2,289.18

Selling and Admin

Expenses974.79 192.5 2,851.26 19.1 3,395.83

Depreciation 271.72 32.46 359.91 9.58 394.39

Miscellaneous

Expenses3,295.22 -2.97 3,197.49 -0.89 3,169.12

Preoperative Exp.

Capitalized0 0 0

Operating Expenses 3,935.28 85.26 7,290.66 5.66 7,703.41

Provisions &

Contingencies1,907.80 -28.91 1,356.20 13.93 1,545.11

Net Profit 1,590.18 41.18 2,244.94 31.35 2,948.70

Total Expenses10,730.2

063.63 17,557.96 -2.98 17,034.82

Extraordinary Items -0.06 883.33 -0.59 57.63 -0.93

Profit brought 1,932.03 33.26 2,574.63 34.22 3,455.57

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forward

Total 3,522.15 36.82 4,818.98 32.88 6,403.34

Preference Dividend 0 0 0

Equity Dividend 301.27 41.2 425.38 29.13 549.29

Corporate Dividend

Tax51.2 41.19 72.29 26.2 91.23

Per share data

(annualized)

Earnings Per Share

(Rs.)44.87 17.61 52.77 22.08 64.42

Equity Dividend (%) 85 17.65 100 20 120

Book Value (Rs.) 324.38 6.18 344.44 36.51 470.19

Appropriations

Transfer to Statutory

Reserves436.05 47.06 641.25 45.83 935.15

Transfer to Other

Reserves159.02 41.18 224.5 31.35 294.87

Proposed

Dividend/Transfer to

Govt.

352.47 41.19 497.67 28.7 640.52

Balance c/f to

Balance Sheet2,574.61 34.22 3,455.57 31.17 4,532.79

Total 3,522.15 36.82 4,818.99 32.88 6,403.33

Interpretation of Comparative Statements

Comparative Balance Sheet:

The total assets and liabilities have increased by

21.38% compared to 2008-2009 to reach Rs.

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2,22,458.56 crore but this rise is less when compared

to the previous period’s rise of 37.6%. The increase in

total assets can be attributed mainly by the rise in

Advances and Balances with Banks and Money at Call

and Short notice. This could be an indication of the

healthy position the bank is in. Cash and Balance with

RBI has also increased over the period by 14.46%

further contributing to the rise in total assets.

Investments have reduced by 0.36% over the period.

According to the schedules to the accounts, there

has been addition of fixed assets, mainly to premises

including land worth Rs.2, 735,762,000 further adding

to rise in value of fixed assets. This increase in assets is

met by a 7.61% rise in Capital, increase in deposits by

17.22% and a large increase in borrowingswhich shows

the company has raised money through

borrowings.This is an indication of the bank planning for

expansion to cover more areas and increase its

operations. But the large part of this expansion is

funded by deposits and borrowings which may not be

good sign as far as the bank and its shareholders are

concerned.

There is a 14.46% increase in cash balances with

the RBI which could be explained by the various

25



policies adopted by the central bank, 263.35% increase

in balance with banks and money at call and short

notice, 27.25% in advances and 24.38% in fixed assets.

Contingent liabilities have increased by 17.56% and

Bills for collection by 16.73%. Book value has increased

by 36.5% to 470.19.

Capital has increased by 7.61%. It consists of

55,00,00,000 Equity Shares of Rs. 10/- each of

Authorised Capital and 45,77,43,272 Equity Shares of

Rs. 10/- each of Issued, Subscribed and Paid-up Capital.

Reserves have increased by 48.06% compared to the

previous period where there was only 27.67% rise. This

rise can be attributed to the rise in profits. The deposits

have grown by 17.22% which is a good indication of the

bank’s healthy position and the confidence it enjoys

with the public.

Comparative Income Statement:

We notice that the interest earned has decreased

by 0.98% over the period ending March 2010 whereas

there was in increase by 61.47% over the previous

period. This change is not favourable to the bank as far

26



as shareholders and the management are concerned.

