RESEARCH REPORT ON

HDFC BANK

Benoy Paul Jose.

Chennai Business School.
BFS. 033.
 Research Report on HDFC Bank 2010

INDEX

Particulars Page No.

Indian Banking Sector 3-4
HDFC Bank
Background, Promoters, Capital Structure 5
Management, Business , Ratings 6
Products & Customer Segments 7
Business Mix 7-9
Financial Ratios 9-11
SCOT Analysis 11-13
HDFC Bank v/s ICICI Bank 14
Future Prospects - Recommendation 15
Charts 16
Balance Sheet 17
P&L and Cash Flow Statements 18
Reference 19

Benoy Paul Jose. CBS.BFS.033. Page 2 of 19

 Research Report on HDFC Bank 2010

Indian Banking Sector

The growth in the Indian Banking Industry has been more qualitative than quantitative and
it is expected to remain the same in the coming years. Based on the projections made in the
"India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the
report forecasts that the pace of expansion in the balance-sheets of banks is likely to
decelerate. The total assets of all scheduled commercial banks by end-March 2010 is
estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current
market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an
annual composite rate of 13.4 per cent during the rest of the decade as against the growth
rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will
be large additions to the capital base and reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled
banks. Scheduled banks constitute of commercial banks and co-operative banks. There are
about 67,000 branches of Scheduled banks spread across India. As far as the present scenario
is concerned the Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India account for
more than 78 per cent of the total banking industry assets. Unfortunately they are burdened
with excessive Non Performing assets (NPAs), massive manpower and lack of modern
technology. On the other hand the Private Sector Banks are making tremendous progress.
They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as
foreign banks are concerned they are likely to succeed in the Indian Banking Industry. They
have the advantage of modern technology and large capital back up.

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.

Benoy Paul Jose. CBS.BFS.033. Page 3 of 19

 Research Report on HDFC Bank 2010

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 crore. 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.

Consolidation of Banks in India

India would see a large number of global banks controlling huge stakes of the banking
entities in the country. The overseas banking units would bring along with it capital,
technology, and management skills. This would lead to higher competition in the banking
frontier and ensure greater efficiency. The FDI norms in the banking sector would give more
leverage to the Indian banks.

Thus, a consolidation phase in the banking industry in India is expected in the near future
with mergers and acquisitions gathering more pace. One might also see mergers between
public sector banks or public sector banks and private banks. Credit cards, insurance are the
next best strategic places where alliances can be formed.

Future challenges of Banks in India

The Indian banks are hopeful of becoming a global brand as they are the major source of
financial sector revenue and profit growth. The financial services penetration in India
continues to be healthy, thus the banking industry is also not far behind. As a result of this,
the profit for the Indian banking industry will surely surge ahead. The profit pool of the
Indian banking industry is probable to augment from US$ 4.8 billion in 2005 to US$ 20
billion in 2010 and further to US$ 40 billion by 2015. This growth and expansion pace would
be driven by the chunk of middle class population. The increase in the number of private
banks, the domestic credit market of India is estimated to grow from US$ 0.4 trillion in 2004
to US$ 23 trillion by 2050. This will make India the third largest banking hub of the globe.

Benoy Paul Jose. CBS.BFS.033. Page 4 of 19

 Research Report on HDFC Bank 2010

HDFC Bank
Background:
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January 1995.

Promoters:
HDFC is India's premier housing finance company and enjoys an impeccable track record in
India as well as in international markets. Since its inception in 1977, the Corporation has
maintained a consistent and healthy growth in its operations to remain the market leader in
mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC
has developed significant expertise in retail mortgage loans to different market segments
and also has a large corporate client base for its housing related credit facilities. With its
experience in the financial markets, a strong market reputation, large shareholder base and
unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian
environment.

Capital Structure:
As on 31st December, 2009 the authorized share capital of the Bank is Rs. 550 crore. The
paid-up capital as on said date is Rs. 455,23,65,640/- (45,52,36,564 equity shares of Rs. 10/-
each). The HDFC Group holds 23.87 % of the Bank's equity and about 16.94 % of the equity
is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS)
Issue). 27.46 % of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has
about 4,58,683 shareholders.

The shares are listed on the Bombay Stock Exchange Limited and The National Stock
Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the
New York Stock Exchange.

Benoy Paul Jose. CBS.BFS.033. Page 5 of 19

 Research Report on HDFC Bank 2010

Management:
Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Capoor
was a Deputy Governor of the Reserve Bank of India.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years,
and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia.

