THE INDIAN BANKING SECTOR REVIEW

THE INDIAN BANKING SECTOR REVIEW

Without a sound and effective banking system in India it cannot have a healthy economy. The banking
system of India should not only be hassle free but it should be able to meet new challenges posed by the
technology and any other external and internal factors. For the past three decades India's banking
system has several outstanding achievements to its credit. It is no longer confined to only metropolitans
or cosmopolitans in India; in fact, Indian banking system has reached even to the remote corners of the
country. This is one of the main reasons of India's growth process. The government's regular policy for
Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of
India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank
transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a
pizza. Money has become the order of the day.

Post independence

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an
institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to
regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank may be
opened without a license from the RBI, and no two banks could have common directors.

Liberalisation : The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. In the early
1990s the then Narsimha Rao government embarked on a policy of liberalisation and gave licenses to a
small number of private banks, which came to be known as New Generation tech-savvy banks, which
included banks such as Global Trust Bank (the first of such new generation banks to be set up)which
later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank
and HDFC Bank.

Current situation

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the
Government of India holding a stake), 29 private banks (these do not have government stake; they may
be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network
of over 53,000 branches and 17,000 ATMs . According to a report by ICRA Limited, a rating agency, the
public sector banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively. Over the last four years, India’s economy has been
on a high growth trajectory, creating unprecedented opportunities for its banking sector. Most banks
have enjoyed high growth and their valuations have appreciated significantly during this period. Looking
ahead, the most pertinent issue is how well the banking sector is positioned to cater to continued
growth. A holistic assessment of the banking sector is possible only by looking at the roles and actions of
banks, their core capabilities and their ability to meet systemic objectives, which include increasing
shareholder value, fostering financial inclusion, contributing to GDP growth, efficiently managing
intermediation cost, and effectively allocating capital and maintaining system stability.

BANKING STRUCTURE IN INDIA

The banking institutions in the organized sector, commercial banks are the oldest institutions, some
them having their genesis in the nineteenth century. Initially they were set up in large numbers, mostly
as corporate bodies with shareholding with private individuals. Today 27 banks constitute a strong
Public Sector in Indian Commercial Banking. Commercial Banks operating in India fall under different sub
categories on the basis of their ownership and control over management;

I. Public Sector Banks

Public Sector Banks emerged in India in three stages. First the conversion of the then existing Imperial
Bank of India into State Bank of India in 1955, followed by the taking over of the seven associated banks
as its subsidiary. Second the nationalization of 14 major commercial banks in 1969and last the
nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks.

II. New Private Sector Banks

After the nationalization of the major banks in the private sector in 1969 and 1980, no new bank could
be setup in India for about two decades, though there was no legal bar to that effect. The Narasimham
Committee on financial sector reforms recommended the establishment of new banks of India. RBI
thereafter issued guidelines for setting up of new private sector banks in India in January 1993. These
guidelines aim at ensuring that new banks are financially viable and technologically up to date from the
start. They have to work in a professional manner, so as to improve the image of commercial banking
system and to win the confidence of the public. Eight private sector banks have been established
including banks sector by financially institutions like IDBI, ICICI, and UTI etc.

III. Local Area Banks

Such Banks can be established as public limited companies in the private sector and can be promoted by
individuals, companies, trusts and societies. The minimum paid up capital of such banks would be 5
crores with promoters contribution at least Rs. 2 crores. They are to be set up in district towns and the
area of their operations would be limited to a maximum of 3 districts. At present, four local area banks
are functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh.
 IV. Foreign Banks

Foreign commercial banks are the branches in India of the joint stock banks incorporated abroad. There
number was 38 as on 31.03.2009.

Scheduled Commercial Banks in India

The commercial banking structure in India consists of:

V. Scheduled Commercial Banks in India

Unscheduled Banks in India Scheduled Banks in India constitute those banks which have been included
in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down vide section42 (6) a) of the Act. "Scheduled banks in
India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a
subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a
corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank
included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include
a co-operative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c)
of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

