A

PROJECT REPORT ON A Comprehensive Study On Financial Analysis

OF H.D.F.C. BANK

JAIPUR
SUBMITTED TO:

Jaipur national university in partial fulfillment of the Requirement for award of the degree of
PGDM
(SESSION: 20011-12)- PGDM 3RD SEMESTER

Under the guidance of : MS. Rajni kansal Faculty,MBA

Submitted by: ISHA ARORA D/o Mr. KULDEEP ARORA PGDM- III

Financial Analysis of HDFC Bank

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 BANK LTD.We have had the advantages of his critical advice from his profound knowledge in Finance Sector. He has indeed taken personal interest in preparing an innovative Report on Financial analysis &

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

I also want to thank Mr. E.Dheeraj who is the Relationship Manager-Corporate Salary of this branch, my company guide for his enduring patience, valuable guidance and constant encouragement during the course of project work. My sincere thanks are due to all the officers of HDFC Bank for their worthy help and cooperation. Finally, 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 Organization Mr. Gopala Krishna Branch manager, HDFC BANK
LTD. K-Block, Sector 18, Noida - 201301 Uttar Pradesh Tel 0120-4664301 / 328 / 335 /336 Fax 0120 - 2514534

Company Guide - Mr. E.Dheeraj-Relationship Manager-Corporate Salary Faculty Guide Dr. Sunita Bishnoi

Financial Analysis of HDFC Bank

(ISHA ARORA) Pgdm III

Financial Analysis of HDFC Bank

EXECUTIVE SUMMARY
Undertake something is difficult, It will do you good, Unless you try to do something Beyond what you have already mastered You will never grow. RONALDE. OSBORN

I did my training in HDFC BANK, JAIPUR. The concept of this project is to check whether HDFC BANK is performing well year after year or lacking in performance. The performance can be evaluated by doing Financial Analysis of Financial Statements of Bank. The purpose of this project is to evaluate the performance of HDFC BANK. It primarily aims at learning the various factors that can help I evaluation process. I have tried to find out the reasons or ground where it is lacking. I have also tried to find out the areas of improvement. In order to do financial analysis of co. the various tools like RATIO ANALYSIS, COMPARATIVE FINANCIAL STATEMENT AND TREND PERCENTAGES have been used. The project also includes objective of study, Research Methodology, Analysis and Interpretation, findings recommendations limitation of study conclusion bibliography and annexure.

Financial Analysis of HDFC Bank

JUSTIFICATION OF THE STUDY

Financial Statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information in the financial statement is not an end in itself as no meaningful can be drawn from these statements alone. The information provided in the financial statement is of immense use in making decisions through analysis and interpretation of financial statements. The financial analysis is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance sheet and P&L A/C. There are various methods or techniques used in analyzing financial statement such as comparative statement, trend analysis, common size statement, schedule of changes in working capital, fund flow and cash flow analysis, cost volume profit analysis and RATIO ANALYSIS. Ratio analysis is one of the most powerful tool of financial analysis. It is a process of establishing and interpreting various ratios that the financial statements can be analysed more clearly and decisions made from such analysis. Just like a DOCTOR examines his patient by recording his body temperature, blood pressure etc before making his conclusion regarding the illness and before giving his treatment, a financial analyst analysis the financial statement with various tools of analysis before commenting upon the financial health or weaknesses of an enterprise. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. Financial statement analysis is an attempt to determine the significance and meaning of financial statement data so that forecast may be made of the future earning, ability to pay interest and debt maturities and profitability of a sound dividend policy. 6

Financial Analysis of HDFC Bank

OBJECTIVE OF THE STUDY

Objectives are the ends that states specifically how goal be achieved. Every study must have an objective for which all the efforts have been done. Without objective no research can be conducted and no result can be obtained. On the basis of objective all the research process is followed. Objectives are the main aspect of every study. The objective of the study gives direction to go through the research problem. It guides the researcher and keeps him on track. I have two objectives regarding my research project. These are shown below:1. 2. 1. Primary objective Secondary objective Primary objective :1) 2) To study the software used in HDFC Bank To analysis the financial statements of the corporation to its

true financial position by the use of ratios 2. Secondary objective:1) 2) 3) 4) To find out the shortcomings in HDFC Bank To see whether HDFC is going well or not in different areas To inform the management about the financial condition of HDFC To inform the investor, enabling them to take the investment

decision.