But the interest expense has also gone down by -

12.62% whereas there was a rise by 82.34% over the

previous period. The decrease in interest expense is

mainly due to the reduction in interest on deposits and

interest on RBI/Inter-Bank Borrowings. The decrease in

interest earned has gone down mainly due to

decreases in Interest / discount on advances / bill,

income from investments, Interest on balance with RBI

and other inter-bank funds. From the balance sheet we

have noticed that investments had gone down. There is

decrease in investments from 32.09% to 26.35%, which

shows that bank has sold some of its investments Since

there has been a much greater descent in interest

expense, the profit had increased over the period.

There has been a decrease in the rate of depreciation

from 32.46% to 9.58%. Employee cost and selling and

Administrative expenses has increased down by 2.28%

and 19.10% respective whereas in the previous year it

was 71.99% and 192.50% respectively.

Net profit for the period was Rs.2948.70 crore

which represents an increase by 31.35% compared to a

rise of 41.18% over the previous period. The decrease

in interest income could have contributed to the decline

27



in the rate. Profit brought forward from the previous

year was Rs.3,455.57 crore. Equity dividend rose by

29.13% to 549.29 crore compared to 41.20% over the

previous period and corporate dividend tax rose by

26.2% to Rs. 91.23 crore.

Equity dividend percentage rose by 20% to 120%

from the previous 100%. The book value has increased

by 36.51% to 470.19 which is good news for the

investors. Transfers to statutory and other reserves

rose by 45.83 and 31,83% respectively. Proposed

Dividend rose by 28.7% to 640.52 which indicate the

healthy position of the bank.

Comparative Balance Sheet of HDFC Bank with respect to ICICI as of 31 st March 2010.

28



HDFC Bank ICICIMar. 2010 % Mar.2010 %

Total share capital 457.74 14.46 1,114.89 -23.81Equity share capital 457.74 263.38 1,114.89 0.14Share Application money

0 27.251 0

Preference share capital

0 -0.256 0 -100

Reserves 21064.8 14.901 50,503.48 4.3Revaluation reserves 0 24.2787 0Net worth 21522.5 0 51,618.37 3.48Deposits 167404.5 -6.3188 2,02,016.60 -7.48Borrowings 12915.7 21.382 94,263.57 40.02Total debt 180320.1 21.382 2,96,280.17 3.71Other liabilities and 20615.94 17.56 15,501.18 -64.57Provisions

Total liabilities 222458.6 21.38 3,63,399.72 -4.19

Cash & balances with RBI

15483.28 23.35 27,514.29 56.9

Balances with banksMoney at call 1459.11 27.25 11,359.40 -8.61

Advances 125830.6 18.989 1,81,205.60

-17

Investments 58607.62 24.39 1,20,892.80 17.31Gross block 4707.97 -6.31 7,114.12 -4.43

Accumulated depreciation

2585.16 21.383 3,901.43 7.12

Net block 2122.81 17.599 3,212.69 -15.49Capital work in progress

0 16.7 0

Other assets 5955.15 36.5 19,214.93 -20.48Total assets 222458.6 21.39 3,63,399.71 -4.19

Here we, observe that share capital has increased

by a greater extent for HDFC bank than ICICI but still

ICICI is shown to be having a much larger share capital

29



than HDFC. Reserves rose about 14.9% as of March

2010 when compared to ICICI where it is only 4.3%.

ICICI has a much larger amount in investment where

they seek to increase their wealth but the growth is

larger for HDFC bank for the period. Advances grew at

19% for HDFC bank whereas in the case of ICICI bank,

there is decrease by 17%. HDFC is a smaller bank than

ICICI but when comparing profitability, efficiency etc it

is not behind ICICI in any manner. ICICI bank gets funds

by borrowings and the rate of increase is more than

that of HDFC. Total assets rose by 21.39% for HDFC

bank whereas it went down by 4.19% for ICICI bank.

Ratio Analysis of HDFC Bank

Here a ratio analysis of HDFC Bank for three

periods with respect to its competitors namely ICICI

Bank, Axis Bank is performed (FY ending March of that

year).