VI. Cooperative Banks

Besides the commercial banks, there exists in India another set of banking institutions called
cooperative credit institutions. These have been made in existence in India since long. They undertake
the business of banking both in urban and rural areas on the principle of cooperation. They have served
a useful role in spreading the banking habit throughout the country. Yet, there financial position is not
sound and a majority of cooperative banks has yet to achieve financial viability on a sustainable basis.
The cooperative banks have been set up under various Cooperative Societies Acts enacted by State
Governments. Hence the State Governments regulate these banks. In 1966, need was felt to regulate
their activities to ensure their soundness and to protect the interests of depositors According to the RBI
in March 2009, number of all Scheduled Commercial Banks (SCBs) was 171 of which, 86 were Regional
Rural Banks and the number of Non-Scheduled Commercial Banks including Local Area Banks stood at 5.
Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees
and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of
all offices, 82 per cent of staff and 60.3 per cent of all automated teller machines (ATMs).
SWOT ANALYSIS OF BANKING SECTOR

STRENGTH

 Indian banks have compared favorably on growth, asset quality and profitability with other
regional banks over the last few years. The banking index has grown at a compounded annual
rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market
index for the same period.
 Policy makers have made some notable changes in policy and regulation to help strengthen the
sector. These changes include strengthening prudential norms, enhancing the payments system
and integrating regulations between commercial and co-operative banks.
 Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the
vast networking & growing number of branches & ATMs. Indian banking system has reached
even to the remote corners of the country.
 In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets relative to other banks in comparable economies in its
region.

WEAKNESS

 Public Sector Banks need to fundamentally strengthen institutional skill levels especially in sales
and marketing, service operations, risk management and the overall organisational performance
ethic & strengthen human capital.
 Old private sector banks also have the need to fundamentally strengthen skill levels.
 The cost of intermediation remains high and bank penetration is limited to only a few customer
segments and geographies.
 Structural weaknesses such as a fragmented industry structure, restrictions on capital
availability and deployment, lack of institutional support infrastructure, restrictive labour laws,
weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks
(SCBs), unless industry utilities and service bureaus.
 Refusal to dilute stake in PSU banks:
 The government has refused to dilute its stake in PSU banks below 51% thus choking the
headroom available to these banks for raining equity capital.
 Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from
the North Block in terms of approving merger of PSU banks may hamper their growth prospects
in the medium term.

OPPORTUNITY

 The market is seeing discontinuous growth driven by new products and services that include
opportunities in credit cards, consumer finance and wealth management on the retail side, and
in fee-based income and investment banking on the wholesale banking side. These require new
skills in sales & marketing, credit and operations.
 With increased interest in India, competition from foreign banks will only intensify.
  Given the demographic shifts resulting from changes in age profile and household income,
consumers will increasingly demand enhanced institutional capabilities and service levels from
banks.
 New private banks could reach the next level of their growth in the Indian banking sector by
continuing to innovate and develop differentiated business models to profitably serve segments
like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means
to grow and reaching the next level of performance in their service platforms. Attracting,
developing and retaining more leadership capacity
 Foreign banks committed to making a play in India will need to adopt alternative approaches to
win the “race for the customer” and build a value-creating customer franchise in advance of
regulations potentially opening up post 2009.

Reach in rural India for the private sector and foreign banks.

Liberalisation of ECB norms:

The government also liberalised the ECB norms to permit financial sector entities engaged in
infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not
permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.

Hybrid capital:

In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds
and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would
help PSU banks, left with little headroom for raising equity.

THREATS

 Threat of stability of the system: failure of some weak banks has often threatened the stability
of the system.
 Rise in inflation figures which would lead to increase in interest rates.
 Increase in the number of foreign players would pose a threat to the Public Sector Bank as well
as the private players.

Key players

Andhra Bank Kotak Mahindra Bank

State Bank of India Centurion Bank of Punjab
Allahabad Bank Citibank
Vijaya Bank Standard Chartered Bank
Punjab National Bank HSBC Bank
HDFC Bank State Bank of Mysore
UTI Bank American Express Bank
ICICI Bank ABN AMRO
Vision of banks in India

 The banking scenario in India has already gained all the momentum, with the domestic and
international banks gathering pace.
 The focus of all banks in India has shifted their approach to 'cost', determined by revenue minus
profit. (This means that all the resources should be used efficiently to better the productivity
and ensure a win-win situation.)
 To survive in the long run, it is essential to focus on cost saving. (Previously, banks focused on
the 'revenue' model which is equal to cost plus profit.)
 Post the banking reforms, banks shifted their approach to the 'profit' model. ( which meant
that banks aimed at higher profit maximization.)

Focus of banks in India

The banking industry is slated for growth in future with a more qualitative rather than quantitative
approach.