Financial Analysis of HDFC Bank

Contents Introduction.......................................................................................5

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 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. The claims of bond holders, on the other hand, are long term. Accordingly, bond holders are more interested in the cash flows ability of the bank to service debt over a long period of time.

Inflation Rate
Inflation rate in double-digit and resulted in hike in policy rates by 150 bps, which put the liquidity situation under high stress. Although, further rate hike is not imminent, but inflation would drive the monetary policy further and interest rate expected to remain high.

Financial Analysis of HDFC Bank

Headline inflation is always considered as a major vexation for the Indias central bank. Since, inflation was reading in a double-digit figure, it was a challenge for the Reserve Bank of India to fix the inflation problem under the condition of fragile global economic recovery without denting the recovery process. In response to that, RBI revised its policy rates by over 100 bps and now it does seem that the policy action is working but the money supply is still at 20.34 per cent. Both trend lines are now acting inversely, and inflation is falling down to 8 per cent. According to VMW Research, inflation is projected at 7.48 per cent for the month of Nov, 2010. It is also evident that in the past three months, schedule commercial banks and non-banking financial companies have started borrowing from the RBIs window of Liquidity Adjustment Facility (LAF) at the rate of 6.25 per cent.

10

Financial Analysis of HDFC Bank

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.

11

Financial Analysis of HDFC Bank

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, 12

Financial Analysis of HDFC Bank 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.

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

13

Financial Analysis of HDFC Bank 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 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 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. 14

Financial Analysis of HDFC Bank 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 cores (Rs5.5 billion), of this the paid-up amount is Rs 424.6 crore (Rs.4.2 billion). In terms of equity share, the HDFC Group holds 19.4%. Foreign Institutional Investors (FIIs) have around 28% of the equity and about 17.6% is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). The bank has about 570,000 shareholders. Its shares find a listing on the Stock Exchange, Mumbai and National Stock Exchange, while its American Depository Shares are listed on the New York Stock Exchange (NYSE), under the symbol 'HDB'

.
Capital Adequacy Ratio:
Banks total Capital Adequacy Ratio (CAR) calculated in line with the Basel II framework stood at 17.4%, well above the regulatory minimum of 9.0%. Of this, Tier I CAR was 13.3%.

15

Financial Analysis of HDFC Bank

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: 1. 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 16

Financial Analysis of HDFC Bank 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.

2. 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.

3. 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.

4. 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.

5. 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

Financial Statement analysis of HDFC Bank

Comparative Statement Analysis
Here we analyse the comparative financial statements of HDFC Bank as at 31st March 2008, 2009, 2010. Comparative Balance Sheet of HDFC Ltd. as at 31st March 2008, 2009 and 2010 (in cr.)

Capital & Liabilities Total Share Capital

Mar' 08

Inc./ Dec

Mar'09

Inc./De c

Mar'10

354.43

70.95

20.02

425.38

32.36

7.61

457.74

18

Financial Analysis of HDFC Bank

Equity Share Capital Share Applicatio n Money Preference Share Capital Reserves Revaluatio n Reserves Net Worth Deposits Borrowing s Total Debt Other Liabilities & Provisions Total Liabilities

