INTRODUCTION

Financial statement analysis is very helpful in spanning banks 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 bank. Their claims are short term, and the ability of the bank to pay these claims quickly is best judged by an analysis of the banks liquidity. 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.

FINANCIAL SECTOR OF INDIA AN OVERVIEW

Financial Sector of India is intrinsically strong, operationally sundry and exhibits competence and flexibility besides being sensitive to Indias 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 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.

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.

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. Most banks had to restructure some loans in their portfolio during FY10 which deferred their interest income. Further the PSU banks had also to provide for the loss of interest on the agriloans waived by the government.

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 HDFCs 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.

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.

Banks 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 Banks 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 a preferred provider of banking services for target retail and wholesale customer segments, and to achieve a healthy growth in profitability, consistent with the Banks 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 banks market share in Indias 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. 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 crore (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 (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'.

FINANCIAL ANALYSIS An Overview

Financial Analysis:
Financial analysis is a study of relationship among the various financial factors in a business. The process of 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 diagnosiss 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 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:

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 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

OBJECTIVES AND RESEARCH METHODOLOGY

Objectives of the study:
1. To analyse the financial statements of the HDFC Bank 2. To analyse the position of the bank by the means of ratio analysis 3. To analyse the trend in light of the creditors, shareholders and managerial perspectives

Research Methodology:
For the purpose of analysis, the income statement and the position statements of the HDFC and Axis bank was thoroughly studied.

FINANCIAL ANALYSIS AND INTERPRETATION OF HDFC BANK

Comparative Statement Analysis

Here we analyse the comparative financial statements of HDFC Bank as at 31st March 2008, 2009, 2010.

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Comparative Balance Sheet of HDFC - as at 31st March 2008, 2009 and 2010 (in RsCr.)
Capital & Liabilities Total Share Capital 354.43 425.38 70.95 20.02 457.74 32.36 7.61 Mar'08 Mar'09 Inc/Dec % Mar'10 Inc/Dec %

Equity Share Capital

354.43

425.38

70.95

20.02

457.74

32.36

7.61

Share Application Money Preference Share Capital Reserves

400.92

400.92

-400.92

-100

11,142.80

14,226.43

3083.63

27.67

21,064.75

6838.32

48.07

Revaluation Reserves

Net Worth

11,497.23

15,052.73

3555.5

30.9

21,522.49

6469.76

42.98

Deposits

1,00,768.60

1,42,811.58

42042.98

41.7

1,67,404.44

24592.86

17.22

Borrowings

4,478.86

2,685.84

-1793.02

-40.03

12,915.69

10229.85

380.88

Total Debt

1,05,247.46

1,45,497.42

40249.96

38.24

1,80,320.13

34822.71

23.93

Other Liabilities & Provisions

16,431.91

22,720.62

6288.71

38.27

20,615.94

-2104.68

-9.26

Total Liabilities

1,33,176.60

1,83,270.77

50094.17

37.61

2,22,458.56

39187.79

21.38

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Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances

Mar'08 12,553.18

Mar'09 13,527.21

Inc/Dec 974.03

% 7.76

Mar10 15,483.28

Inc/Dec 1,956.07

% 14.46

2,225.16

3,979.41

1,754.25

78.84

14,459.11

10,479.70

263.35

63,426.90

98,883.05

35,456.15

55.9

1,25,830.59

26,947.54

27.25

Investments

49,393.54

58,817.55

9,424.01

19.08

58,607.62

-209.93

-0.35

Gross Block

2,386.99

3,956.63

1,569.64

65.76

4,707.97

751.34

18.99

Accumulated Depreciation Net Block

1,211.86

2,249.90

1,038.04

85.66

2,585.16

335.26

14.9

1,175.13

1,706.73

531.6

45.24

2,122.81

416.08

24.37

Capital Work In Progress Other Assets

4,402.69

6,356.83

1,954.14

44.39

5,955.15

-401.68

-6.32

Total Assets

1,33,176.60

1,83,270.78

50,094.18

37.61

2,22,458.56

39,187.78

21.38

Contingent Liabilities

5,82,835.94

3,96,594.31

-1,86,241.63

-31.95

4,66,236.24

69,641.93

17.56

Bills for collection

17,092.85

17,939.62

846.77

4.95

20,940.13

3,000.51

16.73

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

Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative Exp. Capitalized Operating Expenses Provisions & Contingencies Net Profit Total Expenses Extraordinary Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend

