Professional Documents
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OF
Submitted to:
Dr. Sampada Kapse
INTRODUCTION:
Reforms have taken place in the banking sector since 1991 despite changes in the
government. The Finance Ministry continuously formulated major policies in the
financial sector such by giving licenses to private sector banks as part of the liberalization
process, opening of the insurance sector, designing measures to increase financial
soundness like introducing capital adequacy requirements and other prudential norms for
banks, limiting the entry of foreign banks etc. The banking system has evolved from the
traditional banking practices of lending and deposits to other avenues such as investment
banking, insurance services etc. Going forward, banks that have ensured sufficient capital
to sustain credit growth will increase focus on non funded income to sustain margins
The service sector has been in the driver’s seat registering CAGR of 8% in the last
seventeen years, which has been mainly contributed by the growth in trade, hotels, and
transport, storage and communication sectors. The growth of these segments has been the
result of opening of trade, liberalization of policies, and increased disposable income in
the hands of the people and changing consumer attitude and lifestyle. The table below
highlights the contribution of the different sectors that have boosted economic growth
directly or indirectly. While hotels and restaurants contribute least amongst the sectors
discussed here, banking & insurance and real estate & business services contribute the
most.
% share in GDP at constant prices FY07
Hotels & restaurants 1.5%
Communication 4.9%
Banking & insurance 6.7%
Real estate & business services 7.6%
Banking in India has attained fair amount of maturity in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region.
Since Indian economy is witnessing strong growth the demand for banking services,
especially retail banking, mortgages and investment services are expected to be strong.
One may also expect M&As, takeovers, and asset sales.
According to a report by ICRA Limited, a rating agency, the public sector banks
hold over 75 percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively
MEANING OF RATIOS:
A relationship between various accounting figures, which are connected with each other,
expressed in mathematical terms, is called accounting ratios.
According to Kennedy and Macmillan, "The relationship of one item to another
expressed in simple mathematical form is known as ratio."
Robert Anthony defines a ratio as – "simply one number expressed in terms of another."
Accounting ratios are very useful as they briefly summarise the result of detailed and
complicated computations. Absolute figures are useful but they do not convey much
meaning. In terms of accounting ratios, comparison of these related figures makes them
meaningful. It is difficult to say which business concern is more efficient unless figures
of capital investment or sales are also available.
Analysis and interpretation of various accounting ratio gives a better understanding of the
financial condition and performance of a business concern.
Also, ratio analysis may help by comparing your company with prior periods. If a
particular ratio is declining when it would be better if it were staying the same or
increasing, then again looking at the ratios are important to find out where the problem
lies. Ratios are important to spot trends easily.
INTERPRETATION-The EPS of Rs10/- nominal value share has shown a consistent and
healthy growth over the years and as compared to 04-05 it has become about 102%. This
shows strong foundation of the bank to achieve this growth rate by increasing the net
income from Rs 665.6(lacs) to Rs.1590.2(lacs) and shares from 29,03,83,946
to34,40,20,927.This helped the bank to meet the financial needs mostly from its retained
earnings and avoided the need to avail capital at a cost from the market. So the bank was
in position to utilize funds efficiently to improve the financial position of bank.
There is volatility in the quarterly EPS. Gross profit reduced from Rs.1088.70(lacs) in
Mar-08 to Rs.1027.51(lacs) in Jun-08 . This shows the bank also suffered from the global
crisis that has badly hit the economies of the world and also during these periods the
banks had increased the Fixed Deposit rates from 9.5% to 10.5% p.a.
Also the noteworthy thing is that the employee expenses in Mar-08 were Rs.345.6(lacs)
and Rs.611.63(lacs) in Sep-08
2) Dividend yield:- The owners of the bank are rewarded in form of dividend
which is attributed from the profits. This keeps the owners motivated as they believe that
their hard earned money offered to bank is being efficiently utilized and they are getting
returns on their investments
INTERPRETATION-In 05-06 the operating margin ratio was 29.56% as the company
had incurred Rs.169109(lacs) on operating expenses for infrastructure and staffing in
relation to the expansion in the branch network and growth in the retail loan and credit
card businesses. In the next year it has shown improvement when the bank spent
Rs.242080(lacs) on the operating expenses as its operating income increased from
Rs.173357 to Rs.256391(lacs). And the ratio diminished again in 07-08 as the operating
expenses were Rs.374562(lacs) and operating profit was Rs 376541(lacs) which is a
result of increase in operating expenses from 49.38% in 05-06 to 49.87% of the net
revenues.
> Net Profit Margin -Net profit divided by net revenues is called Net profit margin
INTERPRETATION -In 05-06 the NPM is 15.55% as the bank had efficiently converted
its revenues into actual profits and showed an effective cost control. However in the
subsequent year it reached 13.57 as the net profit as a percentage of net revenues came
down from 25.43% to 22.90%. And further in 07-08 the NPM has diminished and net
profit to net revenues came down to 21.17%. Lower net profit margins have lead to a
reduction in the returns to the investors. But this reduction is not an outcome of
inefficiency but the bank has to spend more on operating expenses to counter the
competition from other banks and the margins of profit have squeezed.