The Bank's Board of Directors is composed of eminent individuals with a wealth of

experience in public policy, administration, industry and commercial banking. Senior
executives representing HDFC are also on the Board.

Senior banking professionals with substantial experience in India and abroad head various
businesses and functions and report to the Managing Director. Given the professional
expertise of the management team and the overall focus on recruiting and retaining the best
talent in the industry, the bank believes that its people are a significant competitive strength.

Businesses:
• Wholesale Banking services.
• Retail banking services.
• Treasury.

Ratings:
1. Credit Analysis & Research Ltd. (CARE)-
• Fixed Deposits – AAA.
• Certificate of Deposit (CD) – PR1+.
• Tier II Bonds – CARE AAA.
• Perpetual Bonds & Upper Tier II issues – CARE AAA.

2. Fitch Ratings India Private Ltd. –

• Deposits – AAA.
• Tier II Bonds – AAA.

Benoy Paul Jose. CBS.BFS.033. Page 6 of 19

 Research Report on HDFC Bank 2010

Products & Customer Segments:

Business Mix:

The bank maintains a good mix of customer segments in their business.

Total Deposits –
The total
otal deposits in the bank have seen a
considerable
ble increase over the years. From
Rs.68,297 crores in 2007, there has been a
steady increase of deposits to Rs.
Rs.100,768
crores in 2008 and to Rs.
Rs.142,811 crores in
2009.

Benoy Paul Jose. CBS.BFS.033. Page 7 of 19

 Research Report on HDFC Bank 2010

Advances –

The advances has seen an

increase from Rs.63,426 crores to
Rs.98,883 crores.

Net Revenues –

Net Revenue for the year 2007

stood at Rs.4,984 crores. In 2008 it
rose to Rs.7,511 crores and in 2009
it peaked to Rs.10,711 crores.

Savings & current accounts –

The significant expansion in the bank’s

operations has had a positive impacted on
the CASA numbers. The number of
savings accounts grew almost 70% to
approximately 1 crore and savings
balances which is a good indicator of the
Banks retail liability franchise grew 33.5%
to Rs. 34,914.7 crores at the end of the
current financial year.

Benoy Paul Jose. CBS.BFS.033. Page 8 of 19

 Research Report on HDFC Bank 2010

Non Fund Revenues –

Multiple sources of core fees &

commissions:
– Third party product sales
– Trade Finance
– Cash management
– Core Banking charges (Retail &
Wholesale)
– Retail Asset Fees
– Credit card Fees
– Depositary charges
– Custody

Other Income (non-funded revenues) at 31% of Net Revenues in FY 2009

Key components of Other Income:

Fees and commissions 75%,

FX and Derivatives Revenues 13%,

Profit on sale of Investments 12%

Financial Statements - Ratios:

Ratios/Year Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Dividend per share 4.50 5.50 7.00 8.50 10.00
Interest Spread 5.39 5.25 5.47 7.08 6.98
Net Profit Margin 17.77 15.55 13.57 12.82 11.35
Loans Turnover 0.17 0.18 0.2 0.22 0.24
Interest Coverage ratio 0.74 0.65 0.52 0.47 0.37
Net Interest Margin 0.16 0.16 0.23 0.20 0.28
Earnings per share 27.55 35.64 43.29 44.87 52.77
Capital Adequacy ratio 12.16 11.41 13.08 13.60 15.69
ROE 25.58 33.61 41.70 37.98 57.49

The bank has been consistently performing for the last 5 years. The ratios have been steadily
increasing year on year.

Benoy Paul Jose. CBS.BFS.033. Page 9 of 19

 Research Report on HDFC Bank 2010

• Dividend per share –

This ratio tells the dividend earned per share an investor holds. The
bank has recently declared a proposal for increasing the dividend to
Rs.12.00.

• Interest Spread –
The interest spread expresses the nominal average difference between
borrowing and lending rates. Changes in the spread are an indicator of
profitability as the spread is where a bank makes its money. Although
there has been a slight decline in the spreads from 2008, it is still at
better levels comparing to the industry.

• Net Profit Margin –

The net profit margin indicts the profits made after tax by the company.
Even though the profits margins are showing a declining trend, the
banking industry in as such is showing the same trend. Compared to
the closest competitor ICICI banks profit margin of 9.74, HDFC bank
has a better position.

