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HDFC Bank Vs Citigroup

Jun 24, 2003

If one were to list the largest bank in India, State Bank of India would come out on top easily. Among the most efficient banking companies' in India, HDFC Bank would probably make it to the top. But how does this private sector major compare on a global scale? Are the current premium valuations justified? Here is the comparison with Citigroup, one of the largest universal bank in the world.

Particulars (US$ m) Citigroup HDFC Bank
Total Assets 1,097,190 6,473
Advances 436,304 2,501
Total revenues 92,556 537
Total profits 13,448 82

While HDFC Bank and Citigroup are not strictly comparable, we have undertaken this exercise to give the viewer an understanding of how India's best banking major compares with the world's best. In terms of size, Citigroup is a behemoth with an advances size of US$ 436 bn. In comparison, SBI's advances stands at US$ 24 bn (FY02) and HDFC Bank's at US$ 2.5 bn (FY03). Apart from size, Citi Group differs significantly from its Indian counterpart, i.e. HDFC Bank, in terms of the services portfolio.

Citigroup is essentially a universal bank that has a presence in over 100 countries across the globe. HDFC Bank, on the other hand, is essentially a retail bank with a local presence, i.e. in India. Citigroup's business divisions are segregated mainly into four units, namely, Global Consumer, Global corporate and Investment bank, Private client services and Global investment management. Global consumer division essentially is a retail-banking outfit, which caters to retail clients by offering services like cards (both credit and debit), consumer finance and other retail banking services. Global corporate and investment bank deals with the requirements of corporate clients.

Private client services, primarily functions under the entity Smith Barney, which deals with the investment related needs of clients, especially in relation to equity markets. This division provides investment advice, financial planning and brokerage services to its clients. And finally, the Global investment management division provides services related to life insurance, pensions and private banking services to HNIs and other retail clients. However, HDFC Bank's services portfolio is not as diverse as Citigroup.

What is commendable about Citigroup's performance over the years is the fact that it has managed to register a consistent growth rate in both revenues as well as bottomline in the last 3-4 years. Citigroup's inorganic initiatives have helped it to a large extent in maintaining its growth momentum. HDFC Bank, on the other hand, has also managed to perform well, albeit on a significantly lower base.

In term of loan exposure, we observe that Citigroup is heavily tilted towards the retail segment. Of the total loan portfolio of US$ 436 bn, retail sector accounts for nearly 69%. HDFC Bank too has been growing aggressively on the retail front (29% of total loans in FY03 as compared to 21% last year). On the asset quality front, HDFC Bank seems to have an edge. HDFC Bank's net NPAs to advances ratio stands at a low 0.5% (FY02), while for Citigroup, it stands at 2.1% (FY03). Having said that, we must keep in mind the fact that considering the size of Citigroup's loan assets, its NPAs seem well under control.

Particulars Citibank HDFC Bank
Revenue growth (3yr CAGR) 5.9% 31.4%
PAT growth (3yr CAGR) 6.3% 35.8%
Operating margin 22.2% 11.80%
Profits per employee 2.56 0.9
Revenues per employees 17.6 16.9
NIM (%) 7.6 3.3
Net NPAs to advances ratio (%)* 2.1 0.5
* in FY02 for HDFC Bank

In terms of efficiency, despite being one of the most profitable banks in the country, HDFC bank still languishes compared to Citigroup. HDFC Bank's lower operating margins may be because it is in an expansionary phase, during which operating expenses are on the higher side. As far as other parameters are concerned, Citigroup enjoys higher profit per employee. HDFC Bank however, compares favorably on the revenue per employee front. Though NIM (Net Interest Margin) of Citigroup is significantly higher, it is not strictly comparable. Unlike HDFC Bank, Citigroup derives a significant part of its revenues from fee based or non-interest income. Hence these figures are not strictly comparable.

Particulars (FY03) Citibank HDFC Bank
P/E (x) 17.4 18.2
P/BVPS 2.8 3.1
ROA (%) 1.2 1.4
RONW (%) 15.5 18.5

HDFC Bank currently trades at 18.2x FY03 earnings, which is higher compared to Citigroup. HDFC Bank gets relative high valuations (price to book value ratio) on the Indian bourses due to its history of strong growth as well as its good asset quality. Despite having a global presence, Citigroup's operating parameters compare favorably, which is reflected in its valuations.

What does this comparison mean for Indian investors? That the Indian banking sector is still evolving and retail credit penetration is still poor. Though retail assets have grown at an impressive rate due to the fall in interest rate in the last five years, we still have a long way to go. Keeping the long-term potential in mind, HDFC Bank is well placed to capitalize on the retail front. The bank's focus on offering a wide range of services without losing focus of asset quality is commendable.

To conclude, consider the table below that highlights the potential of the retail-banking sector in India.

Yet to make a mark...
Particulars India US
GDP (US$ bn) 474 9,437
No. of cars sold (m) 0.1 16.0
Mortage to GDP ratio (%) 2% 60%
No. of equity investors (m) 2.5 50% of all households

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