Profitability Ratios

1. Profit Margin

30



Profit Margin = (Profit after Tax / Net Revenue) * 100

HDFC Bank:Year 2008 2009 2010Profit Margin 12.82 11.35 14.76

2. Return on Assets

Return on Assets = (Profit After Tax / Average Total Assets) * 100

HDFC Bank:Year 2008 2009 2010Return on Assets 1.20 1.20 1.3

3. Asset Turnover

Assets Turnover = (Net Revenue / Average Operating Assets) * 100

HDFC Bank:Year 2008 2009 2010Assets Turnover 5.18 5.0 4.24

4. Return on Equity

Return on Equity = (Profit After Tax / Average Shareholders’ Equity) * 100

HDFC Bank:Year 2008 2009 2010Return on Equity 13.83 15.32 13.7

5. Earnings Per Share

31



Earnings Per Share (EPS) = (Profit After Tax / Weighted Average No. of Equity Shares) * 100

HDFC Bank:Year 2008 2009 2010EPS 44.87 52.77 64.42

Interpretation of Profitability Ratios

The Profit Margin has increased by over 30% to 14.76

as of March 2010 over the period where as there was a

slight fall as of March 2009 over the period. The net

profit had gone up by 31% for the period 2009-10

although for the period 2008-09, the rise in profits was

41%. Though there was a fall by 0.98% in interest

income, other income rose by 9.8% over the period due

to increase in fees and commissions earned and

income from foreign exchange and derivatives offset in

part by lower bond gains than those in the previous

financial year as per the annual report of the bank.

Total income rose by 0.91% over the period. Total

expenses had gone down by 2.98%, thus explaining the

rise in profit margin. Although total income had

increased by 60.73% for the period ending March 2009,

there was a higher increase in total expenses by

63.63%. Hence total expenses rose at a higher

percentage than total income thus causing a reduction

32



in profit with respect to income thus causing a fall in

Profit margin during the period.

The rise in profit margin over the period 2009-10

shows the good health the bank is in. Investors have

reason to feel satisfied as an increase in profit cause

increase in wealth. Increase in capital value signals a

healthy position for the management too. The

profitability is in good shape and hence potential

investors can take a favourable decision as the profit

margin shows the bank in good health. Operating

efficiency could have increased over the period and it

shows effective cost control. This outcome is favourable

to the management. Creditors too can take comfort in

the fact that the situation is favourable to them also as

there rise in profits and there is less risk of returns.

There is a slight increase in Return On Assets ratio to 1.3 from

1.2 over the period ending March 2010. There has been

an increase in profits over the period though assets

have also increased over the period. An increase in

ROA indicates higher efficiency and here the costs have

shown to be effectively controlled. From the three other

banks, only Axis Bank is shown to have a higher ROA

33



due to its consistently better performance when

compared to other banks including HDFC.

There was a fall in Assets Turnover ratio to 4.24 from 5.00

during the period. We can see that there was a fall in

this ratio over the previous period also. This could be

due to the lesser rise in Net Revenue when compared

to the rise in assets over the period. A fall in this ratio

indicates lesser efficiency in utilising the assets to

generate revenue. We see that the ratios for the other

three banks too have fallen during the period, but they

are still higher than that of HDFC bank indicating higher

efficiency. The management has to consider this

seriously and take steps to improve the operating

efficiency of the bank.

There was a fall in Return on Equity ratio over the period

ending March 2010 to 13.7 from 15.32 though there

was a rise in the previous period from 13.82. This

indicates that the efficiency to generate profits from

every unit of shareholder’s equity has gone down which

should be of concern to the shareholders as well as the

management. The opportunity cost has to be

considered in the case of Return on Equity.

34



There has been in increase in Earnings per Share (EPS) over the

period to 64.42 from 52.77. This shows strong

foundation of the bank to achieve this growth rate by

increasing the net income. This is good news for the

shareholders as well as the management because this

results in maximization of wealth which is the objective

of any firm. According to the Annual Report, post-

merger of the erstwhile Centurion Bank of Punjab with

the bank, 26,200,220 warrants convertible into an

equivalent number of equity shares were issued to

HDFC Limited on a preferential basis at a rate of Rs.

1,530.13 each. On November 30, 2009 these said

warrants were converted by HDFC Limited and

consequently the bank issued them 26,200,220 equity

shares. During the year under review, 61.59 lac shares

were allotted to the employees of the bank pursuant to

the exercise of options under the employee stock

option scheme of the bank. These include the shares

allotted under the employee stock option scheme of the

erstwhile Centurion Bank of Punjab. Correspondingly

there was a large rise in net revenue and profit

contributing to the higher EPS. Hence shareholders can

find the situation more favourable.