> Reported Return On Net Worth: This ratio indicates how profitable a company is by
comparing its net income to its average shareholders' equity. The ratio measures how
much the shareholders earned from their investment in the company. The higher the ratio
percentage, the more efficient management is in utilizing its equity base and the better
return is to investors.
INTERPRETATION In the year 05-06 RONW is 16.43% and shareholders have been
benefitted from their stake in the company in the form of fair returns. In that year the
share capital was Rs. 31314(lacs) whereas the net income was Rs. 342466(lacs). In the
next year the ratio improved as there was only Rs. 625(lacs) increase in share capital
when the net income increased by Rs.156005(lacs). But again in 07-08 there is a
substantial reduction in the ratio with the infusion of Rs. 3504(lacs) of share capital and
the net income increased by Rs 252632(lacs).
Rs (lacs)
Year 06-07 07-08
Net income 45.55 50.68
Source: Annual Report of HDFC Bank
Rs (lacs)
Year 06-07 07-08
Share Capital 2 10.97
Source: Annual Report of HDFC Bank
INTERPRETATION -The quick ratio has been 5.18 in the year 05-06 which indicates the
bank’s robustness and financial soundness in paying off its short term obligations. It has
reduced in the next year but in the year 08 it has increased.
Rs (lacs)
Year 05-06 06-07 07-08
Quick assets 1477834 904665 691900
Current liabilities 483196 538195 290599
Source: Annual Report of HDFC Bank
The figures indicate that there is excess liquidity in the bank except in 06-07.But the
banks are under the guidance of RBI and they have to follow the liquidity norms laid
down by RBI.
> Current Ratio- The ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities with its short-term assets. The higher the current ratio, the
more capable the company is of paying its obligations. A ratio under 1 suggests that the
company would be unable to pay off its obligations if they came due at that point
Source:Http://money.rediff.com/money/jsp/ratio.jsp?
companyCode=14030055.
INTERPRETATION -The ratio shows a decline due to the credit expansion, increasing
demand deposits and other liabilities.
Rs (lacs)
Year 05-06 06-07 07-08
Demand deposits 1618579 1958482 2875970
Other liabilities 784949 1368913 1643191
Source: Annual Report of HDFC Bank
> Total debt/equity - It indicates what proportion of equity and debt the company is using
to finance its assets. A high debt/equity ratio generally means that a company has been
aggressive in financing its growth with debt. This can result in volatile earnings as a
result of the additional interest expense.
Source:Http://money.rediff.com/money/jsp/ratio.jsp?
companyCode=14030055
INTERPRETATION -There is growth of the bank and it is able to manage its funds from
the internal sources. The equity capital has increased its share in the liabilities in balance
sheet over 90% in comparison to the outside debts. This helps the bank to maintain high
credit reputation in market.
Rs(lacs)
Total liabilities 6820686 8480246 12167937
Shareholders equity 529953 643315 1149723
Source: Annual Report of HDFC Bank
> Interest Coverage Ratio- This ratio is used to determine how easily a company can pay
interest on outstanding debt. The interest coverage ratio is calculated by dividing a bank's
earnings before interest and taxes (EBIT) of one period by the bank's interest expenses of
the same period.
The lower the ratio, the more the company is burdened by debt expense. When a
company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may
be questionable. An interest coverage ratio below 1 indicates the company is not
generating sufficient revenues to satisfy interest expenses.
Also ,
Rs (lacs)
Year 05-06 06-07 07-08
Interest expenses: 192950 317945 488712
EBIT : 434581 652541 1011752
Source: Annual Report of HDFC Bank
INTERPRETATION -The ratio for the year 06 is 1.87 which is reasonable and not below
1.5.This indicates that the bank is in a sound financial health and is able to pay the
interest on its outstanding debts. The ratio was best in 06-07 among the three financial
years. But has reduced in the year 08 to 1.79. Still the bank has maintained a healthy ratio
over the years.
7) Asset Quality Ratio: The most important ratio for the stakeholders of
bank is the Non-Performing Assets ratio which is covered under the asset quality ratio.
This ratio shows the true picture of the qualitative value of assets rather than the
quantitative value of assets
INTERPRETATION -The ratio shows a decline. But comparing the components of the
ratio the 0.04% decline has occurred when in the background the increase in loans given
shows a 35% increase which means the bank has adhered to strict policies in allocation of
funds and it has not been aggressive in allocating loans.
Rs (lacs)
Year 06-07 07-08
Net NPA 20289 29852
Net Advances 4699478 6342690
Source: Annual Report of HDFC Bank
9) Component Ratio: This ratio shows the components and their composition
in the business of the bank. One such ratio is Long term assets to total assets. The high
ratio indicates more investment in fixed assets that bank has purchased to continue its
operations smoothly.
Also,
Rs (lacs)
Year 05-06 06-07 07-08
Long term assets 85508 96667 117513
Total assets 7350639 9123561 13317660
Source: Annual Report of HDFC Bank
INTERPRETATION -In the year 06-07 there was a decline in the ratio which shows that
the bank had more of investments and current assets. And as the company had expansion
plans in the other two years the ratios are higher.