The Housing Development Finance Corporation (HDFC) Bank is the second largest private sector bank in India by net profit and generated revenues of over INR 52,278.8 million in 2007. HDFC Bank has a 55% market share in clearing and settlements of securities exchanges for cash and futures securities transactions.. As of September 30, 2008, the bank had total assets of INR 1006.82 billion.
During the global economic slowdown and tight liquidity conditions, what sets this bank apart is its high proportion of CASA (Current accounts and Savings accounts) deposits - around 44% against an industry average of 35-40% of total deposits. 17% of their CASA accounts come from salary accounts, which are sticky in nature and have large idle funds the bank can make use of. The high CASA proportion also ensures their costs of deposits are relatively low.  Also HDFC Bank is well capitalized from secondary stock offerings; in the past 12 months they raised INR 17.28 billion through lower and upper tier II bonds. .
On February 25, 2008 HDFC Bank agreed to buy Centurion Bank of Punjab. The combined entity has the largest branch network in private banks in India, a strong deposit base of around INR 1220 billion and net advances of around INR 890 billion.
Headquartered in Mumbai, the bank is one of the first private banks to be set up in India in 1994. With a network reach of 1412 branches spread over 528 cities across India and with over 2890 ATMs across these cities,the bank is the largest private sector bank in terms of branch network in India -- the next largest, ICICI bank, has 1400 branches.
Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of two private banks in the New Generation of Private Sector Banks. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally approved by The Reserve Bank of India. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC Bank for every 29 shares of CBoP. The value of the all-share deal worked out to INR 95100 million. The merged entity will have a strong deposit base of around INR 1,220 billion and net advances of around INR 890 billion. The Balance sheet size of the combined entity would be over INR 1,630 billion. 
|Annual income data, in INR Lacs||2001||2002||2003||2004||2005||2006||2007||2008||2009||2010|
|Net Interest Income||146,90||305,59||501,29||607,44||771,21||1,244,66||1,589,87||2,300,68||3,468,48||5,227,88|
|Loan Loss Provisions||7,58||53,60||52,69||85,77||88,39||178,28||176,22||479,76||861,01||1,216,03|
|Profit After Tax||82,40||120,04||210,12||297,04||387,60||509,50||665,56||870,78||1,141,45||1,590,18|
|Earnings Per Share (INR)||4.12||5.93||8.64||11.01||13.75||17.95||22.92||27.92||36.29||46.22|
|Dividend Per Share (INR)||1.30||1.60||2.00||2.50||3.00||3.50||4.50||5.50||7.00||8.50|
Discussion FYO8: The bank's total net revenues (net interest income plus other income) increased by 50.7% to INR 75.11 billion from INR 49.85 in 2006-07. Foreign exchange and derivatives revenues grew from INR 2.8 to INR 3.20 billion which is largely related to customer transactions. Operating (non-interest) expenses increased from INR 24.21 billion in 2006-07 to INR 37.46 billion. Net profit increased by 39.3% from INR 11.42 billion in 2006-07 to INR 15.90 billion. 
The revenue growth was driven principally by an increase in net interest income. Net Interest Income grew by 50.7% primarily due to an increase in the average balance sheet size by 39.8% and an increase in net interest margin from 4.0% to around 4.4%. The key driver in volumes was growth in advances. The other income (non-interest revenue) increased by 50.6% to INR 22.83 billion primarily due to fees and commissions, profit/(loss) on revaluation / sale of investment and income from foreign exchange and derivatives income. Operating (non-interest) expenses increased due to higher infrastructure and staffing expenses in relation to the expansion in the branch network, and growth in the retail loan and credit card businesses.
Discussion FY09(till 3rd quarter): HDFC Bank reported a 38% jump (Y/Y) in net interest income to Rs 19.8 bn and 37% growth (Y/Y) in operating profit to Rs14.6 bn. HDFC Bank has reported a net profit of Rs 6.22 bn for Q3FY2009, indicating a growth of 44.8% year on year (yoy). The CASA ratio is down at 40.0% from 44.0% QoQ.The bank’s Capital Adequacy ratio (CAR) improved to 13.7% in 3QFY09 from 11.4% in preceding quarter. The bank’s advances grew by 38.4%yoy to Rs988bn for the quarter but decreased by 3.4% qoq. Retail advances grew by 58.8% yoy and 2.1% qoq to Rs596bn during the quarter. The bank has a high percentage of Auto Loans (25.3%), Business Banking loans (22.7%) and Personal loans (14.9%) in its Retail loan portfolio mix. The bank saw higher slippages during the quarter with gross non performing assets at Rs19.1bn (1.9%) compared with Rs 16.8bn (1.6%) in Q2FY09. 
