A

PROJECT REPORT

ON

CAMEL ANALYSIS OF HDFC BANK

Subject: M.O.F.I. & F.S. Batch: 2010-12

Under the guidance of Dr. Ashish Mehta (Faculty of M.O.F.I. & F.S.)

PREPARED BY: Vijay Kumbhar (10F38) Nilesh Gosai (10F22)

G.H.PATEL POST-GRADUATE INSTITUTE OF BUSINESS MANAGEMENT SARDAR PATEL UNIVERSITY, VIDYANAGAR

ACKNOWLEDGEMENT

I would like to express my indebtedness Prof. Ashish Mehta, Faculty of Management of financial Institution, G. H. Patel Post-graduate Institute of Business Management, for his valuable guidance at every stage for the completion of this project work.

I extend my sincere thanks to Prof. P. K. Priyan, Faculty of Financial Management, for his significant advice and suggestions for the project.

And further I would like to thank all the faculty members of G.H.P.B.I.M. who have helped me in completing my project. I have gained a lot of knowledge throughout the course of carrying out this project.

I would like to sincerely thank my Parents and all my Friends who have helped me in completing this project by providing me with the psychological and academic support.

Table of contents

Chapter. Particulars No. 1 Introduction 2 HDFC bank- at a glance 3 CAMELS Analysis 3.1 Capital Adequacy 3.2 Assets Quality 3.3 Management Quality 3.4 Earnings 3.5 Liquidity 4 Du-Pont analysis 5 Share Price of the banks 6 Conclusions 7 Bibliography

Page No. 1 3 6 7 10 11 15 18 20 23 25 27

Chapter-1 INTRODUCTION

A sound financial system is indispensable for a healthy and vibrant economy. The banking sector constitutes a predominant component of the financial services industry and the performance of any economy, to a large extent, is dependent on the performance of the banks. Banking institutions in our country have been assigned a significant role in financing the process of planned economic growth. In 1969, 14 banks were nationalized with the objective of extending credit facilities to all segments of the economy and also to mitigate seasonal imbalances in their availability. Since nationalization, the banking system in India has witnessed structural and dimensional changes. A number of steps were taken in close succession, enabling the nationalized banks to play an active role in economic development. The second step in the process of nationalizing the banks was taken in 1980, when six other major banks were nationalized. Directed interest rates on deposits and lending, exchange controls, directed credit became the hallmark of this tightly regulated new structure. Whenever the crisis occurs, why the banks start making changes in their policies with immediate effects unlike other industries which takes time, because the financial system is the backbone of any economy The industrialist have their own goals irrespective of governing party of the country, and for their Projects/Business models it is very necessary that the economic environment should be stable, so that their estimated time and forecasted result should not be changed. Hence the financial system follows the NEWTONS THIRD LAW i.e. it reacts very quickly with the global changes, to provide the inertia/shelter to the Domestic Environment. The present supervisory system in banking sector is a substantial Improvement over the earlier system in terms of frequency, coverage and focus as also the tools employed. Nearly one-half of the Basel Core Principles for Effective Banking Supervision has already been adhered to and the remaining is at a stage of implementation. Two Supervisory Rating Models, based on CAMELS for rating of the Indian Commercial Banks and Foreign Banks operating in India respectively, have been worked out on the lines recommended by the Padmanabhun Working Group (1995). These ratings would enable the Reserve Bank to identify the banks whose condition warrants special supervisory attention.

Chapter-2 HDFC Bank - at a glance

2.1 History HDFC Bank was incorporated in 1994 by Housing Development Finance Corporation Limited (HDFC), India's largest housing finance company. It was among the first companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. The Bank started operations as a scheduled commercial bank in January 1995 under the RBI's liberalisation policies. Times Bank Limited (owned by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India. Shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more than 1,000. The amalgamated bank emerged with a base of about Rs. 1,22,000 crore and net advances of about Rs.89,000 crore. The balance sheet size of the combined entity is more than Rs. 1,63,000 crore. 2.2 Mission World Class Indian Bank Benchmarking against international standards. Best practices in terms of product offerings, technology, service levels, risk management and audit & compliance To build sound customer franchises across distinct businesses

2.3 Business Focus

Wholesale banking services

Blue-chip manufacturing companies in the Indian corp to small & mid-sized corporates and agri-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of for its corporate customers, mutual funds, stock exchange members and banks.