• Loans Turnover –
This ratio states the borrowings of a bank over and above its capital and
its ability to pay off the same. The ratio for the bank is on the higher
side compared to peers in the industry. This has to be monitored over
the period. The bank is in an expansion mode, this could be one reason
why they need to borrow more. The bank needs to lower the turnover
ratio by which it can increase its profitability and shareholder
confidence.

• Interest coverage ratio –

The interest coverage ratio for the bank is on the lower side. And this
has been on the decline. There has been increasing cost pressure on the
entire banking sector. This could be a reason for even HDFC to have a
decreasing interest coverage ratio.

• Earnings per Share (EPS) –

EPS is the portion of a company's profit allocated to each outstanding
share of common stock. It serves as an indicator of a company's
profitability. The bank’s EPS has been steadily growing for the past 5
years. This is an incentive for the shareholders of the bank. The
performance of the bank has been satisfactory and the investors can
expect the EPS to grow more.

Benoy Paul Jose. CBS.BFS.033. Page 10 of 19

 Research Report on HDFC Bank 2010

• Capital Adequacy ratio –

This ratio determines the capacity of a bank in terms of meeting the
time liabilities and other risk such as credit risk, market risk, operational
risk, and others. It is a measure of how much capital is used to support
the banks' risk assets. HDFC has a strong CAR comparing to its
industry peers and is well above the Basel norms.

SCOT Analysis:

Strengths Challenges
Management RBI Policies
Competency Efficiency
Outreach Customer Loyalty
Demanding Customers

HDFC Bank
Opportunities Threats
Technology Competition
Micro lending Regulations

Strengths

Management

The company is run by well known names in the Indian banking industry. The most
prominent among them being Mr. Jagdish Capoor and Mr. Aditya Puri.

Competency

The bank has developed certain competency areas to increase its business. Some of them
being the loan segment, financial services segment et al.

Benoy Paul Jose. CBS.BFS.033. Page 11 of 19

 Research Report on HDFC Bank 2010

Outreach

The bank has a pan India presence and has been growing considerably in the number of
branches. They are present in urban as well as semi-urban areas too. A good network of
ATM’s also support the outreach.

Challenges

RBI Policies

The Reserve Bank of India, time and again comes out with its monetary policy to control
macro economic factors (like inflation, rupee appreciation etc…) that adversely affect India’s
economic stability. The CRR, REPO Rates, Bench Mark Rate etc. has created an ambiguity in
the industry as such. The investors have to consider the impacts of these factors on the
performance of the bank as such.

Efficiency

The growing competition and the demanding customers it in turn has made it necessary to
look for efficiencies in the business. The Bank need to consistently access low cost funds and
simultaneously improve the efficiency. There is continuous pressure to maintain the spread
for the bank to sustain its business model.

Customer Loyalty

This is one of the major challenges that banks across the counter face. The low cost of
switching and numerous options available has led the customers to switch loyalty amongst
the banks in very short period of time. With a huge customer base, the bank has to provide
sufficient service and keep the customers satisfied in order to reduce the customer attrition.

Demanding Customers

The new generation customers are highly aware of the industry and the operations of the
banks as such. They demand high quality of service and wide range of technological
offerings. The bank should keep up to the expectations of this new breed of clientele as this
is the future of banking industry.

Benoy Paul Jose. CBS.BFS.033. Page 12 of 19

 Research Report on HDFC Bank 2010

Opportunities

Technology

The bank has to leverage on the available technological options. The number of ATM’s that
the bank has is comparatively lesser than its most performing peers. There has to be more e-
based services from the bank. Technological advancements like biometric systems etc. can be
implemented, especially in the rural areas.

Micro Lending

The new trend in the financial services is the micro lending. The bank already has some
operations in this segment. The Indian micro lending market is booming and is still in this
growth stage. This provides the bank a good opportunity to have a strong base in this
segment also, like what it has been doing in the retail and corporate space.

Threats

Competition

The banking segment in India as such is at a growth stage. Owing to the same, there is stiff
competition in this segment both from domestic players as well as foreign players. Out of
the domestic players apart from the incumbent SBI, Axis Bank and ICICI Bank are inching
ahead head to head at par with the HDFC. The foreign banks like the Standard Chartered
Bank, ABN Amro etc are good competitors. The provision of converting NBFC’s to banks in
the recent budget is sure to start new trends in the Indian banking segment. Thus the bank
has to come out ways by which it can outcome all these competitions.

