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HDFC Bank – Moving ahead aggressively

Jul 12, 2000

Technology is playing a dominant role in the success of the new private sector banks. HDFC Bank is one of the new private sector banks, which is registering excellent financial performance year over year. In the past one-year due to adoption of the latest technology, the private sector banks have been able to reduce their cost of operations. This has resulted in improvement in operating profit margins of most of the private sector banks. The table indicates among the private sector banks only HDFC Bank’s net profit margins have declined. However the bank continues to enjoy the highest profit margins among the new banks.

Comparative key ratios
ParticularsHDFC BankICICI BankGlobal Trust BankUTI BankIDBI Bank
Operating profit margins     
FY0032.2%21.7%28.2%20.2%17.5%
FY9928.4%19.7%16.4%16.3%13.2%
Net profit margins     
FY0014.9%10.1%12.4%8.9%12.7%
FY9918.6%10.0%11.1%7.4%9.5%
Return on Assets     
FY001.8%0.9%1.4%0.8%1.4%
FY991.9%0.9%1.4%0.8%0.9%

HDFC Bank has been able to improve its operating profit margins due to drop in the cost of funds from 11.9% in the previous year to 10.2% in the current year. Out of the total loan portfolio of bank current and saving account deposits accounts for 15% and the rest is accounted by time deposits. Falling interest rates in FY00 also helped the bank in reducing its borrowing cost. The bank’s technology initiatives will further contribute in increasing its profit margins.

Transaction costs are expected to fall with banks opting for Internet banking. As per some estimates if over the counter transaction costs Re 1, an ATM transaction costs 50 paise, phone banking is still cheaper at 35 paise, a debit card transaction cost just 20 paise and Internet banking would be the cheapest at 10 paise a transaction. HDFC Bank has already received 80,000 applications for Internet banking and the number of people transacting on the net is picking up. The bank has also leveraged its customer base to cross-sell various banking products, which has helped the bank to push up its revenues. For example if a customer opens a savings account with the bank, he will be offered demat account, loans against shares, personal loans, housing loans and various other products.

At the current market price of Rs 277, HDFC Bank is trading at a P/E ratio of 47 times and Price/Book value ratio of 9 times its FY00 earnings. The bank’s high growth rate is one of the reasons for its premier valuations.

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