Retail banking services

HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2009, the bank had a total card base (debit and credit cards) of over 13 million. The Bank is also one of the leading players in the merchant acquiring business with over 70,000 Point -of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is positioned in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.With Finest of Technology and Best of Man power in Banking Industry HDFC BANK's retail services have become by and large the best in India and since the contribution to CASAi,e total number of current and savings account of more than 50% ,HDFC BANK has full potential to becomes Indias No.1 Private Sector Bank.
Treasury

Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. These services are provided through the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. 2.4 Distribution Network 2000 branches & 5998 ATMs in the country 996 towns & cities across India All branches are OLRT connected 16 branches in Middle east & 6 in Africa Representative offices in Hong Kong, NewYork, London & Singapore

3. CAMELS ANALYSIS
Regulators, analysts and investors have to periodically assess the financial condition of each bank. Banks are rated on various parameters, based on financial and non-financial performance. One of the popularly used assessments goes by the acronym CAMELS. A technique, used to rate banks on various parameters based on financial and nonfinancial performance Each letter refers to the specific category of performance C = Capital Adequacy M = Management quality L = Liquidity A = Assets quality E = Earnings S = Sensitivity to Market Risk

3.1. CAPITAL ADEQUACY

It indicates the banks capacity to maintain capital commensurate with the nature and extent of all types of risks, as also the ability of the banks managers to identify measure, monitor and control these risks.

3.1.1. Capital Adequacy ratio

Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset. Capital adequacy ratio is defined as

TIER 1 CAPITAL - (paid up capital + statutory reserves + disclosed free reserves) (equity investments in subsidiary + intangible assets + current & b/f losses) TIER 2 CAPITAL -A) Undisclosed Reserves, B)General Loss reserves, C) hybrid debt capital instruments and subordinated debts The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries.

Two types of capital are measured: tier one capital ( above), which can absorb losses without a bank being required to cease trading, and tier two capital ( above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Minimum requirements of capital fund in India: Existing Banks 09 % New Private Sector Banks 10 % Banks undertaking Insurance business 10 % Local Area Banks 15%

Capital Adequacy Ratio (%)

20 15 10 5 0 HDFC bank Axis bank 2007 13.08 11.57 2008 13.6 13.73 2009 15.09 13.69 2010 16.45 15.8 2011 15.32 12.65

The capital adequacy ratio is increased by 2.24% in HDFC bank from FY2007 to FY2011 in comparison with Axis bank has sharp increased by just 1.08% from FY 2007 to FY 2011.

3.1.2. Debt-equity ratio

It is calculated by total debt to Net worth. It is a measure of a bank's financial leverage. It indicates what proportion of equity and debt the bank is using to finance its assets. If the ratio is high (financed more with debt) then the bank is in a risky position especially if interest rates are on the rise. The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. The two components are often taken from the firm's balance sheet or statement of financial position (socalled book value), but the ratio may also be calculated using market values for both, if

the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially.
20 18 I n T i m e s 16 14 12 10 8 6 4 2 0 HDFC bank Axis bank 2007 10.98 18.81 2008 9.12 10.63 2009 10.34 12.49 2010 8.35 9.87 2011 8.71 11.34

The debt-equity ratio is decreased in both the banks. It is decreased by 2.27% in HDFC bank and 7.53% in Axis bank from FY 2007 to FY 2011.

3.1.3. Credit extended ratio

It is calculated by dividing advances to total assets. It indicates banks aggressiveness in lending which ultimately result in better profitability. The higher ratio indicates better profitability.

70 P 60 e 50 r 40 c 30 e e 20 n 10 t 0 a g HDFC bank Axis bank

2007 51.36 50.3

2008 47.59 54.26

2009 53.97 55.2

2010 56.56 57.76

2011 57.84 58.7

The credit extended ratio is sharply increased in both the banks by 6% and 8% from FY 2007 to FY 2011 in HDFC bank and Axis bank respectively.

3.2. ASSETS QUALITY

This measure reflects the magnitude of credit risk prevailing in the bank due to its composition and quality of loans, advances, investments and off-balance sheet activities. It depends on the following parameters: Volume of classifications Special mention loans-ratios and trends Level, trend and comparison of non-accrual and renegotiated loans Volume of concentrations. Volume and character of insider transactions 3.2.1. Net NPAs to Net Advances Ratio It is calculated by dividing Net NPAs to Net Advances. The net NPA to loans (advances) ratio is used as a measure of the overall quality of the bank's loan book. An NPA are those assets for which interest is overdue for more than 90 days (or 3 months). It helps identify the quality of assets that a bank possesses

3.2.2. Net NPAs to Total Assets Ratio It is calculated by dividing Net NPAs to Total assets. It is used as a measure of the overall quality of the bank's loan book. The higher ratio indicates poor quality of assets possessed by the bank.