35



Liquidity Ratios

1. Current Ratio

Current Ratio = (Current Assets / Current Liabilities)

HDFC Bank:Year 2008 2009 2010Current Ratio 0.26 0.27 0.28

2. Quick Ratio

Quick Ratio = (Quick Assets / Current Liabilities)

HDFC Bank:Year 2008 2009 2010Quick Ratio 4.89 5.23 7.14

Interpretation of Liquidity Ratios

36



The Current Ratiois mainly used to give an idea of the

company's ability to payback its short-term liabilities

with its short-term assets. The higher the current ratio,

the more capable the company is of paying its

obligations. Hence creditors are most concerned about

these liquidity ratios. A lesser current ratio leads to

higher creditor concern. A ratio under 1 suggests that

the company would be unable to pay off its obligations

if they came due at that point. Due to a rise in current

assets the ratio shows a rise, but is very low as current

assets are only 28% of current assets.

The Quick Ratio is an indicator of a company's short-

term liquidity. It measures a company's ability to meet

its short-term obligations with its most liquid assets.

The higher the quick ratio, the better the position of the

company. Hence creditors are most concerned about

the quick ratios. A lesser quick ratio leads to higher

creditor concern. The quick ratio is more conservative

than the current ratio. When short-term obligations

need to be paid off immediately, there are situations in

which the current ratio would overestimate a

company's short-term financial strength. The quick

ratio has been 7.14 in the year 09-10 which indicates

37



the bank’s robustness and financial soundness in

paying off its short term obligations. The figures

indicate that there is excess liquidity in the bank except

in 2009-10. But the other three banks show a higher

liquidity when compared to HDFC. But the banks are

under the guidance of RBI and they have to follow the

liquidity norms laid down by RBI.

Solvency Ratios

1. Total Debt To Equity Ratio

Total Debt to Equity Ratio = (Total Debt /Shareholders’ Equity)

HDFC Bank:Year 2008 2009 2010Total Debt to Equity Ratio

8.76 9.75 7.78

38



2. Interest Coverage Ratio

Interest Coverage Ratio = (Earnings before Income Tax / Interest Expenses)

HDFC Bank:Year 2008 2009 2010Interest Coverage Ratio

1.79 1.44 1.63

3. Loan to Deposit Ratio

Loan to Deposit Ratio = (Total Loans Lent / Total Deposit)

HDFC Bank:Year 2008 2009 2010Loan to Deposit Ratio

65.28 66.64 76.00

Interpretation of Solvency Ratios

The Total Debt to Equity ratio indicates what proportion of

equity and debt the company is using to finance its

assets. A high total debt/equity ratio generally means

that a company has been aggressive in financing its

growth with debt. This can result in volatile earnings as

39



a result of the additional interest expense. In the case

of HDFC Bank, this ratio has decreased over the period

ending March 2010. There is growth of the bank and it

is able to manage its funds from the internal sources.

The equity capital has increased its share in the

liabilities in balance sheet in comparison to the outside

debts. This helps the bank to maintain high credit

reputation in market. The other banks were able to

reduce the ratio substantially.

The Interest Coverage ratio is used to determine how

easily a company can pay interest on outstanding debt.

The interest coverage ratio is calculated by dividing a

bank's earnings before interest and taxes (EBIT) of one

period by the bank's interest expenses of the same

period. The lower the ratio, the more the company is

burdened by debt expense. When a company's interest

coverage ratio is 1.5 or lower, its ability to meet

interest expenses may be questionable. An interest

coverage ratio below 1 indicates the company is not

generating sufficient revenues to satisfy interest

expenses. The ratio for the year ending 2010 is 1.63

which is reasonable and not below1.5. This indicates

that the bank is in a sound financial health and is able

40



to pay the interest on its outstanding debts. The ratio

was best in 2007-08 among the three financial years.

But has reduced in the year 2009 to 1.44 and increased

to 1.63 in 2009-10. The bank has maintained a

somewhat healthy ratio over the years.

The Loan to Deposit ratio is indicative of the percentage

of funds lent by the bank out of the total amount raised

through deposits. Higher ratio reflects ability of the

bank to make optimal use of the available resources.

