HDFC Bank

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 BANKLTD.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 onFinancial 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 guidefor 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, its 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 OrganizationMr. Gopala Krishna Branch manager, HDFC

BANKLTD. 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

Financial Analysis of HDFC Bank

Financial Analysis of HDFC Bank

Contents Introduction ..................................................................................... 5 Financial Sector of India An Overview ........................................... 7 HDFC Bank................................................................................... 11 Financial Statement analysis of HDFC Bank ................................... 19 Comparative Statement Analysis................................................... 19 Ratio Analysis of HDFC Bank ...................................................... 28 Common Size Analysis of HDFC Bank ........................................ 42 Trend Analysis of HDFC Bank ..................................................... 45 Managers Perspective47

Financial Analysis of HDFC Bank

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 theperformance 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
5

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Inflation Rate

Infl ti n t i 150 tress. Alt

t in ,

l - i it nd i t t li

lt d in i idit it

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ti n nder inent, t

, f rt er rate onetary .

i e is not i

inflation

ould dri e t e

oli y furt er and interest

rate expected to remain i

Headline inflation is al ays considered as a major exation for t e Indias central reading in a double-digit figure, it ank. Since, inflation as

as a challenge for the

Reserve Bank of India to fix the inflation problem under the condition of fragile global economic recovery ithout denting

the recovery process. In response to that, RBI revised its policy

6

Financial Analysis of HDFC Bank

rates by over

bps and now it does seem that the policy

action is working but the money supply is still at 2 .34 per cent. Both trend lines are now acting inversely, and inflation is falling down to 8 per cent. According to VMW 2 esearch, inflation is projected at 7.48 per cent for the month of Nov, . It is also evident that in the past three months, schedule commercial banks and non banking financial companies have started borrowing from the BIs window of Liquidity

Adjustment Facility (LAF) at the rate of 6.2 per cent. Since, banks are now left with the limited amount of liquidity; theyre again focusing on deposits from customers. Several banks have revised their deposit rates between bps and 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, BI has already started the

Open Market Operation (OMO) to infuse liquidity by way of purchasing government bonds in exchange of money.

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
7

Financial Analysis of HDFC Bank

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 eserve Bank of India ( BI) 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 S c r

After a difficult FY 9 Indian banks managed to grow their balance sheets in FY albeit at a lower average rate than that ) and statutory liquidity ratio (SL )
8

projected by the BI. The monetary stimuli (reduction in repo rate, cash reserve ratio (C

Financial Analysis of HDFC Bank

offered to the banks by the BI 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 6.9% YoY and 7.2% YoY respectively in FY . 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 retail portfolio, while home loans grew by reluctance towards uncollateralized BI. In the % YoY, personal Credit card

loans enjoyed a much smaller growth of 6% YoY due to bank's credit. 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 FY
9

as

Financial Analysis of HDFC Bank

compared to that in FY 9 showing improved maturity in the financial sector.

Despite poor pricing power lower cost of funds helped Indian banks grow their net interest margins in FY . 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.

10

Financial Analysis of HDFC Bank

HDFC Bank
In August, 994 the Housing Development Finance eserve Bank of India has approved BI. The

Corporation Limited (HDFC) was incorporated in the name of HDFC Bank Limited. The in principle to set up private banks. HDFC was one of the first organizations to receive in principle approval from HDFC Bank has its registered office in Mumbai. In January 99 , 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 ,72 branches in India.

Objective:

11

Financial Analysis of HDFC Bank

 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 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
12

Financial Analysis of HDFC Bank

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.

13

Financial Analysis of HDFC Bank

Capital Structure:

At present, HDFC Bank boasts of an authorized capital of s. cores ( s . billion), of this the paid up amount is s

424.6 crore ( s.4.2 billion). In terms of equity share, the HDFC Group holds 9.4%. Foreign Institutional Investors (FIIs) have around 28% of the equity and about 7.6% is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). The bank has about 7 , 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:
14

Financial Analysis of HDFC Bank

Banks total Capital Adequacy atio (CA ) calculated in line with the Basel II framework stood at 7.4%, well above the regulatory minimum of 9. %. Of this, Tier I CA was 3.3%.

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
15

Financial Analysis of HDFC Bank

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 and each individual component of

the statement is represented as a percentage of the total of , 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
1

Financial Analysis of HDFC Bank

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 .