Share Holding Pattern: The Housing Development Finance Corporation(HDFC) Limited, the promoter group of HDFC Bank, holds 19.39 % of total shares of the bank. Other private corporates having more than 1 % of total shares of HDFC bank include Life Insurance Corporation (LIC) 5.07; ICICI Prudential Life Insurance 3.02 %; DBS Bank Ltd 2.73 %; Bank Muscat SAOG 2.13 %; Europacific Growth Fund 1.39 %; Bennett Coleman & Co Ltd 1.26 %; JP Morgan Asset Management Europe 1.08 %.
Health Indicators The best way of judging a bank’s health is looking at the most critical parameters such as capital adequacy ratio, asset quality and earnings, which define their ability to pay service depositors.
|HDFC Bank Limited share holding pattern |
|ADRs and GDRs||18.01%|
|Private Corporate Bodies||12.39%|
|Banks Fin. Inst. and Insurance||5.59%|
The Wholesale Banking segment offers a range of commercial and transactional banking services, including working capital finance, trade services, transactional services, and cash management services. It provides its services to large, mid & small sized corporates, agri-based businesses, mutual funds, stock exchange members, and banks.The Bank also has relationships with 110 micro finance institutions and has extended credit facilities. Revenue and EBIT from Wholesale banking services stood at INR 19.94 billion and INR 2.94 billion for FY08 repectively.
The Retail Banking segment provides various retail loan products, including auto loans, loans against marketable securities, personal loans, and loans for two-wheelers; credit cards; debit cards; and investment advisory services through the branch network, as well as through alternative delivery channels, such as automated teller machines (ATMs), phone banking, net banking, and mobile banking. It also provides depository participant services for retail customers, providing the facility to hold their investments in electronic form. Revenue from Retail Banking Services was INR 25.05 billion and EBIT was INR 2.01 billion for FY08.
The Treasury Services segment operates primarily in areas, such as foreign exchange and derivatives, local currency money market and debt securities, and equities. The company also offers accounts and deposit products, investment and insurance, and payment services. Treasury business has shown strong grown with increase in revenue from INR 1810 million in FY07 to INR 4800 million in FY 08 and an increase in EBIT of INR 636.4 million over the same period.
HDFC Securities Limited (HSL): provides investors a robust platform to trade in Equities in NSE and BSE , and derivatives in NSE.
Key ratios such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo rate and Reverse Repo rate are all controlled by the government and affect the bank's liquidity. Inflation in India has more than halved from a 16-year high of 12.91 percent in August 2008 to 5.60 percent in the week ending 10th January 2009 as the global economic slump drives down prices of oil and other commodities.. As a result, the government and the central bank have taken the opportunity to unveil measures to spur a slowing economy using CRR, SLR, Repo and reverse Repo rates as tools to battle the economic slump. A decrease of CRR by 100 basis points (1.0%) infuses INR 400 bn into the Indian banking system. The current CRR and Repo rate stand at 5.5% and 7.5 % respectively. 
National banks such as HDFC Bank are subject to many regulations, especially since the failure of a national bank jeopardizes the livelihood of millions of people. A host of regulatory bodies regulate HDFC Bank and its competitors including The Ministry of Finance, Government of India, The Reserve Bank of India and Securities and Exchange Board of India (SEBI). Regulations can often impede the flow of funds from the bank's subsidiaries to the Corporation and between the bank and its customers and can limit the products and services the bank is able to offer. As HDFC Bank works to broaden its products and services and increase its branch network, it will have to gain approval from the Reserve bank of India and other government agencies.
