MINI PROJECT

Submitted By Group 2 Akshay Talreja

Anurag Patel
Nischal Upreti
Vivek Kumar
1. What do you notice about the sources of funds for the banks?

As per the calculation of total deposit to total asset for pnb is 87%, ABN-AMRO is 61.9%, HDFC is 74% so
it shows that major source of funds are from the deposits side apart from that borrowing and capital are
also source of funds.

2. What proportion of total liabilities is equity capital and reserves?

Equity Capital and Reserves/Total Liabilities

HDFC 0.12
PNB 0.06
ABN AMRO 0.05

3. Compare the liability composition. Are there any differences? What are the potential vulnerabilities in
each of the liability compositions?

For the bank ABN-AMRO in liability side there is Derivatives which is approx. 2% of total asset, actual
amount of Derivatives decreased by EUR 1.2 billion on the back of mid- to long-term interest and FX rate
movements impacting on the valuation of derivatives. Also, the foreign bank has a liability of issues debt
which is 21% significantly higher source of longer-term funding but it is not there in Indian bank.

4. Examine the maturity pattern of deposits of the banks as given in the notes to accounts. Are there any
striking differences between the three banks?

Term Deposits have maturity period of 6 months to 2 years whereas Demand deposits do not have any
certain maturity period.

Types of Deposits Term Deposits Demand Deposits

HDFC 5319427821 3911981463
PNB NA NA
ABN AMRO 2168080000 16656960000
All amounts in ’000

We can see HDFC has huge Term deposits as they provide high interest rates on these deposits to their
customers. PNB annual report has not given division of their deposits. ABN AMRO has highest demand
deposits among the three banks.

5.What do you notice about use of bank funds in the three banks?

The major utilization of fund is for advances given, advances to total asset is 59% to PNB, 71% to ABN-
AMRO and 65 % in case of HDFC so the public sector bank has lower as comparable to foreign and private
bank. Also, there investment is also significant of total asset. investment to total asset is 25% for PNB and
23 % HDFC which is almost similar between both bank. The advances to investment is approx. 3 times
higher in the cases.

6. What are the potential vulnerabilities of the asset portfolio?

Asset Portfolio of Bank prone to vulnerability includes following asset class.

1) Investments in Bonds and Debentures within the country and outside country.
2) Unsecured loans and advances.
3) Investments in shares, subsidiaries and joint ventures.

Above assets class is vulnerable to following risks.

1) Credit risk or Default risk- Inability of borrower to pay interest and principal obligations.
2) Interest rate risk – Risk of fluctuations in interest rate resulting in lower bond values.
3) Exchange rate risk – Fluctuation in exchange rate can impact foreign investments.
4) Market risk – Unfavorable economic conditions can affect company’s performance and can have
negative impact on share market.

7. What is the nature of bank revenue? What is the proportion of interest to non-interest income in three
banks?

The major revenue comes from the all the three banks are from interest income. Interest income to total
revenue is 87% in PNB, 88% in ABN-AMRO,84% IN HDFC and approx. 13 to 15% is revenue from other
income. The proportion of interest to non-interest income is approximately in range of 6 to 7 times in all
the segments.in foreign bank Other operating income came out lower at EUR 31 million (2017:
EUR 150 million) as the figure for 2017 included a book gain of EUR 114 million following the sale
of the remaining equity stake in Visa Inc.

8. What is the banks’ profitability? Analyze the profitability of the three banks using the simple model
given in Section III of chapter 3.

Analyzing Banks’ profitability using DuPont Analysis.

Return on Equity = Net Income / Average Total Equity

This can be classified into

1) Net Income / Revenue – It indicates profit margin of the company .

2) Revenue / Total Assets – It shows how well the company is utilizing its assets for generating
revenue i.e. asset utilization.
3) Assets / Equity – This is known as Equity multiplier which shows relation between assets to equity
of the firm.
 DuPont Net Income / Revenue / Total Assets / Equity Return on Equity
Revenue Assets
HDFC 0.18 0.10 9.17 16.50
PNB (0.17) 0.08 17.30 (23.53%)
PNB AMRO 0.26 0.02 19.71 10.88%

9.What are the potential threat to profitability?