Mar '08

Mar '09

Mar '10

10,115.00 16,332.26 61.47 2,205.38 3,470.63 57.37

16,172.90 -0.98 3,810.62 9.8

12,320.38 19,802.89 60.73

19,983.52 0.91

4,887.12 1,301.35 974.79

8,911.10 2,238.20 2,851.26

82.34 71.99 192.5

7,786.30 2,289.18 3,395.83

-12.62 2.28 19.1

271.72 3,295.22

359.91 3,197.49

32.46 -2.97

394.39 3,169.12

9.58 -0.89

3,935.28 1,907.80

7,290.66 1,356.20

85.26 -28.91

7,703.41 1,545.11

5.66 13.93

1,590.18

2,244.94

41.18

2,948.70

31.35

10,730.20 17,557.96 63.63 -0.06 1,932.03 -0.59 2,574.63 883.33 33.26

17,034.82 -2.98 -0.93 3,455.57 57.63 34.22

3,522.15 0 301.27 51.2

4,818.98 0 425.38 72.29

36.82

6,403.34 0

32.88

41.2 41.19

549.29 91.23

29.13 26.2

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Tax Per share data (annualized) Earnings Per Share (Rs.) Equity Dividend (%) Book Value (Rs.) Appropriations Transfer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer to Govt. Balance c/f to Balance Sheet Total 3,522.15 4,818.99 36.82 6,403.33 32.88 2,574.61 3,455.57 34.22 4,532.79 31.17 352.47 497.67 41.19 640.52 28.7 159.02 224.5 41.18 294.87 31.35 436.05 641.25 47.06 935.15 45.83 85 324.38 100 344.44 17.65 6.18 120 470.19 20 36.51 44.87 52.77 17.61 64.42 22.08

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Interpretation of Comparative Statements

Comparative Balance Sheet:

The total assets and liabilities have increased by 21.38% compared to 2008-2009 to reach Rs. 2,22,458.56 crore but this rise is less when compared to the previous periods 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 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 15

deposits have grown by 17.22% which is a good indication of the banks 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 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% an 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 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.

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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 31st March 2008, 09, 10 (Rs. million)

31-Mar-10 %BT 31-Mar-09 %BT 31-Mar-08 %BT Equity Capital Preference Capital Share Capital 4577.43 0.00 4577.43 0.21 0.00 0.21 4253.84 0.00 8263.00 0.23 0.00 0.45 3544.33 0.00 3544.33 0.27 0.00 0.27 8.37

Reserves and Surplus 210618.37

9.47 142209.46

7.76 111428.08

Deposits 1674044.39 75.25 1428115.80 77.92 1007685.91 75.67 Borrowings 129156.93 Other Provisions and Liabilities 206159.44 5.81 91636.37 5.00 45949.24 3.45

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 Other Current Assets 59551.50 2.68 63568.31 9.55 147783.39 11.10 3.47 44027.41 3.31

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

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Common Size Income Statement of HDFC Bank Ltd for the periods ending 31st March 2008, 09, 10
31-Mar-10 Profit/Loss A/C Interest Income Earned Commission, Exchange and Brokerage Income Lease Income Dividend Income Miscellaneous Income Other Income Total Income (OI) Interest Expenditure Employee Expenditure Depreciation Other Operating Expenditure Provision and Contingencies Total Expenditure Pretax Income Tax Extra Ordinary and Prior Period Items Net Net Profit Adjusted Net Profit Dividend - Preference Dividend - Equity 29487.01 29487.01 0 5492.92 14.8 14.8 0 2.75 22449.39 22449.39 0 4253.84 11.44 11.44 0 2.17 15901.8 15901.8 0 3012.7 12.83 12.83 0 2.4 170318.1 29487.01 0 0 85.2 14.8 0 0 173779.25 22449.4 0 0 88.56 11.44 0 0 101170.7 22810.8 6909 0 81.6 18.4 5.57 0 34810.28 17.4 29340.15 14.95 14843.3 11.97 0 0 9770.25 38076.11 199805.11 77862.99 22891.76 3943.92 30809.15 0 0 4.89 19.1 100 39 11.5 1.97 15.4 0 0 8333.07 32906.04 196228.65 89111.04 22381.98 3599.09 29346.99 0 0 4.25 16.77 100 45.41 11.41 1.83 14.96 0 0 5686.5 22831.5 123981.5 48871.2 13013.5 2717.2 21725.5 0 0 4.59 18.42 100 39.42 10.5 2.19 17.52 Rs. mln 161729 28305.86 %OI 80.9 14.2 31-Mar-09 Rs. mln 163322.61 24572.97 %OI 83.23 12.52 31-Mar-08 Rs. mln 101150 17145 %OI 81.58 13.83

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Interpretation
From the common size balance sheet, we notice that as on 31st March 2010, equity capital of HDFC bank 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 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.