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:
17

Financial Analysis of HDFC Bank

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

18

Financial Analysis of HDFC Bank

Financial Statement analysis of HDFC Bank Comparative Statement Analysis

Here we analyse the comparative financial statements of HDFC Bank as at 3
st

March 2

8, 2

9, 2

. 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.

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 Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves

354.43

70.95

20.02

425.38

32.36

7.61

457.74

354.43

70.95

20.02

425.38

32.36

7.61

457.74

400.92

400.92

-400.92

-100

11,142.80 0

3083.63 0

27.67 0

14,226.43 0

6838.32 0

48.07 0

21,064.75 0

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Financial Analysis of HDFC Bank

Net Worth Deposits Borrowings Total Debt

11,497.23

3555.5

30.9 41.7 -40.03 38.24

15,052.73 1,42,811.58 2,685.84 1,45,497.42

6469.76 24592.86 10229.85 34822.71

42.98 17.22 380.88 23.93

21,522.49 1,67,404.44 12,915.69 1,80,320.13

1,00,768.60 42042.98 4,478.86 -1793.02

1,05,247.46 40249.96

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

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

Mar'08

Inc./Dec

Mar'09

Inc./Dec

Mar 10

12,553.18

974.03

7.76

13,527.21

1,956.07

14.46

15,483.28

2,225.16

1,754.25

78.84

3,979.41 10,479.70

263.35

14,459.11

63,426.90

35,456.15

55.9

98,883.05 26,947.54

27.25 1,25,830.59

Investments

49,393.54

9,424.01

19.08

58,817.55

-209.93

-0.35

58,607.62

Gross Block Accumulated Depreciation Net Block

2,386.99

1,569.64

65.76

3,956.63

751.34

18.99

4,707.97

1,211.86 1,175.13

1,038.04 531.6

85.66 45.24

2,249.90 1,706.73

335.26 416.08

14.9 24.37

2,585.16 2,122.81

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Financial Analysis of HDFC Bank

Capital Work In Progress Other Assets

4,402.69

1,954.14

44.39

6,356.83

-401.68

-6.32

5,955.15

Total Assets

1,33,176.60

50,094.18

37.61 1,83,270.78 39,187.78

21.38 2,22,458.56

Contingent Liabilities Bills for collection Book Value (Rs) 324.38 5,82,835.94

1,86,241.63 -31.95 3,96,594.31 69,641.93 17.56 4,66,236.24

17,092.85

846.77

4.95

17,939.62

3,000.51

16.73

20,940.13

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 Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin 974.79 Expenses Depreciation Miscellaneous 3,295.22 Expenses -2.97 3,197.49 -0.89 3,169.12 271.72 32.46 359.91 9.58 394.39 192.5 2,851.26 19.1 3,395.83 4,887.12 1,301.35 82.34 71.99 8,911.10 2,238.20 -12.62 2.28 7,786.30 2,289.18 Mar '08 10,115.00 2,205.38 12,320.38 % 61.47 57.37 60.73 Mar '09 16,332.26 3,470.63 19,802.89 % -0.98 9.8 0.91 Mar '10 16,172.90 3,810.62 19,983.52

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Financial Analysis of HDFC Bank

Preoperative Exp. 0 Capitalized Operating Expenses Provisions & 1,907.80 Contingencies -28.91 1,356.20 13.93 1,545.11 3,935.28 85.26 7,290.66 5.66 7,703.41 0 0

Net Profit
Total Expenses Extraordinary Items Profit brought

1,590.18
10,730.20 -0.06 1,932.03

41.18
63.63 883.33 33.26 36.82

2,244.94
17,557.96 -0.59 2,574.63 4,818.98 0

31.35
-2.98 57.63 34.22 32.88

2,948.70
17,034.82 -0.93 3,455.57 6,403.34 0

forward Total Preference Dividend Equity Dividend Corporate Dividend 51.2 Tax Per share data (annualized) Earnings Per Share 44.87 (Rs.) Equity Dividend (%) Book Value (Rs.) Appropriations Transfer to Statutory 436.05 Reserves Transfer to Other 159.02 Reserves Proposed Dividend/Transfer to Govt. Balance c/f to 2,574.61 34.22 3,455.57 31.17 4,532.79 352.47 41.19 497.67 28.7 640.52 41.18 224.5 31.35 294.87 47.06 641.25 45.83 935.15 85 324.38 17.65 6.18 100 344.44 20 36.51 120 470.19 17.61 52.77 22.08 64.42 41.19 72.29 26.2 91.23 3,522.15 0 301.27 41.2