In case of PNB there is no profitability the net loss -99754860000 which has reduced from previous year.
Other private and foreign banks are profitable in nature. As per the IMF the major threat to Indian bank
for profitability is slowing the credit growth in the country and risks from elevated levels of non-
performing loans are “most acute”. When these potential debts converted into NPA it significantly impacts
on the bottom line of the bank financials Of the 20 banks with the worst nonperforming asset (NPA) ratios
from these countries, as many as 13 are from India. Also, interest coverage ratio of Indian bank company’s
ability to pay interest on outstanding debt — of Indian firms was the second lowest among a set of 18
emerging economies.

10. Do the contingent liabilities of the banks increase their risks? How big is the risk?

Yes, contingent liabilities of the banks increases banks risk. In case of HDFC the contingent liability is 82 %
of total asset thus it involves significant risk.

11.Go through the Notes to accounts and disclosure made by the banks. What is the Vulnerability of the
banks?

In case of HDFC the contingent liability is 82 % of total asset and Bills for collection is approx. 4%. There
are certain parts of contingent liabilities

SCHEDULE 12 - CONTINGENT LIABILITIES

1) Claims against the bank not acknowledged as debts – taxation-0.11%

2) Claims against the bank not acknowledged as debts - others -0.011%
3) Liability on account of outstanding forward exchange contracts- 54%
4) Liability on account of outstanding derivative contracts-35%
5) Guarantees given on behalf of constituents: -
a) In India -5%
b) Outside India-0.00733%
6) Acceptances, endorsements and other obligations-4.6%
7) Other items for which the Bank is contingently liable-0.18%

12. Give an overall assessment of the three banks based on your analysis as above and rank the three
banks as least risk, medium risk and high risk.
As per our analysis, we have drawn a conclusion that HDFC is performing very well in the market with high
net income. ABN AMRO is also doing reasonably well however PNB has incurred losses over the years.

NPAs of HDFC is least in the Industry because of their strict rules and regulatons.

Least Risk – HDFC Bank

Medium Risk – ABN AMRO

High Risk - PNB

SWOT ANALYSIS OF HDFC

Strengths
1.HDFC bank has the second largest private banking sector in India. it has 2,201 branches and 7,110 ATM’s
across country also HDFC Bank is India’s largest private sector lender by assets. It is the largest bank in
India by market capitalization as of February 2016.[10] It was ranked 60th in 2019 BrandZ Top 100 Most
Valuable Global Brands

2. HDFC bank is located in 1,174 cities in India and has more than 800 locations to serve customers through
Telephone banking.

3. in the past HDFC has got a lots of awards and recognition, it has received ‘Best Bank’ award from
various financial rating institutions like Dun and Bradstreet, Financial express, Euromoney awards for
excellence, Finance Asia country awards etc.

4. The bank’s ATM card is compatible with all domestic and international Visa/Master card, Visa Electron/
Maestro, Plus/cirus and American Express. This is one reason for HDFC cards to be the most preferred
card for shopping and online transactions

Weaknesses
1. HDFC bank doesn’t have strong presence in Rural areas, where as local banks and informal financial
institution has its direct competitor is expanding in rural market.

2. HDFC lacks in aggressive marketing strategies Comparable to other private bank which now realize the
financial inclusion of rural people.

3.Some of the bank’s product categories lack in performance as comparable to other bank like ICICI .
Opportunities
1. the companies like large and SME are growing at very fast pace and expending in rural area. HDFC has
good reputation in terms of maintaining corporate salary accounts so there is golden opportunity.

2. Greater scope for acquisitions and strategic alliances with local partners due to strong financial position.

3. It has a strong hold in housing loan, now due to modernization of rural houses there is huge scope to
cover the market.

Threats
1. non-banking financial companies (NBFC), universal banking and new age banks are increasing in India
with increase the competition.

2.the major threat is NPA, currently there is not significant NPA in HDFC but there might be risk that at
any time some NPA will get disclosed.

3.Strict RBI regulation some time deter the flexibility of bank which directly affect their business also due
to disruption by digital payment like Paytm, Google Pay, BHIM etc. are directly competing with the
traditional banks.

Market Value of Equity

Residual Method
Growth rate of Total Assets is 17% from last year.

Residual Income = Net Income – Cost of Equity * Shareholders Equity

= 1364195844 - 12%*1492063521

= 1364195844 – 179047623

= 1185148221

Present Value of Market Cap. = 1185148221/0.12

= 9876235175

Value per share = 9876235175000/5475590000

= 1803.68 / share