HDFC Bank Net Non Performing Assets (NPAs) stood at INR 2.99 billion in FY08 and Bank’s ratio of gross NPAs to total customer assets was 1.29%. HDFC bank reported 38% jump (Y/Y) in net interest income to Rs19.8 bn. NII levels were low mainly due to slight shift in bank's strategy to counter tough prevailing scenario. The bank cautiously took the decision to let some of their retail and SME loan book to run off and not to build loan book aggressively for the moment.
Instead the bank built up its Government of India Securities d,xmmm yrerfif (G-secs) bond portfolio and traded to make treasury gain. Profits from trading in government bonds have risen for the quarter ending December 2008, as the market price of the bonds have increased, the yields (the return an investor will receive by holding a bond to maturity) on the 10-year benchmark G-sec portfolio have fallen nearly 230 basis points, or 2.3 percentage points, since end-September 2008. The price movement of a government security has an inverse relation with the movement of market yields. This means that as yields fall, the value or price of g-sec rises correspondingly. In the case of a 10-year government bond, every one-bps rise or fall translates into a 7-paise fall or rise in the price of the g-sec.
HDFC Bank is affected directly and indirectly by market conditions. For example, changes in interest rates adversely affect net interest margin — the difference between the yield the bank earns on assets and the interest rate it pays for deposits and other sources of funding — which in turn affect earnings. Market risks include fluctuations in interest, currency exchange rates, and equity and futures prices. Such risks affect loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities and derivatives. HDFC bank derives a large percentage of its income from net interest margin, as interest rates decrease, banks pay lower rates on deposits and other interest bearing accounts. Meanwhile consumer demand for mortgages and other loan products increases as borrowing becomes less expensive.
Centurion Bank of Punjab Merger has helped in substantial accretion to distribution network & customer base in CASA (Current accounts and Savings accounts) rich states (Delhi, Punjab and Haryana). The branch network of 404 branches of eCBoP is a significant addition of 53% to HDFC Bank’s 761 branches (as of 10th August 2008). However, the acquisition has added only 20% to the HDFC Bank’s assets base and eCBoP’s CASA per branch is 1/5th as compared to that of HDFC Bank (despite having considerable presence in CASA rich states). This provides an opportunity to HDFC Bank to use eCBoP’s branch network.
With a significant expansion of their branch and ATM network after the merger, strong technology infrastructure, superior range of products and high quality retail and wholesale banking services, HDFC Bank can further strengthen its strong liability franchise and reach a larger section of customers. HDFC Bank would also get access to large Non Resident Indian (NRI) base from the middle-east due to significant branch presence of in Kerala. The two banks enjoyed technological, cultural and compensation structure fit, the integration has been progressing quite smoothly. Centurion Bank of Punjab’s retail concentration complements HDFC Bank’s loan book, retail portfolio constitutes 60% and 53% of the total loan book for eCBoP and HDFC Bank respectively. the loan book of both the banks complement each other without any integration issues.
|Total Deposits||Total Advances||Net profit||Total Assets||Branches|
|State Bank of India||4,355.21||3,373.36||45.41||5,665.65||10,186|
|Punjab National Bank||1, 398.60||1,990.48||20.48||1,990.48||4,500|
|Bank of Baroda||1,520.34||1,067.01||14.35||1,795.99||2,800|
HDFC bank is the second largest private sector bank in India in terms of net profit after ICICI bank. Its main competitors include State Bank of India, ICICI Bank, Punjab National Bank, Canara Bank, Bank of Baroda, Bank of India.
Beginning April 2008, bank's non-performing assets, or NPAs, are going up as consumers have started defaulting on their payment obligations with the rise in interest rates. Their exposure to some of the troubled global banks that have either gone under or are staying afloat with government support have also come to the surface. But that is minuscule without any significant dent in their balance sheets.
|HDFC Bank and Competitors |
|Bank||Net Worth (Capital Reserve) in INR billion||% of Net NPA to Net advance||Capital Adequacy Ratio (%)|
|State bank of India||490.33||1.78||13.47|
|Punjab National Bank||123.18||0.64||12.96|
|Bank of Baroda||110.44||0.47||12.91|
|Bank of India||105.89||0.52||12.95|
|Union Bank of India||73.48||0.17||12.51|
|Central Bank of India||59.43||1.45||10.42|
|Oriental Bank of Commerce||57.76||0.99||12.12|