 The total assets of all scheduled commercial banks by end-March 2010 is projected to touch Rs
40,90,000 cr. This is going to comprise around 65% of GDP at current market prices as
compared to 67% in 2002-03.
 The bank's assets are estimated to grow at an annual composite rate of growth of 13.4% during
the rest of the decade as against 16.7% between 1994-95 and 2002-03.
 Barring the asset side, on the liability perspective, there will be huge additions to the capital
base and reserves.
 People will rely more on borrowed funds, pace of deposit growth slowing down side by side.
However, advances and investments would not see a healthy growth rate.

BANKING SECTOR

CURRENT PERFORMANCE OF INDIAN BANKING SECTOR

Indian Banking sector is dominated by Public sector banks (PSBs) which accounted for 72.6% of total
advances for all SCBs as on 31st March 2008. PSBs have rapidly expanded their foot prints after
nationalisation of banks in India in 1969 and further in 1980. Although there is a restrictive
entry/expansion for private and foreign banks in India, these banks have increased their presence and
business over last 5 years. Peculiar characteristic of Indian banks unlike their western counterparts such
as high share of household savings in deposits (57.4% of total deposits), adequate capitalisation, stricter
regulations and lower leverage makes them less prone to financial crisis, as was seen in the western
world in mid FY09. The Scheduled Commercial Banks (SCBs) in India have shown an impressive growth
from FY04 to the mid of FY09. Total deposits, advances and net profit grew at CAGR of 19.6%, 27.4% and
20.2% respectively from FY03 to FY08. Banking sector recorded credit growth of 33.3% in FY05 which
was highest in last 2 and half decades and credit growth in excess of 30% for three consecutive years
from FY04 to FY07, which is best in the banking industry so far. Increase in economic activity and robust
primary and secondary markets during this period have helped the banks to garner larger increase in
their fee based incomes. A significant improvement in recovering the NPAs, lowest ever increase in
new NPAs combined with a sharp increase in gross advances for SCBs translated into the best asset
quality ratio for banking sector in last two decades. Gross NPAs to gross advances ratio for SCBs
decreased from the high of 14% in FY2000 to 2.3% in FY08. Within the group of banks, foreign and
private sector banks grew at higher rate than the industry from FY03 to FY08 primarily because of lower
base effect and rapid expansion undertaken by these banks. In FY09, overall growth in credit and
deposits was led by PSBs. However, growth of private and foreign banks was significantly lower in FY09
due to their high exposure to stressed sectors and problem at parent level for foreign banks. Unsecured
bank credit has risen over the years and stood at 23.3% of bank credit in FY08 as compared to just 10.9%
in FY2000. Lending to sensitive sector has also grown at CAGR of 46.1% from FY05 to FY08. In the
backdrop of the economic downturn, CARE Research feels that the excellent performance seen in last
five years ended FY08 will be difficult to repeat in coming years. The liquidity crisis that swept the
heavyweights of global financial sector off their feet in FY09 did affect the entities in Indian banking
sector as well, albeit marginally. Other than the temporary crunch after bankruptcy of Lehman Brothers,
the global financial meltdown was weathered by banks in India with relative ease. The monetary stimuli
(reduction in repo rate, cash reserve ratio (CRR) and statutory liquidity ratio (SLR)) offered to the banks
by the RBI made things easier. Despite the severe liquidity pressure and poor credit appetite at the retail
and corporate levels, Indian banks managed to grow their advances and deposits by 24% Year on Year
(YOY) and 22% YoY respectively in FY09. The growth was mainly driven by a sharp expansion in term
deposits and growth in agricultural and large corporate credit. Having said that , higher delinquency
levels in retail credit and debt restructuring took its toll on the sector.