354.43

70.95

20.02

425.38

32.36

7.61

457.74

400.92

400.92

-400.92

-100

0 11,142.8 0 0 11,497.2 3 1,00,768. 60 4,478.86 1,05,247. 46

0 3083.6 3 0 3555.5 42042. 98 1793.0 2 40249. 96

0 27.67 0 30.9 41.7 40.03 38.24

0 14,226.4 3 0 15,052.7 3 1,42,811. 58 2,685.84 1,45,497. 42

0 6838.32 0 6469.76 24592.8 6 10229.8 5 34822.7 1

0 48.07 0 42.98 17.22 380.8 8 23.93

0 21,064.7 5 0 21,522.4 9 1,67,404. 44 12,915.6 9 1,80,320. 13

16,431.9 1

6288.7 1

38.27

22,720.6 2

2104.68

-9.26

20,615.9 4

1,33,176. 60

50094. 17

37.61

1,83,270. 77

39187.7 9

21.38

2,22,458. 56

Assets Cash & Balances with RBI

Mar'08 12,553.1 8

Inc./Dec

Mar'09 13,527.2 1

Inc./De c 1,956.0 7

Mar10 15,483.2 8

974.03

7.76

14.46

19

Financial Analysis of HDFC Bank

Balance with Banks, Money at Call Advances Investme nts Gross Block Accumula ted Depreciat ion Net Block Capital Work In Progress Other Assets Total Assets Continge nt Liabilities Bills for collection Book Value 4,402.69 1,33,176 .60 5,82,835 .94 17,092.8 5 324.38 1,86,241 .63 846.77 20.06 4.95 6.18 -31.95 1,954.14 50,094.1 8 44.39 6,356.83 1,83,270 .78 3,96,594 .31 17,939.6 2 344.44 -401.68 39,187. 78 69,641. 93 3,000.5 1 125.75 -6.32 5,955.15 2,22,458 .56 4,66,236 .24 20,940.1 3 470.19 0 0 0 0 0 0 0 1,175.13 531.6 45.24 1,706.73 416.08 24.37 2,122.81 1,211.86 1,038.04 85.66 2,249.90 335.26 14.9 2,585.16 63,426.9 0 49,393.5 4 2,386.99 35,456.1 5 9,424.01 55.9 98,883.0 5 58,817.5 5 3,956.63 26,947. 54 -209.93 27.25 1,25,830 .59 58,607.6 2 4,707.97 2,225.16 1,754.25 78.84 3,979.41 10,479. 70 263.3 5 14,459.1 1

19.08

-0.35

1,569.64

65.76

751.34

18.99

37.61

21.38

17.56

16.73 36.51

20

Financial Analysis of HDFC Bank

(Rs)

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 Mar '08 10,115. 00 2,205.3 8 12,320. 38 4,887.1 2 1,301.3 5 974.79 271.72 3,295.2 2 0 3,935.2 8 1,907.8 0 1,590.18 10,730. 85.26 -28.91 41.18 % 61.47 57.37 60.73 Mar '09 16,332. 26 3,470.6 3 19,802. 89 8,911.1 0 2,238.2 0 2,851.2 6 359.91 3,197.4 9 0 7,290.6 6 1,356.2 0 2,244.94 17,557. 96 -0.59 5.66 13.93 31.35 -2.98 57.63 % -0.98 9.8 0.91 Mar '10 16,172.9 0 3,810.62 19,983.5 2

82.34 71.99 192.5 32.46 -2.97

-12.62 2.28 19.1 9.58 -0.89

7,786.30 2,289.18 3,395.83 394.39 3,169.12 0 7,703.41 1,545.11 2,948.70 17,034.8 2 -0.93

63.63 20 -0.06 883.33 21

Financial Analysis of HDFC Bank Items Profit brought forward Total Preference Dividend Equity Dividend Corporate Dividend 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/Transfe r to Govt. Balance c/f to Balance Sheet Total 1,932.0 3 3,522.1 5 0 301.27 51.2 41.2 41.19 2,574.6 3 4,818.9 8 0 425.38 72.29 29.13 26.2

33.26 36.82

34.22 32.88

3,455.57 6,403.34 0 549.29 91.23

44.87 85 324.38

17.61 17.65 6.18

52.77 100 344.44

22.08 20 36.51

64.42 120 470.19

436.05

47.06

641.25

45.83

935.15

159.02

41.18

224.5

31.35

294.87

352.47 2,574.6 1 3,522.15

41.19

497.67 3,455.5 7 4,818.99

28.7

640.52

34.22 36.82

31.17 32.88

4,532.79 6,403.33

22

Financial Analysis of HDFC Bank

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 deposits have grown by 17.22% which is a good indication of the banks healthy position and the confidence it enjoys with the public. 23