The point to note here is that loans given by bank

would also include its investments in debentures, bonds

and commercial papers of the companies. This ratio

forms an integral part of analysis as it indicates the

amount of reliability the bank has earned in the minds

of its customers and evidence of its robustness. The

ratio has increased over the period ending March 2010

to 76 which is a healthy sign.

Capital Market Ratios

1. Price - earnings Ratio

Price – earnings Ratio = Average Stock Price / Earnings per Share

HDFC Bank (30/12/10):35.74

41



2. Dividend Per Share

HDFC Bank:Year 2008 2009 2010Dividend Per Share

8.50 10.00 12.00

3. Book Value Per ShareBook Value per Share = (Equity Share Capital + Reserves &Surplus / No. of Equity Shares)

HDFC Bank:Year 2008 2009 2010Book Value Per Share

324.38 344.44 470.19

Interpretation of Capital Market Ratios

The Price – Earnings ratio (P/E Ratio) is a valuation ratio of a company's current share price compared to its per-share earnings. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. Here we can see that HDFC Bank has a higher P/E ratio of 35.74.

Dividends Per Share (DPS) is the sum of declared

dividends for every ordinary share issued. Dividend per

share (DPS) is the total dividends paid out over an

entire year (including interim dividends but not

42



including special dividends) divided by the number of

outstanding ordinary shares issued. Dividends are a

form of profit distribution to the shareholder. Having a

growing dividend per share can be a sign that the

company's management believes that the growth can

be sustained. HDFC Bank has a growing DPS value

which is 12.00 for the period ending March 2010 while

it was 10.00 for the period ending March 2009 thus

representing an increase of 20% which is a very

healthy sign for investors as well as the management

which can be confident that the growth can be

sustained. The increase in the ratios of the other three

banks is also similar with State Bank of India showing

the highest DPS of 30.0.

The Book Value per Share (BV) relates the shareholder's

equity to the number of shares outstanding, giving the

shares a raw value. It is measure used by owners of

common shares in a firm to determine the level of

safety associated with each individual share after all

debts are paid accordingly. Should the company decide

43



to dissolve, the book value per common indicates the

dollar value remaining for common shareholders after

all assets are liquidated and all debtors are paid. In

simple terms it would be the amount of money that a

holder of a common share would get if a company were

to liquidate. The BV value for HDFC Bank for the year

ending March 2010 has substantially increased to

470.19 from 344.44 from the previous year which can

be interpreted as a healthy sign as far as investors are

concerned and also for the management. The share

price as of 31-12-2010 is 2346.50 and BV value is

464.14. This could be interpreted as a healthy situation.

44



Common Size Analysis of HDFC Bank

Here a common size financial statement analysis of HDFC Bank for three periods is performed (FY ending March of that year).

Common Size Balance Sheet of HDFC Bank Ltd as on 31 st March 2008, 09, 10 (Rs. million)

31-Mar-10 %BT 31-Mar-09 %BT 31-Mar-08 %BT

Equity Capital 4577.43 0.21 4253.84 0.23 3544.33 0.27

Preference Capital 0.00 0.00 0.00 0.00 0.00 0.00

Share Capital 4577.43 0.21 8263.00 0.45 3544.33 0.27

Reserves and Surplus 210618.37 9.47 142209.46 7.76 111428.08 8.37

Deposits 1674044.39 75.25 1428115.80 77.92 1007685.91 75.67

Borrowings 129156.93 5.81 91636.37 5.00 45949.24 3.45

Other Provisions and Liabilities

206159.44 9.27 162428.23 8.86 163158.48 12.25

Capital and Liabilities (BT) 2224585.70 100.00 1832707.73 100.00 1331766.03 100.00

Fixed Assets 21228.11 0.95 17067.29 0.93 11750.92 0.88

Investments 586076.16 26.35 588175.49 32.09 493935.38 37.09

Advances 1258305.94 56.56 988830.47 53.95 634268.93 47.63

Cash & Money at Call 299423.99 13.46 175066.17 9.55 147783.39 11.10

Other Current Assets 59551.50 2.68 63568.31 3.47 44027.41 3.31

Properties and Assets (BT) 2224585.70 100.00 1832707.73 100.00 1331766.03 100.00

Common Size Income Statement of HDFC Bank Ltd for the periods

45



ending 31 st March 2008, 09, 10

31-Mar-10 31-Mar-09 31-Mar-08Profit/Loss A/C Rs. mln %OI Rs. mln %OI Rs. mln %OIInterest Income

Earned161729 80.