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Ratio Analysis of HDFC Bank

Here a ratio analysis of HDFC Bank for three periods with respect to its competitor Axis Bank is performed (FY ending March of that year).

Profitability Ratios
1. Profit Margin

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

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

Axis Bank Year Profit Margin 2008 12.22 2009 13.31 2010 16.10

2. Return on Assets

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

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

Axis Bank Year Return on Assets 2008 1.24 2009 1.44 2010 1.67

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3. Asset Turnover

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

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

Axis Bank Year Assets Turnover 2008 6.32 2009 7.78 2010 7.31

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

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

Axis Bank Year Return on Equity 2008 12.21 2009 17.77 2010 15.67

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5. Earnings Per Share

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

HDFC Bank: Year EPS 2008 44.87 2009 52.77 2010 64.42

Axis Bank Year EPS 2008 32.15 2009 50.61 2010 65.78

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 in profit with respect to income thus causing a fall in Profit margin during the period.

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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.

Comparing with the competitor Axis Bank shows a larger profit margin due to its consistently good performance. It shows an increase in profit margin. Hence HDFC Bank should take measures to prevent investors to consider the opportunity cost with respect to Axis Bank and arriving at a conclusion that Axis Bank was a better choice.

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. Also Axis Bank is shown to have a higher ROA due to its consistently better performance when compared

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 ratio for Axis bank too has 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.

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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 shareholders 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. Axis Bank has a highest value of this ratio. There is a chance that investors could prefer Axis Bank over HDFC.

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.

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Liquidity Ratios

1. Current Ratio

Current Ratio = (Current Assets / Current Liabilities)

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

Axis Bank: Year Current Ratio 2008 0.36 2009 0.37 2010 0.63

2. Quick Ratio

Quick Ratio = (Quick Assets / Current Liabilities)

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

Axis Bank: Year Quick Ratio 2008 9.23 2009 9.52 2010 19.19

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Interpretation of Liquidity Ratios

The Current Ratio is 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 total assets. Axis Bank is shown to have the higher Current Ratio and has increased substantially when compared to HDFC bank.

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 the banks 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 Axis Bank shows 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.

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Solvency Ratios
1. Total Debt To Equity Ratio Total Debt to Equity Ratio = (Total Debt /Shareholders Equity)

HDFC Bank: Year Total Debt to Equity Ratio 2008 8.76 2009 9.75 2010 7.78

Axis Bank: Year Total Debt to Equity Ratio 2008 9.99 2009 11.49 2010 8.81

2. Interest Coverage Ratio

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

HDFC Bank: Year Interest Coverage Ratio 2008 1.79 2009 1.44 2010 1.63

Axis Bank: Year Interest Coverage Ratio 2008 1.46 2009 1.43 2010 1.62

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3. Loan to Deposit Ratio

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

HDFC Bank: Year Loan to Deposit Ratio 2008 65.28 2009 66.64 2010 76.00

Axis Bank: Year Loan to Deposit Ratio 2008 65.94 2009 68.89 2010 71.87

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 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. Axis banks was 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

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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 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 ratio for Axis is substantially lower.

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.

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Capital Market Ratios

1. Price - earnings Ratio Price earnings Ratio = Average Stock Price / Earnings Per Share HDFC Bank (30/12/10):35.74 Axis Bank (30/12/10): 21.42

2. Dividend Per Share

HDFC Bank: Year Dividend Per Share 2008 8.50 2009 10.00 2010 12.00

Axis Bank Year Dividend Per Share 2008 6.00 2009 10.00 2010 12.00

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

HDFC Bank: Year Book Value Per Share 2008 324.38 2009 344.44 2010 470.19

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Axis Bank Year Book Value Per Share 2008 245.13 2009 284.50 2010 395.99

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. When compared to the Axis bank, HDFC has the higher ratio. 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 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 to dissolve, the book value per common 31

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. The book value of Axis Bank has rose to 395.99 in the period ending March 2010.