Financial Analysis of HDFC Bank

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% and 192.50% respectively. Net profit for the period was Rs.2948.70 crore which represents an increase by 31.35% compared to a rise of 41.18% over the previous period. The decrease in interest income could have contributed to the decline 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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Financial Analysis of HDFC 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 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 457.74 457.74 0 0 21064.8 0 21522.5 167404.5 12915.7 180320.1 20615.94 14.46 263.38 27.251 -0.256 14.901 24.2787 0 -6.3188 21.382 21.382 17.56 ICICI Mar.2010 1,114.89 1,114.89 0 0 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 -100 4.3 % -23.81 0.14

222458.6 15483.28

21.38 23.35

3,63,399.72 27,514.29

-4.19 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

25

Financial Analysis of HDFC Bank

Accumulated depreciation Net block Capital work in progress Other assets Total assets

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 14.9% as of March 2010 when compared to ICICI where it is only 4.3%. ICICI has a much larger amount in investment where they seek to increase their wealth but the growth is larger for HDFC bank for the period. Advances grew at 19% for HDFC bank whereas in the case of ICICI bank, there is decrease by 17%. HDFC is a smaller bank than ICICI but when comparing profitability, efficiency etc. it is not behind ICICI in any manner. ICICI bank gets funds by borrowings and the rate of increase is more than that of HDFC. Total assets rose by 21.39% for HDFC bank whereas it went down by 4.19% for ICICI bank.

Ratio Analysis of HDFC Bank

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

Profitability Ratios
1. Profit Margin Profit Margin = (Profit after Tax / Net Revenue) * 100
26

Financial Analysis of HDFC Bank

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 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

27

Financial Analysis of HDFC Bank

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 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. 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.

28

Financial Analysis of HDFC Bank There is a slight increase in Return On Assets ratio to 1.3 from 1.2 over the period ending March 2010. There has been an increase in profits over the period though assets have also increased over the period. An increase in ROA indicates higher efficiency and here the costs have shown to be effectively controlled. From the three other banks, only Axis Bank is shown to have a higher ROA due to its consistently better performance when compared to other banks including HDFC. There was a fall in Assets Turnover ratio to 4.24 from 5.00 during the period. We can see that there was a fall in this ratio over the previous period also. This could be due to the lesser rise in Net Revenue when compared to the rise in assets over the period. A fall in this ratio indicates lesser efficiency in utilising the assets to generate revenue. We see that the ratios for the other three banks too have fallen during the period, but they are still higher than that of HDFC bank indicating higher efficiency. The management has to consider this seriously and take steps to improve the operating efficiency of the bank.

There was a fall in Return on Equity ratio over the period ending March 2010 to 13.7 from 15.32 though there was a rise in the previous period from 13.82. This indicates that the efficiency to generate profits from every unit of 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 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 29

Financial Analysis of HDFC Bank 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.

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

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Financial Analysis of HDFC Bank

2. Quick Ratio Quick Ratio = (Quick Assets / Current Liabilities) HDFC Bank: Year Quick Ratio 2008 4.89 2009 5.23 2010 7.14

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 1 suggests that the company would be unable to pay off its obligations if they came due at that point. Due to a rise in current assets the ratio shows a rise, but is very low as current assets are only 28% of current assets.

The Quick Ratio is an indicator of a company's short-term liquidity. It measures a

company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Hence creditors are most concerned about the quick ratios. A lesser quick ratio leads to higher creditor concern. The quick

ratio is

more

conservative than the current ratio. When short-term obligations need to be paid off

immediately, there are situations in which the current ratio would overestimate a company's 31

Financial Analysis of HDFC Bank 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 other three banks show a higher liquidity when compared to HDFC. But the banks are under the guidance of RBI and they have to follow the liquidity norms laid down by RBI.

Solvency Ratios
1. Total Debt To Equity Ratio

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

32

Financial Analysis of HDFC Bank

HDFC Bank: Year Total Debt to Equity Ratio

2008 8.76

2009 9.75

2010 7.78

2. Interest Coverage Ratio

Interest Coverage Ratio = (Earnings before Income Tax / Interest Expenses) HDFC Bank: Year 2008 Interest Coverage 1.79 Ratio
3. Loan to Deposit Ratio

2009 1.44

2010 1.63

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 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 33

Financial Analysis of HDFC Bank outside debts. This helps the bank to maintain high credit reputation in market. The other banks were able to reduce the ratio substantially.