9163322.61 83.23 101150 81.58

Commission, Exchange and

Brokerage Income28305.86

14.2 24572.97 12.52 17145 13.83

Lease Income 0 0 0 0 0 0Dividend Income 0 0 0 0 0 0

Miscellaneous Income 9770.25 4.89

8333.07 4.25 5686.5 4.59

Other Income 38076.11 19.1

32906.04 16.77 22831.5 18.42

Total Income (OI) 199805.11 100 196228.65 100 123981.5 100Interest Expenditure 77862.99 39 89111.04 45.41 48871.2 39.42

Employee Expenditure

22891.76 11.5

22381.98 11.41 13013.5 10.5

Depreciation 3943.92 1.97

3599.09 1.83 2717.2 2.19

Other Operating Expenditure

30809.15 15.4

29346.99 14.96 21725.5 17.52

Provision and Contingencies

34810.28 17.4

29340.15 14.95 14843.3 11.97

Total Expenditure 170318.1 85.2

173779.25 88.56 101170.7 81.6

Pretax Income 29487.01 14.8

22449.4 11.44 22810.8 18.4

Tax 0 0 0 0 6909 5.57Extra Ordinary and

Prior Period Items Net0 0 0 0 0 0

Net Profit 29487.01 14.8

22449.39 11.44 15901.8 12.83

Adjusted Net Profit 29487.01 14.8

22449.39 11.44 15901.8 12.83

Dividend - Preference 0 0 0 0 0 0

Dividend - Equity 5492.92 2.75

4253.84 2.17 3012.7 2.4

Interpretation

From the common size balance sheet, we notice

that as on 31st March 2010, equity capital of HDFC bank

46



forms only 0.21% of its liabilities. This ratio is

decreasing from 2008 when it was 0.27% and 0.23% in

2009. Share capital had become 0.45% of the total

liabilities in 2009 but has decreased to 0.21%. Share

capital ratio falling may not be favorable for the

investors. But reserves and surplus shows a marked

increase to 9.47% of total liabilities in 2010 which

indicates the healthy profitability situation. But the bulk

of the share of liabilities i.e. 75.25% is deposits. Though

the percentage has decreased over the previous

period, deposits have increased signaling the

confidence the public has in the bank. This is a

favorable situation for investors and the management.

Borrowings have also risen to 5.81% of total liabilities

which shows the company has raised money through

borrowings. Fixed assets form just 0.95% of the total

liabilities. Investments and Advances form the bulk i.e.

26.35% and 56.56% of the total liabilities. Investments

have reduced from the previous period where it

accounted for 32.09 of total liabilities.

From the common size income statement we

notice that, interest income has reduced over the

period ending March 2010 and it now constitutes

80.94% of the total income whereas in the previous

47



period ending March 2009, it was 83.23% of total

income.The decrease in interest earned has gone down

mainly due to decreases in Interest / discount on

advances / bill, income from investments, Interest on

balance with RBI and other inter-bank funds. There is

decrease in investments from 32.09% to 26.35%, which

shows that bank has sold some of its

investments.However there was an increase in

Commission, Exchange and Brokerage Income and

Other Income which constitutes 14.17% and 19.06% of

the total income respectively. This is a rise from

12.52% and 16.77% which these components

constituted in the total income of the period ending

31st March 2009. Operating expenditures is 15.42% of

the total income and provision and contingencies

17.42% of the total income. The total income has

increased over the previous period and the net profit is

14.76% of the total income which is shows the healthy

profitability situation of the bank. This is more favorable

compared to the previous year where it was only

11.44% of the total income.

Managers’ perspective:

The financial performance during the years

remained healthy. An increment in providing loan

48



shows that the bank is in a sound position, as it is an

asset to the bank. The percentage of deposits has been

increasing but by comparing the percentage change of

loans and deposits, loans have more increase in its

percentage change. Deposits and lending rates spiked

up sharply. Net profit increased by 31.35% from Rs.

2244.95 crores in 2008-09 to Rs. 2498.70 crores in

2009-10.

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hdfc report

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