Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
HDFC Bank – Setting new standards - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Feb 17, 2001

    HDFC Bank – Setting new standards

    The very essence of a leadership is that you have to have a vision. The saying is most apt for HDFC Bank. When it started out in 1994 few would have thought that it would become one of India’s fastest growing private sector banks. Infact, it re-defined the rules of the Indian banking industry. Customer convenience became its driving motto. And it was amply rewarded for this. The bank has grown its small assets base of Rs 9 billion (1995-96) to over Rs 116 billion as on March 2000, a compounded annual growth rate (CAGR) of 90%. Its trail blazing financial performance coupled with service quality nearly matching levels of foreign banks, excellent network and the rapid implementation of latest technology has placed the bank one step ahead of its competitors.

    But setting new standards was not new to the bank’s management. Promoted by India’s No.1 housing finance company HDFC (29 percent stake), the bank had leadership qualities in its blood. Added to that its business partner, Chase Manhattan’s (15 percent holding) global clientele base, some of whom have offices in India, put the bank on a firm footing. Moreover, Chase is a leading custodian for foreign institutional investors (FIIs) in India. Not only this kind of strategic alliances but also the ‘HDFC’ brand name is likely to fuel HDFC Bank’s future revenue generation.

    HDFC Bank was among the first to realise that consolidation was important to stay ahead. So in February 2000, it became the first bank, which successfully amalgamated its operations with Times Bank. The merger added a significant value to the bank in terms of increased branch network, expanded geographic reach, enhanced customer base, skilled manpower, the opportunity to cross-sell and leverage alternative delivery channels. Fiscal year 2001 is likely to be a momentous year for the bank, which will see the integration of Times Bank and its own robust organic growth. Interestingly, the merger set a precedent for the industry to follow. Since then the industry has already seen two mega mergers (ICICI Bank and Bank of Madura, UTI Bank and Global Trust Bank). What’s more, HDFC Bank is now considering $ 200 million ADS issue to fund for the future acquisitions.

    From the outset HDFC Bank focused on the retail segment. It recognized that the Indian mass was looking for more convenient and sophisticated ways to bank. HDFC Bank just tapped this opportunity. Retail business thus became its key driver. Today, the bank provides almost the entire range of retail products with a network of 126 branches and 148 ATMs spread across the country. These include auto loans, personal loans, consumer durable finance and loan against shares. The bank leveraged its customer base of over 1.3 million to cross-sell various banking products, snatching away the market share from other banks. HDFC Bank was among the first to offer real time online banking across its branches and ATM network coupled with value added services like mobile banking, Internet banking, debit cards, bill payment and Internet based cash management products. Added to that, as consumers grow technology savvy, HDFC Bank would accrue the benefits of lower cost of transactions in the future.

    HDFC Bank’s business strategy in terms of marketing and distribution has yielded it a reach dividend by increasing its retail asset portfolio. Remarkably the bank is able to grow without compromising its asset quality. The bank’s non-performing assets (NPA) to advances ratio stood at 0.8 percent as on March 2000. Better control and monitoring systems has contained the level of NPAs of the bank. An interest rate cut of 50 basis points by the Reserve Bank of India in bank rate and cash reserve ratio is expected to ease the asset quality concerns further, and will also provide returns on the bank’s treasury operations. Nevertheless, its operating margins are under pressure with increasing competition (including foreign banks) in the financial markets.

    Performance parameters
    Particulars FY98 FY99 FY00 FY01E
    Operating margins 42.9% 39.1% 44.9% 41.7%
    Returns on net worth 22.2% 24.3% 16.0% 22.9%
    Assets/employee (Rs m) 42.9 44.2 77.7 107.4
    Revenues/employee (Rs m) 3.6 3.8 4.5 6.5
    Operating profits/employee (Rs m) 1.6 1.5 2.0 2.7
    Employees/branch (Nos.) 19.4 17.3 13.5 16.7

    HDFC Bank has shown excellent growth in its financials in the last three years. While the bank’s topline grew at a CAGR of 68 percent (excluding the merger), operating profits witnessed a faster CAGR of 72 percent. Also, during the nine months period ended December 2000, it has displayed an outstanding performance (including the merger impact). While revenues soared by more than 100 percent, profits jumped 83 percent year on year. Its operating margins however, have come down to 40 percent from 45 percent in March 2000. Nevertheless, it is incredible considering the fact that Times Bank had comparatively lower margins. Also, the profit margins of HDFC Bank are the highest in the banking sector thanks to low cost of deposits (contributes 14 percent to total deposits) and high yield on investments. An increase of 190 percent in saving account deposits in the first half of the current year compared to corresponding previous period contributed in maintaining its margins. The bank’s total number of retail accounts climbed up from 825,000 as on March 2000 to over a million in the first half of the current year.

    HDFC Bank’s strong positioning in capital market business as well as cash management business provides it a fair degree of float, as these are interest free deposits. This would further buoy the overall deposit base from over Rs 170 billion projected for March 2001. It is the only bank in the country to have clearing bank status for seven major stock exchanges of the country. It also has the dominant position in share depository business with total number of depository base of over 400,000 as on September 2000. But the concern remains that the bank derives more than 55 percent of its revenues from investment income, which is a volatile stream of revenues. This could make a dent in the future profit growth of the bank if it fails to maintain its treasury operations efficiently.

    In light of the above, valuations of HDFC Bank are at a significant premium to other banks both in terms of price to book value and P/E. The premium attached to the stock is not only in the expectation of strong growth performance in the next few years but also its ability to maintain the highest returns on equity (ROE) among the other banks across the region. Its price to book value ratio is expected to improve further as its ROE rises substantially backed by superior asset quality.



    Equitymaster requests your view! Post a comment on "HDFC Bank – Setting new standards ". Click here!


    More Views on News

    HDFC Bank: Asset Quality Deteriorates due to Farm Loan Waiver (Quarterly Results Update - Detailed)

    Jul 25, 2017

    Asset quality was under pressure on account of farm loan waivers. Despite the higher provisioning, the company reported a healthy profit growth of 20%.

    HDFC Bank: Solid Performance Amidst a Difficult Environment (Quarterly Results Update - Detailed)

    May 3, 2017

    Personal Loans and Credit Cards help HDFC bank report a robust set of numbers over the fourth quarter and for the financial year 2017.

    HDFC Bank: Growth Stumbles Post Demonetisation (Quarterly Results Update - Detailed)

    Jan 30, 2017

    HDFC Bank declared the results for the third quarter of financial year ending March 2017 (3QFY17). The bank has reported 18% YoY and 15% YoY growth in net interest income and net profits respectively in 3QFY17.

    SBI: Asset Quality and Slow Credit Remain Achilles' Heel (Quarterly Results Update - Detailed)

    Aug 22, 2017

    State Bank of India (SBI) continues to battle sliding asset quality and sluggish credit growth.

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)


    • Track your investment in HDFC BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks


    Compare Company With Charts