P e r c e n t a g e

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 HDFC bank Axis bank 2007 0.073 0.363 2008 0.224 0.226 2009 0.342 0.221 2010 0.176 0.232 2011 0.107 0.169

From the above chart, we can conclude that HDFC bank has high qualities of asses than Axis bank has. The Net NPAs in HDFC bank is lesser than Axis bank from FY 2007 to FY 2011 which is by 0.062%.

3.3 MANAGEMENT QUALITY

This measure signaling the ability of the board of directors and senior managers to identify, measure, monitor and control risks associated with banking, this qualitative measure uses risk management policies and processes as indicators of sound mgt. The following factors which affect the management quality Technical competence, leadership of middle and senior management Compliance with banking laws and regulations Adequacy and compliance with internal policies Tendencies towards self-dealing Ability to plan and respond to changing circumstances Demonstrated willingness to serve the legitimate credit needs of the community

Adequacy of directors. Existence and adequacy of qualified staff and programmes

3.3.1. Return on Equity To find the return on equity, numerator is net income and denominator is net worth. Return on equity (ROE) measures the rate of return on the ownership interest of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity. It shows how well a company uses investment funds to generate earnings growth.

P 20 e 15 r c 10 e e 5 n t 0 a g HDFC bank Axis bank

2007 17.67 19.31

2008 13.8 12.1

2009 15.33 17.78

2010 14.03 15.5

2011 15.7 17.7

The return on equity is higher in Axis bank than HDFC bank. But it has been decreasing from FY 2007 to FY 2011 in both the banks. So it tells that the efficiency of generating profits is in down turn in both banks.

3.3.2. Efficiency Ratio It is calculated by dividing non-interest expenses to Net total income. The efficiency ratio is the traditional measure for bank productivity. At its simplest, it is the cost required to generate each dollar of revenue. The higher the ratio, the lower the performance.

P 30 25 e 20 r t 15 c g 10 e e 5 0 n a HDFC bank Axis bank

2007 19.94 18.5

2008 19.01 20.54

2009 18.14 21.67

2010 20.59 25.4

2011 18.62 23.56

The efficiency ratio is decreased in HDFC bank and increased in Axis bank from FY 2007 to FY 2011. It depicts that efficiency is lower in axis bank than HDFC bank.

3.3.3. Advances to Deposits Ratio

The Advances to Deposit Ratio also known as the Loan to Deposit Ratio is a ratio that is widely used by banks. The total loans (which are the money lent by the bank and are the assets of the bank) are placed in the numerator and divided by total deposits (the money received by banks that are the liabilities of banks). This ratio shows the proportion of deposits that is loaned out by the bank. This is a highly important measure of liquidity for banks as banks are now required to keep a specified amount of cash as reserves for depositors if they want to cash their deposited amounts for personal use.

The advances to deposits ratio for HDFC bank rose from 68.77% in 77.21% in 2011 as compared to 62.73% and 75.28% for Axis bank from 2007 to 2011.

3.3.4. Net Income Productivity Ratio

This ratio is calculated by dividing the net income to the no. of employee. This ratio shows surplus earned per employee. The higher ratio indicates better efficiency of the management. It suggests that the most valuable use of an organizations talent is the creation and use of intangibles. Another advantage of profit per employee is that is requires no adjustment for accounting conventions. Since companies expense their spending on intangibles but not on capital investments which are usually depreciated over time, profit per employee is a conservative, output-based measure.

0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 HDFC bank Axis bank

Rs. (In Crore)

2007 0.06 0.08

2008 0.05 0.08

2009 0.04 0.1

2010 0.06 0.12

2011 0.07 0.14

The income generated by each employee is lower in HDFC bank than Axis bank. In HDFC bank, it is increased by just 0.01 crore from FY 2007 to FY 2011 and in Axis bank, it is increased by 0.06 crore from FY 2007 to FY 2011.

3.4 EARNINGS
This indicator shows not only the amount of and the trend in earnings, but also analyses the robustness of expected earnings growth in future. The following factors affect the earning of the organization. Return on assets compared to peer grup averages and banks own trends Material components, and income and expenses-compare to peers and banks own trends Adequacy of provisions for loan losses Quality of earnings Divined payout ratio in relation to the adequacy of bank capital

3.4.1. Profit margin

It is calculated by dividing net income to total income. This ratio measures the percentage of each total income rupee remaining after all costs and expenses including interest and taxes have been deducted. The reasonable ratio ensures adequate return to the owners and so it is of great significance to the owners.