There WILL BE A CHART

Indian banks also enjoyed higher levels of money supply, credit and deposits as a percentage of GDP in
FY09 as compared to that in FY08 showing improved maturity in the financial sector. Despite poor
pricing power lower cost of funds helped Indian banks grow their net interest margins in FY09. 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 FY09 which
deferred their interest income. Further the PSU banks had also to provide for the loss of interest on the
agri-loans waived by the government. With lesser avenues of credit disbursal, banks had to park most of
the liquidity available with them with the RBI. At the end of FY09, banks' investment in SLR securities
increased to 28.1% of total deposits from 27.8% in FY08 and higher than the RBI prescribed level of 24%.
Feeble credit offtake coupled with the fear of bad loans going up in the scenario of economic slowdown
prompted banks to park their surplus funds with the RBI. In FY09, as per the RBI mandate, all foreign
banks operating in India and Indian banks having operational presence outside India migrated to the
Basel II norms. All other commercial banks have been encouraged to migrate to these approaches not
later than FY10. CARE Research expects that with the downturn in the economy, credit and deposit
growth will moderate in coming years. Credit growth will be led by spending on the infrastructure while
retail credit will show a moderate growth. Margin pressures due to lag effect of rate cuts between
interest rate on deposits and advances, lower treasury gains and core fee income and increasing in
provisions for NPAs is likely to put pressure in the bottom line of the banks. Going forward, PSBs’ which
are close to the required lower level of government stake and have concentrated presence in particular
region are likely to consider its merger with other PSB as an important option if they want to sustain the
growth seen in past. With the downturn in the economy, CARE Research expects that credit and deposit
growth will moderate in coming years. Credit growth will be led by spending on the infrastructure while
retail credit will show a moderate growth. Margin pressures due to lag effect of rate cuts between
interest rate on deposits and advances, lower treasury gains and core fee income and increasing in
provisions for NPAs is likely to put pressure in the bottom line of the banks.

INTRODUCTION TO FUNDAMENTAL

ANALYSIS

INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental Analysis involves examining the economic, financial and other qualitative and quantitative
factors related to a security in order to determine its intrinsic value. It attempts to study everything that
can affect the security's value, including macroeconomic factors (like the overall economy and industry
conditions) and individually specific factors (like the financial condition and management of companies).
Fundamental analysis, which is also known as quantitative analysis, involves delving into a company’s
financial statements (such as profit and loss account and balance sheet) in order to study various
financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually
carried out by analysts, brokers and savvy investors. Many analysts and investors focus on a single
number--net income (or earnings)--to evaluate performance. When investors attempt to forecast the
market value of a firm, they frequently rely on earnings. Many institutional investors, analysts and
regulators believe earnings are not as relevant as they once were. Due to nonrecurring events,
disparities in measuring risk and management's ability to disguise fundamental earnings problems, other
measures beyond net income can assist in predicting future firm earnings.

Two Approaches of fundamental analysis

While carrying out fundamental analysis, investors can use either of the following approaches

1. Top-down approach: In this approach, an analyst investigates both international and national
economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The
search for the best security then trickles down to the analysis of total sales, price levels and
foreign competition in a sector in order to identify the best business in the sector.
2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses,
irrespective of their industry/region.

How does fundamental analysis works?

Fundamental analysis is carried out with the aim of predicting the future performance of a
company. It is based on the theory that the market price of a security tends to move towards its
'real value' or 'intrinsic value.' Thus, the intrinsic value of a security being higher than the security’s
market value represents a time to buy. If the value of the security is lower than its market price,
investors should sell it. The steps involved in fundamental analysis are:

1. Macroeconomic analysis, which involves considering currencies, commodities and indices.

2. Industry sector analysis, which involves the analysis of companies that are a part of the sector.

3. Situational analysis of a company.

4. Financial analysis of the company.

5. Valuation The valuation of any security is done through the discounted cash flow (DCF) model,
which takes into consideration: 1. Dividends received by investors 2. Earnings or cash flows of a
company 3. Debt, which is calculated by using the debt to equity ratio and the current ratio (current
assets/current liabilities)

Benefits of fundamental analysis

Fundamental analysis helps in:

1. Identifying the intrinsic value of a security. 2. Identifying long-term investment opportunities

since it involves real-time data.
2. . Identifying long-term investment opportunities since it involves real-time data.
 Drawbacks of fundamental analysis

The drawbacks of fundamental analysis are:

Too many ecnomic indicators and extensive macroeconomic data can confuse novice investors.The
same set of information on macroeconomic indicators can have varied effects on the same currencies at
different times.It is beneficial only for long-term investments

Fundamental Analysis Tools

These are the most popular tools of fundamental analysis.