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Trend Analysis of HDFC Bank

Here a trend analysis of HDFC Bank is performed from a Managerial, Creditors and Investors perspective.

Creditors Perspective Years Particulars Interest Income Interest Expense Amt Iratio Amt Eratio 2008 10,115.00 100 4,887.12 100 1,590.18 100 2009 16,332.26 161.47 8,911.10 182.34 2,244.94 141.18 2010 16,172.90 159.89 7,786.30 159.32 2,948.70 185.43

Profit After Amt Tax Pratio

200 180 160 140 120 Iratio 100 80 60 40 20 0 2008 2009 2010 Eratio Pratio

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Creditors perspective
The financial performance during the fiscal year 2009-10 remained healthy with total net revenues (net interest income plus other income) increasing by 0.91% to Rs. 12,320.38 crores from Rs. 19,802.89crore in 2008-09. The revenue growth was driven both by an increase Commission, Exchange and Brokerage Income and Other Income.

Shareholders Perspective Years Particulars Earnings Per Share Dividend Per Share Amt Eratio Amt Dratio 2008 46.22 100 8.50 100 1,590.18 100 2009 52.85 114.344 10.00 117.647 2,244.94 141.18 2010 64.42 139.377 12.00 141.176 2,948.70 185.43

Profit After Amt Tax Pratio

200 180 160 140 120 Eratio 100 80 60 40 20 0 2008 2009 2010 Dratio Pratio

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Shareholders perspective:
The Banks basic earnings per share increased from Rs. 52.9 to Rs. 64.42 per equity share. Bank has had a consistent dividend policy of balancing the dual objectives of appropriately rewarding shareholders through dividends and retaining capital to maintain a healthy capital adequacy ratio to support future growth. It has had a consistent track record of moderate but steady increases in dividend declarations over its history with the dividend payout ratio rangingbetween 20% and 25%.Net profit increased by 31.35% from Rs. 2244.95 crores in 2008-09 to Rs. 2498.70 crores in 2009-10.

Managerial Perspective Years Particulars Deposits Loans Amt Dratio Amt Lratio Profit After Amt Tax Pratio
250

2008 1007685.9 100 634268.93 100 1,590.18 100

2009 1428115.8 141.722 988830.47 155.901 2,244.94 141.18

2010 1674044.39 166.128 1258305.94 198.387 2,948.70 185.43

200

150 Dratio Lratio 100 Pratio

50

0 2008 2009 2010

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Managers perspective:
The financial performance during the years remained healthy. An increment in providing loan 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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FINDINGS

The financial performance during the years remained healthy. An increment in providing loan shows that the bank is in a sound position, as it is an asset to the bank.

There are indication that the bank is 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.

The bank has a healthy position and enjoys the confidence with the public.

There is a decrease in investments 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.

The reserves and surplus shows a marked increase in 2010 which indicates the healthy profitability situation.

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.

There has been a decrease in the interest 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.

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The total income has increased over the previous period and the net profit is 14.76% of the total income which shows the healthy profitability situation of the bank.

The total expenses rose at a higher percentage than total income thus causing a reduction in profit with respect to income thus causing a fall in Profit margin during the period.

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.

Also Axis bank is shown to have a higher ROA due to its consistently better performance when compared to HDFC bank. Thus, Axis bank has indicates higher efficiency.

Operating efficiency could have increased over the period and it shows effective cost control.

Bank has had a consistent dividend policy of balancing the dual objectives of appropriately rewarding shareholders through dividends and retaining capital to maintain a healthy capital adequacy ratio to support future growth.

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CONCLUSION
The financial performance during the fiscal year ended March 31, 2010 remained healthy with total net revenues (net interest income plus other income) increasing. The analysis also shows that the bank is planning for some kind of expansion to cover more area and increase its operations. This may be a concern for the shareholders as the large part of the expansion would be funded by the deposits and the borrowings. There was a growth in profit which may be a result of decrease in the interest expenses.

The bank has maintained a good amount of reserves and surplus which directs towards a healthy profitability situation. This statement is also backed by the profit margin which would lead to the investors taking a positive and a favorable decision. There has been effective cost control due to which the operating efficiency has increased over the period.

Thus the HDFC bank continues to grow at a healthy pace.

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