Regulations

The regulatory measures from the RBI time and again pose a threat to the banking industry
as such. The RBI has come out with customer friendly policies like the conversion of the
BPLR lending rate to the Base Rate. This will be very customer friendly; however the banks
have to re-wok on their costing regarding the same.

Benoy Paul Jose. CBS.BFS.033. Page 13 of 19

 Research Report on HDFC Bank 2010

HDFC Bank v/s ICICI Bank

ICICI bank has been one of the major competitors for HDFC banks right
for a long time now. The business model of both the banks has many similarities. It would
be apt to have a comparative study on both the banks.

HDFC Bank ICICI Bank

Particulars
Mar'09 Mar'09
Total Income 19,802.50 39,210.00
Interest Earned 16,332.27 31,092.55
% interest earned 82% 79%
Other Income 3,470.63 8,117.76
% of other income 18% 21%
Total Expenses 17,557.96 35,452.17
Net Profit 2,244.90 3,758.13
Net Profit % 11% 10%
Earnings Per Share 52.77 33.78
NPA's 1.98% 1.96%
Capital Adequacy Ratio 15.70% 15.53%
Number of Branches 1412 1694
ATM's 3295 4883

From the above table it is evident that HDFC has been a better performer than ICICI in the
FY 2008-’09.
The percentage increase in net profits and interest earned is higher for HDFC. Even though
ICICI has greater revenue than HDFC, the percentage contribution to net profit is greater for
HDFC bank.
The Capital Adequate Ratio for HDFC is greater than ICICI. This shows the ability of the
bank to cushion losses.
HDFC has a much better EPS than ICICI bank. This will be one motivating factor for any
investor.
HDFC has lesser number of branches as well as ATM’s compared to ICICI. However the
bank is in expansion mode. The bank expects to increase its ATM network by 200 numbers
more, as well as its branch base to a considerably good level by next fiscal year.

Benoy Paul Jose. CBS.BFS.033. Page 14 of 19

 Research Report on HDFC Bank 2010

Future Prospects:

HDFC bank has been showing good performance over the years and consistency has been
the banks hallmark. Their increase in revenue and returns for the investors is commendable.
With the banking industry in India set to poise greater growth levels, HDFC bank is sure to
be one of the leading performers in the industry. The banks CASA numbers are increasing
considerably showing the growth in its operations as well as its customer base.

I recommend a buy on HDFC bank. The scrip has a good potential to move up considerably,
hence it will be a good hold in a long term (12 months) perspective.

The call – (NSE: HDFCBANK)

CMP: 1937.
Buy @ 1915 – 1905 levels.

 Short term
Stop Loss: Closing below 1870.
Targets:

T1 – 1950.

T2 – 1985.

T3 – 2025.

 Long term
Buy hold target: 2800.
Stop loss: closing below 1650.

Benoy Paul Jose. CBS.BFS.033. Page 15 of 19

 Research Report on HDFC Bank 2010

One Year performance of HDFC in NSE.

HDFC Bank v/s Nifty Banking Index.

Benoy Paul Jose. CBS.BFS.033. Page 16 of 19

 Research Report on HDFC Bank 2010

Financials

Balance Sheet: Rs. Cr.

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Capital and Liabilities:
Total Share Capital 309.88 313.14 319.39 354.43 425.38
Equity Share Capital 309.88 313.14 319.39 354.43 425.38
Share Application Money 0.43 0.07 0 0 400.92
Preference Share Capital 0 0 0 0 0
Reserves 4,209.97 4,986.39 6,113.76 11,142.80 14,226.43
Net Worth 4,520.28 5,299.60 6,433.15 11,497.23 15,052.73
Deposits 36,354.25 55,796.82 68,297.94 1,00,768.60 1,42,811.58
Borrowings 5,290.01 4,560.48 2,815.39 4,478.86 2,685.84
Total Debt 41,644.26 60,357.30 71,113.33 1,05,247.46 1,45,497.42
Other Liabilities & Provisions 5,264.46 7,849.49 13,689.13 16,431.91 22,720.62
Total Liabilities 51,429.00 73,506.39 91,235.61 1,33,176.60 1,83,270.77