1.Earnings per Share –EPS

2.Price to Earnings Ratio– P/E

3.Projected Earning Growth – PEG

4.Price to Sales – P/S

5.Price to Book – P/B

6.Dividend Payout Ratio

7.Dividend Yield

8.Book Value

9.Return on Equity

Ratio analysis

financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and
appraising financial and management performance. A good financial analyst will build in financial ratio
calculations extensively in a financial modeling exercise to enable robust analysis Financial ratios allow a
financial analyst to:

1. Standardize information from financial statements across multiple financial years to allow
comparison of a firm’s performance over time in a financial model.
 2. Standardize information from financial statements from different companies to allow an apples
to apples comparison between firms of differing size in a financial model.
3. Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates
comparison of these relationships over time and across firms in a financial model.

In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are:

1. Performance ratios
2. Working capital ratios
3. Liquidity ratios
4. Solvency ratios

These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following
questions or concerns:

1) Performance ratios
 What return is the company making on its capital investment?
 What are its profit margins?
2) Working capital ratios
 How quickly are debts paid?
 How many times is inventory turned?
3) Liquidity ratios
 Can the company continue to pay its liabilities and debts?
4) Solvency ratios (Longer term)
 What is the level of debt in relation to other assets and to equity?
 Is the level of interest payable out of profits

Technical analysis

is the practice of anticipating price changes of a financial instrument by analyzing prior price changes
and looking for patterns and relationships in price history.

Since all the investors in the stock market want to make the maximum profits possible, they just cannot
afford to ignore either fundamental or technical analysis. The price of a security represents a consensus.
It is the price at which one person agrees to buy and another agrees to sell. The price at which an
investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price
to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are
the cause of a major challenge in forecasting security prices, because they refer to human expectations.
As we all know firsthand, humans expectations are neither easily quantifiable nor predictable. If prices
are based on investor expectations, then knowing what a security should sell for (i.e., fundamental
analysis) becomes less important than knowing what other investors expect it to sell for. That's not to
say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong
consensus of a stock's future earnings that the average investor cannot disprove.
WHY ONLY FUNDAMENTAL ANALYSIS

Long-term Trends

Fundamental analysis is good for long-term investments based on long-term trends, very long-term. The
ability to identify and predict long-term economic, demographic, technological or consumer trends can
benefit patient investors who pick the right industry groups or companies.

Value Spotting

Sound fundamental analysis will help identify companies that represent a good value. Some of the most
legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are
seen as the champions of value investing. Fundamental analysis can help uncover companies with
valuable assets, a strong balance sheet, stable earnings, and staying power.

Business insights

One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a
thorough understanding of the business. After such pains taking research and analysis, an investor will
be familiar with the key revenue and profit drivers behind a company. Earnings and earnings
expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good
understanding can help investors avoid companies that are prone to shortfalls and identify those that
continue to deliver. In addition to understanding the business, fundamental analysis allows investors to
develop an understanding of the key value drivers and companies within an industry. A stock's price is
heavily influenced by its industry group. By studying these groups, investors can better position
themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented
(computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-
oriented (high yield).

Knowing Who's Who

Stocks move as a group. By understanding a company's business, investors can better position
themselves to categorize stocks within their relevant industry group. Business can change rapidly and
with it the revenue mix of a company. This has happened with many of the pure internet retailers, which
were not really internet companies, but plain retailers. Knowing a company's business and being able to
place it in a group can make a huge difference in relative valuations.

The charts of the technical analyst may give all kinds of profit alerts, signals and alarms, but there’s little
in the charts that tell us why a group of people make the choices that create the price patterns.
 HDFC BANK

COMPANY PROFILE

Housing Development Finance Corporation Limited, more popularly known as HDFC Bank Ltd, was
established in the year 1994, as a part of the liberalization of the Indian Banking Industry by Reserve
Bank of India (RBI). It was one of the first banks to receive an 'in principle' approval from RBI, for setting
up a bank in the private sector. The bank was incorporated with the name 'HDFC Bank Limited', with its
registered office in Mumbai. The following year, it started its operations as a Scheduled Commercial
Bank. Today, the bank boasts of as many as 1412 branches and over 3275 ATMs across India.

AMALGAMATIONS

In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector bank promoted by
Bennett, Coleman & Co. / Times Group). With this, HDFC and Times became the first two private banks
in the New Generation Private Sector Banks to have gone through a merger. In 2008, RBI approved the
amalgamation of Centurion Bank of Punjab with HDFC Bank. With this, the Deposits of the merged entity
became Rs. 1,22,000 crores, while the Advances were Rs. 89,000 crores and Balance Sheet size was Rs.
1,63,000 crores.