425.38

29.13

549.29

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Financial Analysis of HDFC Bank

Balance Sheet

Total

3,522.15

3 .82

4,818.99

32.88

6,403.33

Interpretation of Comparative Statements

Comparative Balance Sheet:

The total assets and liabilities have increased by 2 .38% compared to 2 82 9 to reach Rs. 2,22,4 8. 6 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 4.46% further contributing to the rise in total assets. Investments have reduced by .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, 73 ,762, further adding to rise in value of fixed assets. This increase in assets is met by a 7.6 % rise in Capital, increase in deposits by 7.22% 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
23

Financial Analysis of HDFC Bank

borrowings which may not be good sign as far as the bank and its shareholders are concerned. There is a 4.46% increase in cash balances with the RBI which could be explained by the various policies adopted by the central bank, 263.3 % increase in balance with banks and money at call and short notice, 27.2 % in advances and 24.38% in fixed assets. Contingent liabilities have increased by 7. 6% and Bills for collection by increased by 36. % to 47 . 9. Capital , , , has increased by 7.6 %. It consists of Equity Shares of Rs. / each of Authorised / each of 6.73%. Book value has

Capital and 4 ,77,43,272 Equity Shares of Rs.

Issued, Subscribed and Paid up Capital. Reserves have increased by 48. 6% 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 7.22% 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 .98% over the period ending March 2
24

whereas there was

Financial Analysis of HDFC Bank

in increase by 6 .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 2.62% 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. 9% to 26.3 %, 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. 8%. Employee cost and selling and Administrative expenses has increased down by 2.28% and 9. % respective whereas in the previous year % respectively. crore which

it was 7 .99% and 92.

Net profit for the period was Rs.2948.7

represents an increase by 3 .3 % compared to a rise of 4 . 8% 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.3,4 . 7 crore. Equity dividend rose by 29. 3% to 49.29 crore compared to
25

Financial Analysis of HDFC Bank

4 .2 % over the previous period and corporate dividend tax rose by 26.2% to Rs. 9 .23 crore. Equity dividend percentage rose by 2 % to 2 % from the previous %. The book value has increased by 36. % to 47 . 9 which is good news for the investors. Transfers to statutory and other reserves rose by 4 .83 and 3 ,83% respectively. Proposed Dividend rose by 28.7% to 64 . 2 which indicate the healthy position of the bank.

Comparative Balance Sheet of HDFC Bank with respect to ICICI as of 31st March 2010.
HDFC Bank Mar. 2010 Total share capital Equity share capital Share Application money Preference share capital 457.74 457.74 0 0 % 14.46 263.38 27.251 -0.256 Mar.2010 1,114.89 1,114.89 0 0 -100 % -23.81 0.14 ICICI

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Financial Analysis of HDFC Bank

Reserves Revaluation reserves Net worth Deposits Borrowings Total debt Other liabilities and Provisions Total liabilities Cash & balances with RBI Balances with banks Money at call Advances Investments Gross block Accumulated depreciation Net block Capital work in progress Other assets Total assets 222458.6 21.38 3,63,399.72 -4.19 21064.8 0 21522.5 167404.5 12915.7 180320.1 20615.94 14.901 24.2787 0 -6.3188 21.382 21.382 17.56 50,503.48 0 51,618.37 2,02,016.60 94,263.57 2,96,280.17 15,501.18 3.48 -7.48 40.02 3.71 -64.57 4.3

15483.28

23.35

27,514.29

56.9

1459.11 125830.6 58607.62 4707.97

27.25 18.989 24.39 -6.31

11,359.40 1,81,205.60 1,20,892.80 7,114.12

-8.61 -17 17.31 -4.43

2585.16 2122.81 0 5955.15 222458.6

21.383 17.599 16.7 36.5 21.39

3,901.43 3,212.69 0 19,214.93 3,63,399.71

7.12 -15.49

-20.48 -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 than HDFC. Reserves rose about 4.9% as of March 2 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
27

