In partial fulfilment of the course Management of banking and Financial Institutions under the guidance of Prof. N. R. Bhusnurmath, Finance Area, MDI Gurgaon Submitted by: Divya Gosain 09P135 15th November 2010 Table of Contents 1. Present Scenario in Retail Banking in India3 2. About the Bank4 a. Bank Profile4 b. Mission4 c. Product Segments5 d. Business Strategy5 3. Key Financial Highlights6 4. Financial Comparison with other Banks8 5. SWOT Analysis of HDFC Bank12
Retail Banking Scenario in India In the past five years, Indian retail banking has been showing phenomenal growth with a CAGR of over 35%. During the same period, 42% of credit growth has come from retail products. Also, banking assets are expected to reach $1 trillion levels by year end 2010. Source: Celent Bank Report, Prathima Rajan Most banks in India are currently focussing on expanding their retail and rural base. A growing Indian economy, expanding middle class segment and technological and IT revolution are fuelling this growth.
Also after the recommendations of the Narasimham Committee Report, with the entry of many private players in the retail banking space, starte of the art infrastructure and excellent customer service have entered into the domain, along with aggressive marketing techniques. Retail banking market has transformed into a customer centric “buyers” market. It now consists of multiple products and customer groups and various channels of distribution. The inherently strong domestic consumption combined with both the monetary and fiscal stimuli measures helped the Indian economy bounce back after the economic meltdown.
Service sector growth was dominated by social and personal services reflecting increased government expenditure. In addition adequate capital provisioning and stringent prudential regulations shielding the domestic banking system, deterioration of asset quality of Indian banks will be minimal. About HDFC Profile: The Housing Development Finance Corporation was founded in 1997 by Hasmukh Bhai Parakh. In 1994, after approval from the RBI on the recommendations of the Narasimham Report, HDFC Bank Limited was incorporated, with the registered office at Mumbai.
The Bank’s first IPO in India was in 1995, and currently HDFC is listed at NSE, BSE and also has an ADR listed on the NYSE. HDFC posted total income and net profit of Rs. 19,980. 5 cr and Rs. 2,948. 7 cr respectively for the financial year ended March 31, 2010. Its dividend payout ratio has consistently ranged between 20-25% over the years. Also, the capital adequacy ratio (CAR) stood at 17. 4%, well above the RBI regulatory minimum of 9. 0%. As at March 31, 2010, the Bank’s total balance sheet increased by 21% to Rs. 222,459 cr.
The bank currently has 1,725 branches spread in 780 cities in India. In addition, there are also 4,865 ATMs all over the country. HDFC Bank is also a clearing/settlement bank to various leading stock exchanges. As a financial institution, HDFC had significant expertise in retail mortgage loans in addition to a large corporate client base for its housing related credit facilities. With this experience, a strong market reputation, large shareholder base and unique consumer franchise, it was ideally positioned as a promoter to a private bank in the country.
Mission: HDFC’s mission is “To become a World Class Bank”. To achieve this aim, it seeks to (1) build sound customer franchises across distinct businesses (2) become the preferred provider of banking services for target retail and wholesale customers and, (3) to achieve healthy growth in profitability. The business philosophy at the bank is based on four core principles. These are: 1. Operational Excellence 2. Customer Focus 3. Product Leadership 4. People Product Segments: HDFC had a well balanced product and business mix in the Indian banking market.
Customer segments accounts for almost 85% of net revenues. The bank is poised to grow well in both retail and wholesale segments. HDFC offers products across: 1. Personal Loan 2. Deposit 3. Investment and Insurance 4. Credit Cards 5. Payment Services 6. Forex Services 7. Corporate Loan 8. SME Services 9. Clearing and Settlement 10. Funds, Trusts, etc. Business Strategy: HDFC Bank has the strategy that emphasizes the following: 1. Increase in market share balancing quality and volume growth coupled with excellent customer service 2.