The profit margin has been increasing in both banks. In HDFC bank, it is increased by 3% from FY 2007 to FY 2011 and in Axis bank, it is increased by 4 % for the same period.

3.4.2. Yield on Assets

It is calculated by dividing interest income to total assets. It indicates banks ability to generate interest out of its assets. The higher the ratio, the higher the profitability of the firm.

12 10 Percentage 8 6 4 2 0 HDFC bank Axis bank 2007 7.32 6.22 2008 9.57 6.39 2009 10.54 7.34 2010 9.37 6.44 2011 9.16 6.24

The profitability of the HDFC bank is higher than Axis bank from FY 2007 to FY 2011. In HDFC bank, it is 9.16% in FY 2011 which is 6.24% in Axis bank.

3.4.3. Net Interest Margin

Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin of non-financial companies. It is usually expressed as a percentage of what the financial institution earns on loans in a time period and other assets minus the interest paid on borrowed funds divided by the average amount of the assets on which it earned income in that time period (the average earning assets). Net interest margin is similar in concept to net interest spread, but the net interest spread is the nominal average difference between the borrowing and the lending rates, without compensating for the fact that the earning assets and the borrowed funds may be different instruments and differ in volume. The net interest margin can therefore be higher (or occasionally lower) than the net interest spread.

6 5 Percentage 4 3 2 1 0 HDFC bank Axis bank 2007 3.24 2.14 2008 4.74 2.36 2009 4.99 2.49 2010 5.33 2.77 2011 5.1 2.7

The net interest margin is higher in HDFC bank than Axis bank. In HDFC bank, it is 5.1% and in Axis bank, it is 2.7% in FY 2011.

3.4.4. Earning Per share

Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.

90 80 70 60 In Rs. 50 40 30 20 10 0 HDFC bank Axis bank 2007 34.61 23.4 2008 43.48 29.94 2009 51.24 50.57 2010 64.26 62.06 2011 83.68 82.54

Implication of the Earnings per Share ratio is that it tells investors in what stock their investment money should go, as EPS tells how much each dollar invested earns (this is true if we only consider the EPSs of the different company's stocks). The EPS is higher in HDFC bank than Axis bank by 1.14% in FY 2011.

3.5 LIQUIDITY
This measure takes into account the adequacy of the banks current and potential sources of liquidity, including the strength of its funds management practices. The following factors affect the liquidity of the firm. Adequacy of liquidity sources compared to present and future needs Availability of assets readily convertible to cash without undue loss Access to money markets Level of diversification of funding sources (on and off balance sheet) Degree of reliance on short-term volatile sources of funds Trend and stability of deposits Ability to securities and sell certain pools of assets Mgt. competence to identify, measure, monitor and control liquidity position

3.5.1. Deposits Ratio It is calculated by dividing to total assets. This ratio indicates the liquidity position of the bank. The higher this ratio, the bank needs to invest more in liquid assets to meet short term obligations.

100 Percentage 80 60 40 20 0 HDFC bank Axis bank 2007 66.08 80.24 2008 65.28 79.97 2009 66.64 79.46 2010 72.44 78.22 2011 76.02 77.97

The deposits ratio is increased in HDFC bank from FY 2007 to FY 2011 by 10% while in Axis bank it is decreased by 3% from FY 2007 to FY 2011.

3.5.2. Cash to Deposits Ratio

It is calculated by dividing Cash and bank balance with RBI to deposits. Its similar to the Capital Reserve Ratio (CRR). Higher the ratio, the lower is the amount that banks will be able to use for lending and investment. Thus, it will affects the lending ability of the bank.

The cash to deposits ratio is higher in HDFC bank than Axis bank in FY 2011. In HDFC bank, it is increased by 4% from FY 2007 to FY 2011 while in Axis bank, it is decreased by o.6% from FY 2007 to FY 2011.

Chapter-4 DU-PONT ANALYSIS

Du-Pont Analysis
The DuPont system for financial analysis is a means to fairly quickly and easily assess where the business strengths and weaknesses potentially lie and thus where management time may optimally be spent. It is not the only nor the most thorough, but it is a fairly straight-forward and systematic means to drill back into the financial numbers to determine the source or lack thereof for financial performance. The Du Pont model of analysis requires no more than a few simple calculations, well within the ability of any student, manager, or small business owner. The potential reward for taking the time to make these calculations is great. Who would not want to know precise actions that can be taken that will lead to higher profitability and return? Even the original model (culminating in ROA) provides valuable insights on return, but the more refined versions that break out the components of ROE allow even novice small business managers to make sound financial decisions that will have a positive impact on the return to firms owners.