Financial Analysis of HDFC Bank

at 9% for HDFC bank whereas in the case of ICICI bank, there is decrease by 7%. 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 2 .39% for HDFC bank whereas it went down by 4. 9% 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

Profit Margin = (Profit after Tax / Net Revenue) * 100 HDFC Bank: Year Profit Margin

2008 12.82

2009 11.35

2010 14.76

2. Return on Assets

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

28

Financial Analysis of HDFC Bank

HDFC Bank: Year Return on Assets

2008 1.20

2009 1.20

2010 1.3

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

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

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

Interpretation of Profitability Ratios

The Profit Margin has increased by over 3 % to

4.76 as of

March 2

over the period where as there was a slight fall as

29

Financial Analysis of HDFC Bank

of March 2

9 over the period. The net profit had gone up by 9 although for the period 2 8 9,

3 % for the period 2

the rise in profits was 4 %. Though there was a fall by .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 .9 % over the period. Total expenses had gone down by 2.98%, thus explaining the rise in profit margin. Although total income had increased by 6 .73% for the period ending March 2 9, 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. The rise in profit margin over the period 2 9 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
30

Financial Analysis of HDFC Bank

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

.3 from .2

over the period ending March 2

. 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 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 .

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 2

to 3.7 from

.32 though there was a rise in the

31

Financial Analysis of HDFC Bank

previous period from 3.82. 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.
There has been in increase in Earnings perShare (EPS) over the

period to 64.42 from 2.77. 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, 26,2 ,22 warrants convertible into an equivalent number of equity shares were issued to HDFC Limited on a preferential basis at a rate of Rs. , 3 . 3 each. On November 3 , 2 26,2 9 these said warrants were converted by HDFC Limited and consequently the bank issued them ,22 equity shares. During the year under review, 6 . 9

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

32

Financial Analysis of HDFC Bank

revenue and profit contributing to the higher EPS. Hence shareholders can find the situation more favourable.

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

2. Quick Ratio

Quick Ratio = (Quick Assets / Current Liabilities) HDFC Bank: Year Quick Ratio

2008 4.89

2009 5.23

2010 7.14

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Financial Analysis of HDFC Bank

Interpretation of Liquidity Ratios

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 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. 4 in the year 9 which indicates the banks robustness and financial soundness in paying off its short term obligations. The figures
34

Financial Analysis of HDFC Bank

indicate that there is excess liquidity in the bank except in 2 9 . But the other three banks show a higher liquidity But the banks are under the when compared to HDFC. down by RBI.

guidance of RBI and they have to follow the liquidity norms laid

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

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Financial Analysis of HDFC Bank

2. Interest Coverage Ratio

Interest Coverage Ratio = (Earnings before Income Tax /Interest Expenses) HDFC Bank: Year 2008 Interest Coverage 1.79 Ratio

2009 1.44

2010 1.63

3. Loan toDeposit 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

Interpretation of Solvency Ratios

The Total Debt toEquity 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 2
36

. There is growth of the bank

Financial Analysis of HDFC 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 . or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below the year ending 2 indicates the company is not generating is .63 which is reasonable and not sufficient revenues to satisfy interest expenses. The ratio for

below . . 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 2 in 2 9 7 8 among the three financial years. 9 to .44 and increased to .63 But has reduced in the year 2 over the years.

. The bank has maintained a somewhat healthy ratio

37

Financial Analysis of HDFC Bank

The Loan toDeposit 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 2 healthy sign. to 76 which is a

Capital Market Ratios

1. Price - earnings Ratio

Price earnings Ratio = Average Stock Price / Earnings per Share HDFC Bank (30/12/10):35.74

2. Dividend Per Share

HDFC Bank: Year Dividend Per Share

2008
8.50

2009
10.00

2010
12.00

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

HDFC Bank: Year Book Value Per Share

2008
324.38

2009
344.44

2010
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 3 .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 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 2. ending March 2 March 2 while it was . for the period

for the period ending

9 thus representing an increase of 2 % which is a

39

Financial Analysis of HDFC Bank

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 3 . .

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 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 2 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 3 22 is 2346. and BV value is has substantially increased to 47 . 9 from 344.44 from the previous

40

Financial Analysis of HDFC Bank

464. 4. This could be interpreted as a healthy situation.