The Interest Coverage ratio is used to determine how easily a company can pay
interest on outstanding debt. The interest coverage ratio is calculated by dividing a bank's earnings before interest and taxes (EBIT) of one period by the bank's interest expenses of the same period. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. The ratio for the year ending 2010 is 1.63 which is reasonable and not below1.5. This indicates that the bank is in a sound financial health and is able to pay the interest on its outstanding debts. The ratio was best in 2007-08 among the three financial years. But has reduced in the year 2009 to 1.44 and increased to 1.63 in 2009-10. The bank has maintained a somewhat healthy ratio over the years.

The Loan to Deposit ratio is indicative of the percentage of funds lent by the bank
out of the total amount raised through deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources. The point to note here is that loans given by bank would also include its investments in debentures, bonds and commercial papers of the companies. This ratio forms an integral part of analysis as it indicates the amount of reliability the bank has earned in the minds of its customers and evidence of its robustness. The ratio has increased over the period ending March 2010 to 76 which is a healthy sign.

34

Financial Analysis of HDFC Bank

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) 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 35.74. 35

Financial Analysis of HDFC Bank

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 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.

36

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 31st March 2008, 09, 10 (Rs. million) 3131- %B MarMar-10 T 09 4577.4 0.2 4253. Equity Capital 3 1 84 0.0 Preference Capital 0.00 0.00 0 4577.4 0.2 8263. Share Capital 3 1 00 Reserves and Surplus Deposits Borrowings % B T 0. 23 0. 00 0. 45 31Mar -08 354 4.33 0.00 354 4.33 111 428. 08 100 768 5.91 459 49.2 4 163 158. 48 133

%BT 0.27 0.00 0.27 8.37 75.67 3.45 12.25 100.00

210618 9.4 14220 7. .37 7 9.46 76 77 167404 75. 14281 .9 4.39 25 15.80 2 129156 5.8 91636 5. .93 1 .37 00

Other Provisions and 206159 9.2 16242 8. Liabilities .44 7 8.23 86 Capital and Liabilities (BT) 222458 100 18327 10 37

Financial Analysis of HDFC Bank 5.70 .00 07.73 Fixed Assets Investments Advances Cash & Money at Call Other Current Assets Properties and Assets (BT) 21228. 0.9 17067 11 5 .29 586076 26. 58817 .16 35 5.49 125830 56. 98883 5.94 56 0.47 299423 13. 17506 .99 46 6.17 59551. 2.6 63568 50 8 .31 222458 100 18327 5.70 .00 07.73 0. 176 00 6.03 117 0. 50.9 93 2 32 493 .0 935. 9 38 53 634 .9 268. 5 93 147 9. 783. 55 39 440 3. 27.4 47 1 10 133 0. 176 00 6.03

0.88 37.09 47.63 11.10 3.31 100.00

Common Size Income Statement of HDFC Bank Ltd for the periods ending 31st March 2008, 09, 10
Profit/Loss A/C 31-Mar-10 31-Mar-09 Rs. mln %O Rs. mln %OI 38 31-Mar-08 Rs. mln %OI

Financial Analysis of HDFC Bank 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 I 80. 9 14. 2 0 0 4.8 9 19. 1 10 0 39 11. 5 1.9 7 15. 4 17. 4 85. 2 14. 8 0 0 14. 8 14. 8 0 2.7 5 163322. 61 24572.9 7 0 0 8333.07 32906.0 4 196228. 65 89111.0 4 22381.9 8 3599.09 29346.9 9 29340.1 5 173779. 25 22449.4 0 0 22449.3 9 22449.3 9 0 4253.84 83.2 3 12.5 2 0 0 4.25 16.7 7 100 45.4 1 11.4 1 1.83 14.9 6 14.9 5 88.5 6 11.4 4 0 0 11.4 4 11.4 4 0 2.17

161729 28305.8 6 0 0 9770.25 38076.1 1 199805. 11 77862.9 9 22891.7 6 3943.92 30809.1 5 34810.2 8 170318. 1 29487.0 1 0 0 29487.0 1 29487.0 1 0 5492.92

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

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

39

Financial Analysis of HDFC Bank

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.

40

Financial Analysis of HDFC Bank

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.

41