Develop scalable systems and deliver more products at low costs leveraging technological platform 3. Disciplined credit risk management to maintain asset quality 4. Focus on development of innovative products and services to address inefficiencies in the sector 5. Development of low cost products and services 6. Healthy earnings growth with low volatility To leverage on the development of innovative and low cost products and services is the main focus of HDFC, this will also help it maintain an edge over the competitors in the Indian banking sphere. The bank is also highly customer centric.
Key Financial Highlights If we compare the current financials to the previous year, we find that there has been excellent growth achieved by HDFC Bank. 1. It can be seen that the bank has achieved a staggering 31. 3% yoy increase in the profit after tax between 31st March 2009 and 2010. Also, annual revenues have increased by almost 14% 2. HDFC has been an investors dream come true with its P/E ratio increasing by a whopping 55% and earnings per share jumping up by about 28% 3. Loans have gone up by 27% yoy signalling a recovering economy and business growth 4.
To highlight its quality of capital adequacy, the Tier 1 capital ratio has shown an increase of 25% yoy to reach 13. 26% presently 5. If we perform a segment wise analysis, we can see that half of the revenues come from the retail banking arm of the bank. The next up on the order is wholesale banking, highlighting the importance of HDFC in the corporate loan and services segment 6. After analysis of segment wise profit before tax, we can see that wholesale banking is the most profitable segment of the bank, accounting for 40% share. This can be accounted for the better margins in this compared to retail banking.
The next on the list here is retail, largely due to the huge volume drivers. 7. There is little difference in the segment wise capital employed between divisions. Treasury services have accounted for the highest share of 35%. Retail and wholesale banking are neck to neck with the next highest of ~32%. We can say from this that the returns on retail and wholesale segments of the bank are higher than those from treasury services For a further in depth analysis of the investments, we first analyse the types of investments that the bank has made.
They are classified as: It can be inferred from the table that almost 87% of the investments are in government securities. Debentures and bonds constitute about 2% and the rest are classified as others. We can also analyze that about 40% of the investments and 44% of the advances fall in the maturity bucket of 1 to 3 years. On the other hand, if we look at the borrowings of HDFC Bank, 46% of those are in the maturity bucket of over 5 years. In addition, 19% of the borrowings are in the maturity bracket of 6 months to 1 year.
Also, the Non performing assets of the bank have shown a 9% increase yoy from 2009 to 2010. The gross and net NPAs are tabulated as under: Financial Comparison with other Banks In the following graphs, we highlight the performance of HDFC Bank vis-a-vis the other top ten banks in the country. (Data Source for all charts is Capitaline; In Rs. Crore; as of 31st Mar 2010) Capital: Total Reserves: Investments: Advances: Deposits: Borrowings: Total Revenue: Profit after Tax: HDFC Bank is the third most profitable bank in the country after SBI and ICICI SWOT Analysis | | |Strengths | | |Right strategy for the right products |Weaknesses | |Large Capital Base |Some gaps in range for certain sectors | |Products have required accreditations |Customer service staff need training | |High degree of customer satisfaction |Processes and systems, etc | |Lower response time with efficient and effective service |Management cover insufficient |Dedicated workforce aiming at making a long-term career|Sector growth constrained by low unemployment levels and | |in |competition for staff | |the field | |
Opportunities |Threats | |Profit margins will be good |Legislation impacts | |Could extend to overseas broadly |Vulnerable to reactive attack by major competitors | |New specialist applications |Lack of infrastructure in rural areas could constrain investment | |Could seek better customer deals |and growth | |Fast-track career development opportunities on an industry-wide |High volume/low cost market is intensely competitive | |basis | | |Applied research centre | | Mapping of Strengths and Opportunities 1. Because of its large capital base, HDFC Bank has the opportunity for market expansion, especially penetration in the rural markets 2. Due to large volumes, the bank operates on a low cost model. This will help it counter the stiff competition from other banks operating in the same space 3. To counter the issue of workforce responsiveness HDFC can look into developing outsourcing models for non-core businesses like customer care and e-banking