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Financial Analysis of HDFC Bank

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 Equity Capital 4577.43 Preference Capital 0.00 Share Capital 4577.43 Reserves and Surplus 210618.37 Deposits 1674044.39 Borrowings 129156.93 Other Provisions and 206159.44 Liabilities Capital and Liabilities (BT) 2224585.70 Fixed Assets 21228.11 Investments 586076.16 Advances 1258305.94 Cash & Money at Call 299423.99 Other Current Assets 59551.50 Properties and Assets (BT) 2224585.70 %BT 31-Mar-09 %BT 31-Mar-08 %BT 0.21 4253.84 0.23 3544.33 0.27 0.00 0.00 0.00 0.00 0.00 0.21 8263.00 0.45 3544.33 0.27 9.47 142209.46 7.76 111428.08 8.37 75.25 1428115.80 77.92 1007685.91 75.67 5.81 91636.37 5.00 45949.24 3.45 9.27 162428.23 100.00 0.95 26.35 56.56 13.46 2.68 100.00 1832707.73 17067.29 588175.49 988830.47 175066.17 63568.31 1832707.73 8.86 163158.48 12.25 100.00 0.93 32.09 53.95 9.55 3.47 100.00 1331766.03 11750.92 493935.38 634268.93 147783.39 44027.41 1331766.03 100.00 0.88 37.09 47.63 11.10 3.31 100.00

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Financial Analysis of HDFC Bank

Common Size Income Statement of HDFC Bank Ltd for the periods ending 31st March 2008, 09, 10
31-Mar-10 Profit/Loss A/C Rs. mln Interest Income 161729 Earned Commission, Exchange and 28305.86 Brokerage Income Lease Income 0 Dividend Income 0 Miscellaneous Income 9770.25 Other Income 38076.11 Total Income (OI) 199805.11 Interest Expenditure 77862.99 Employee 22891.76 Expenditure Depreciation 3943.92 Other Operating 30809.15 Expenditure Provision and 34810.28 Contingencies Total Expenditure 170318.1 Pretax Income 29487.01 Tax 0 Extra Ordinary and 0 Prior Period Items Net Net Profit 29487.01 Adjusted Net Profit 29487.01 Dividend - Preference 0 Dividend - Equity 5492.92 31-Mar-09 Rs. mln 31-Mar-08 Rs. mln 101150 17145 0 0 5686.5 22831.5 123981.5 48871.2 13013.5 2717.2 21725.5 14843.3 101170.7 22810.8 6909 0 15901.8 15901.8 0 3012.7

%OI

%OI 83.23 12.52 0 0 4.25 16.77 100 45.41 11.41 1.83 14.96 14.95 88.56 11.44 0 0 11.44 11.44 0 2.17

%OI 81.58 13.83 0 0 4.59 18.42 100 39.42 10.5 2.19 17.52 11.97 81.6 18.4 5.57 0 12.83 12.83 0 2.4

80.9 163322.61 14.2 24572.97

0 0 0 0 4.89 8333.07 19.1 32906.04 100 196228.65 39 89111.04 11.5 1.97 15.4 17.4 22381.98 3599.09 29346.99 29340.15

85.2 173779.25 14.8 22449.4 0 0 0 14.8 14.8 0 2.75 0 22449.39 22449.39 0 4253.84

Interpretation

From the common size balance sheet, we notice that as on 3

st

March 2

, equity capital of HDFC bank forms only 8 when

.2 % of its liabilities. This ratio is decreasing from 2 it was .27% and .23% in 2

9. Share capital had become 9 but has decreased to

.4 % of the total liabilities in 2

43

Financial Analysis of HDFC Bank

0.2 %. 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. 7 .2 % 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 .81% of total liabilities which shows the company has raised money through borrowings. Fixed assets form just 0.9 % of the total liabilities. Investments and Advances form the bulk i.e. 26.3 % and 6. 6% 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 26.3 %, which shows that bank has sold some of its investments.However there was an increase in Commission, Exchange and Brokerage Income and
44

Financial Analysis of HDFC Bank

Other Income which constitutes 14.17% and 19.06% of the total income respectively. This is a rise from 12. 2% 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 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.

45

Financial Analysis of HDFC Bank

46