Du-Pont analysis of HDFC bank

PROFIT MARGIN = NI/TI 2011 = 0.27 2010 = 0.25 2009 = 0.17 ROA = NI/TA 2011 = 0.23 2010 = 0.22 2009 = 0.26 ROE = Net Income/NW 2011 =15.7 % 2010 = 14.0% 2009 = 15.33% EM= TA/NW 2011 = 10.86 2010 = 10.31 2009 = 12.49 ASSETS TURNOVER RATIO =TI/TA 2011 = 4.65 2010 = 4.24 2009 = 5.0

Du-Pont analysis of Axis bank

Profit Margin = NI/TI 2011 = 0.171 2010 = 0.161 2009 = 0.132

ROA = NI/TA 2011 = 0.014 2010 = 0.014 2009 = 0.012

ROE = Net Income/NW 2011 = 17.84% 2010 = 15.67% 2009 = 17.78%

EM= TA/NM 2011 = 12.78 2010 = 11.26 2009 = 14.46

ASSETS TURNOVER RATIO = TI/TA 2011 = 0.082 2010 = 0.086 2009 = 0.093

From the above chart, we can conclude that the ROE is higher in Axis bank as compared to HDFC bank in FY 2011 by 2%. Along with this, Equity Multiplier is also lower in HDFC bank as compared to Axis bank in FY 2011.

Chapter-4 SHARE PRICE ANALYSIS

SHARE PRICE OF HDFC BANK

(www.yahoo.finance.com) SHARE PRICE OF Axis BANK

(www.yahoo.finance.com)
From the above chart, we can conclude that the volatility in both banks is nearer to same. The share price of both banks was down in FY 2008 and was on peak in FY 2009-10.

Chapter-5 CONCLUSIONS

CONCLUSIONS From the capital adequacy point of view, HDFC banks performance is better than Axis bank from FY 2007 to FY 2011. HDFC bank has maintained higher Capital adequacy for riskweighted assets than what Axis bank has. HDFC bank has also lower debt-equity ratio than Axis bank. And as far as credit extended ratio is concerned, HDFC bank has higher profitability than axis bank. From the Assets quality point of view, The Net NPAs is lower in HDFC bank as compared to Axis bank in FY 2011. The Net NPAS to Net Advances ratio is lower in HDFC bank which shows its assets quality to getting bank its loan and advances. From the Management quality point of view, the ROE is lower in HDFC bank than Axis bank in FY 2011 which shows that the efficiency of generating profit is lower in HDFC bank than Axis bank. While Efficiency ratio is higher in Axis bank which shows that its efficiency is lower as compared to HDFC bank. The advances to deposits ratio is neared to same in both banks but the risen from FY 2007 is higher in axis bank as compared to HDFC bank. The profit per employees tells that Axis bank is better than HDFC bank which is 0.14 crore per employee in Axis bank as compared to HDFC bank has 0.07 crore in FY 2011. From the Earnings view point, HDFC bank is better than Axis bank. The yield on assets is higher in HDFC bank than Axis bank in FY 2011 by 3%.While Net Interest Margin is double in HDFC bank as compared to Axis bank in FY 2011. The Earning per Share is almost equal in both the banks in FY 2011. At last, the Liquidity point of view, deposits to total assets ratio is higher in Axis bank as compared to HDFC bank in FY 2011. But it has been decreasing in Axis bank from 80.24% in FY 2007 to 77.97% in FY 2011. The same pattern is in Cash to deposits ratio in both banks. HDFC bank has 10.81% as compared to 7.34% in Axis bank in FY 2011. From the Du-Pont point of view, the ROE is higher in Axis bank as compared to HDFC bank in FY 2011 by 2%. Along with this, Equity Multiplier is also lower in HDFC bank as compared to Axis bank in FY 2011. From the share price point of view, we can conclude that movement in share price is not much volatile in both banks.

Chapter-6 BIBLIOGRAPHY

Padmalatha Suresh and Justin Paul, Management of Banking and Financial Services, Second Edition, Pearson Annual Report of HDFC bank, from 2006-2007 and 2011-2012 Annual Report of Axis Bank, from 2006-2007 and 2011-2012 http://www.allbankingsolutions.com/repo.htm http://www.investopedia.com/ http://boards.fool.com/ http://www.equitymaster.com/detail.asp http://www.moneycontrol.com/ http://www.yahoo-finance.com/ Capitaline software