There will be IS and BS and Ratio

PERFORMANCE HIGHLIGHTS

 Net profit has grown 41.2% to 2245cr in 2009 from 1590 in 2008 largely due to treasury gains.
 ROE is 17.2% in 2009 as compared to 17.7% in 2008.
 ROA is 1.4% in 2009 which is unchanged from last year.
 Net interest spread is 10.39 in 2009 as compared to 11.30 in 2008.
 NIM is 4.9% in 2009 which is unchanged from last year.
 P/E IS 28.38% in 2009 as compared to 30.4% in 2008.
 The bank’s CAR stood at comfortable 15.4% as at 30th June2009, with tier I at 10.6%.
 Warrant conversion by HDFC Ltd will further boost the tier I capital adequacy.
 CASA ratio is maintained at 45% this year.
 The NPA in 2008 was 903.64 crores.

OUTLOOK AND VALUATION

I believe that HDFC Bank is among the most competitive banks in the Banking Sector and is poised to
maintain its profitable growth over the long term. I believe that the

Bank’s competitive advantages, driving gains in CASA market share and traction in

multiple Fee Revenue streams, can support up to 5% higher core sustainable RoEs vis-à-vis sectoral
averages over the long term, creating a material margin of safety in our Target valuation multiples. We
should maintain our view that the substantial inorganic and organic network expansion since 3QFY2008
will enable the Bank regain strong traction in CASA Deposits and Fee Income market share gains over
the next 1-2 years, especially once the macro-environment starts improving, progressively restoring
financial parameters like CASA ratio and RoE back to pre-merger levels. While HR and IT integration of
the eCBoP branches has been completed, it is likely to take the Bank 12-18 months for productivity
improvements to scale up closer to levels of its own branches, so that merger benefits start accruing to
its Bottom-line.
 HIERARCHY FOR CHOOSING BANKING STOCK FOR INVESTMENT

1) HDFC Bank Ltd

HDFC Bank is among the most competitive bank in the Banking Sector and is poised to maintain its
profitable growth over the long term. Network expansion since 3QFY2008 will enable the Bank regains
strong traction in CASA Deposits and Fee Income. Market share gains over the next 1-2 years. While HR
and IT integration of the centurion bank of Punjab branches has been completed, it is likely to take the
Bank 12-18 months for productivity improvements to scale up closer to levels of its own branches, so
that merger benefits start accruing to its Bottom-line. The bank stock is likely to get highest return
comparatively with other bank.

2) ICICI Bank Ltd

The bank’s strategy of strengthening its profitability by expanding branch network, replacing bulk
deposits with retail deposits and improving CASA ratio. These measures are likely to result in margin
improvement and subsequent increase in medium-term ROEs from the current levels. Looking at the
future growth this bank is 2nd most preferred stock for investing.

2) SBI LTD
Banks balance sheet is coming to Rs10 trillion. SBI has maintained its leadership position across financial
product and had aggressively expanded its book in recent past and had gained market share. SBI
currently has 1111 branches and plans to add 1000 branches this fiscal catering to over 50000 villages. It
is also aiming at extending banking services to 100000 un banked villages in FY 10

Key risk to bank is-

1) sharper than expected asset quality deterioration,

2) Slower credit growth,

3) Margin compression.

4)Punjab National Bank Ltd

PNB Ltd has been ranked on 5th position in preference this is because there is asset quality concerns
could continue to weigh in overseas branches. The bank is growing rapidly on the international front and
plans to continue its growth globally. It has already acquired permission from RBI to open further
branches abroad especially one in DIFC, Dubai. Although it is a positive sign, there is a concern of FOREX
losses that could be reported by the bank in the future quarters due to adverse fluctuation in currency.
Further spreads in countries abroad may not be as healthy as in India and asset quality concerns could
continue to weigh in overseas branches.

CONCLUSION

 Fundamental analysis can be valuable, but it should be approached with caution. If you are
reading research written by a sell-side analyst, it is important to be familiar with the analyst
behind the report.
 We all have personal biases, and every analyst has some sort of bias. There is nothing wrong
with this, and the research can still be of great value.
 Learn what the ratings mean and the track record of an analyst before jumping off the deep
end.
 Corporate statements and press releases offer good information, but they should be read with a
healthy degree of skepticism to separate the facts from the spin.
 Press releases don't happen by accident; they are an important Personal Research tool for
companies.
 Investors should become skilled readers to weed out the important information and ignore the
hype.