Assets
Cash & Balances with RBI 2,650.13 3,306.61 5,182.48 12,553.18 13,527.21
Balance with Banks, Money 1,823.87 3,612.39 3,971.40 2,225.16 3,979.41
at Call
Advances 25,566.30 35,061.26 46,944.78 63,426.90 98,883.05
Investments 19,349.81 28,393.96 30,564.80 49,393.54 58,817.55
Gross Block 1,290.51 1,589.47 1,917.56 2,386.99 3,956.63
Accumulated Depreciation 582.19 734.39 950.89 1,211.86 2,249.90
Net Block 708.32 855.08 966.67 1,175.13 1,706.73
Other Assets 1,330.57 2,277.09 3,605.48 4,402.69 6,356.83
Total Assets 51,429.00 73,506.39 91,235.61 1,33,176.60 1,83,270.78

Contingent Liabilities 84,585.95 1,38,898.60 2,02,126.73 5,82,835.94 3,96,594.31

Bills for collection 5,342.70 5,239.26 7,211.88 17,092.85 17,939.62
Book Value (Rs) 145.86 169.24 201.42 324.38 344.44

Benoy Paul Jose. CBS.BFS.033. Page 17 of 19

 Research Report on HDFC Bank 2010

P&L Statement: Rs. Cr.

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Income
Interest Earned 3,093.49 4,475.34 6,889.02 10,115.00 16,332.26
Other Income 637.36 1,213.64 1,510.24 2,205.38 3,470.63
Total Income 3,730.85 5,688.98 8,399.26 12,320.38 19,802.89
Expenditure
Interest expended 1,315.56 1,929.50 3,179.45 4,887.12 8,911.10
Employee Cost 276.67 486.82 776.86 1,301.35 2,238.20
Selling and Admin Expenses 506.44 943.03 727.53 974.79 2,851.26
Depreciation 144.07 178.59 219.6 271.72 359.91
Miscellaneous Expenses 634.49 1,035.10 2,113.28 3,295.22 3,197.49
Operating Expenses 1,261.62 2,170.85 2,590.66 3,935.28 7,290.66
Provisions & Contingencies 300.05 472.69 1,246.61 1,907.80 1,356.20
Total Expenses 2,877.23 4,573.04 7,016.72 10,730.20 17,557.96
Net Profit for the Year 853.62 1,115.94 1,382.54 1,590.18 2,244.94
Extra ordinary Items -0.26 0 -0.35 -0.06 -0.59
Profit brought forward 405.32 602.34 1,455.02 1,932.03 2,574.63
Total 1,258.68 1,718.28 2,837.21 3,522.15 4,818.98
Equity Dividend 140.07 172.23 223.57 301.27 425.38
Corporate Dividend Tax 19.64 24.16 38 51.2 72.29
Per share data (annualised)
Earning Per Share (Rs) 27.55 35.64 43.29 44.87 52.77
Equity Dividend (%) 45 55 70 85 100
Book Value (Rs) 145.86 169.24 201.42 324.38 344.44
Appropriations
Transfer to Statutory Reserves 242.01 -265.37 288.38 436.05 641.25
Transfer to Other Reserves 66.56 87.08 114.14 159.02 224.5
Proposed Dividend/Transfer to Govt 159.71 196.39 261.57 352.47 497.67
Balance c/f to Balance Sheet 602.34 1,455.02 1,932.03 2,574.61 3,455.57

Total 1,070.62 1,473.12 2,596.12 3,522.15 4,818.99

Cash Flow Statement: Rs. Cr.

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Net Profit Before Tax 978.94 1253.51 1638.75 2280.63 3299.25
Net Cash From Operating Activities -348.06 1724.76 666.63 3583.43 -1736.14
Net Cash (used in)/from -243.33 -381.97 -311.4 -619.82 -663.78
Net Cash (used in)/from Financing Activities 1138.03 1104.87 1637.88 3628.34 2964.66
Net (decrease)/increase In Cash and Cash 546.64 2447.66 1993.11 6591.95 564.74
Equivalents
Opening Cash & Cash Equivalents 3194.36 3741 6188.66 8074.54 14778.34
Closing Cash & Cash Equivalents 3741 6188.66 8181.77 14666.49 15343.08

Benoy Paul Jose. CBS.BFS.033. Page 18 of 19

 Research Report on HDFC Bank 2010

References:

1. http://www.hdfcbank.com
2. www.investopedia.com
3. http://en.wikipedia.org
4. http://economictimes.indiatimes.com
5. http://www.thehindubusinessline.com
6. http://www.business-standard.com
7. http://www.google.com/finance

Benoy Paul Jose. CBS.BFS.033. Page 19 of 19