Perform EIC Analysis of Banking Sector and HDFC bank

A
REPORT ON
“ PERFORM EIC
ANALYSIS OF BANKING
SECTOR AND HDFC BANK
"

Fundament analysis
■ Investors generally like to be rational and
scientific in their investment selection.
■ Thus they would want to collect and analyze a
lot of information about the past performance of
companies, industries and the economy as a
whole.
■ So that the future expected performance can be
estimated.

Fundament analysis
■ Such an evaluation of company, industry and
economy is known as fundamental analysis.
■ Fundament analysis is a logical and systematic
approach of estimating future price and
dividends.
■ It is based on the premise that a share price of a
company depends upon fundamental factors
relating to the company, industry and economy.

■ Fundamental analysis is done in three steps:
– Economy analysis
– Industry analysis
– Company analysis
■ The logic is that a company’s efforts alone are
not responsible for its performance. But a
company belongs to an industry and industry is
part of overall economy. Thus, industry and
economy as a whole affects the performance of
the company.
■ Here, we took Banking industry for analysis.

Economy analysis
■ A booming economy is good for the stock market as
there are higher chances for companies earning more
profits & hence giving more returns. Similarly, an
economic slowdown can dampen profits hence returns
go down.
■ Thus, a study of certain economic variables is
important to ascertain whether the economy is doing
well or otherwise. In the case of banking industry,
■ Strong GDP growth will facilitate banking sector
expansion.
■ Rising per capita income will lead to increase in the
fraction of the Indian population that uses banking
services. Growth of banking sector of India is 6.3 per
cent per capita growth (annually).

Economy analysis
■ Population in 15-64 age groups is expected to
grow strongly going ahead, giving further push
to the number of customers in banking sector.
■ Total banking sector credit is expected to
increase at a CAGR of 2.5 per cent during FY11
to FY16 to reach USD1015.9 billion by March
2016.
■ During FY16, USD1 trillion was the total value of
bank loans in India.
■ The sector will also benefit from economic
stability and credibility of the monetary policy.

Economy analysis
Interest rate income
■ Public sector banks account for over 72.3 per cent
of interest income in the sector in FY15
■ They lead the pack in interest income growth with
a CAGR of 11.5 per cent over FY09-15
■ Overall, the interest income for the sector has
grown at 11per cent CAGR during FY9-15
■ Interest income of Public Banks was witnessed to
beUSD105.44 billion in FY16

Economy analysis
Return on assets and loan to deposit ratio showing
an uptrend.
■ Loan-to-Deposit ratio for banks across sectors has
increased over the years
■ Private and foreign banks have posted high return
on assets than nationalized and public banks.
■ This has prompted most of the foreign banks to
start their operations in India

Economy analysis
Government
The government and the regulator have undertaken
several measures to strengthen the Indian
banking sector.
■ In July 2016, the government allocated Rs 22,915
crore (US$ 3.41 billion) as capital infusion in 13
public sector banks, which is expected to improve
their liquidity and lending operations, and shore
up economic growth in the country.

Economy analysis
■ The Reserve Bank of India (RBI) has released the
Vision 2018 document, aimed at encouraging
greater use of electronic payments by all sections
of society by bringing down paper-based
transactions, increasing the usage of digital
channels, and boosting the customer base for
mobile banking.
■ Reduce the burden of loan repayment on farmers,
a provision of Rs 15,000 crore (US$ 2.2 billion)
has been made in the Union Budget 2016-17
towards interest subvention.
■ The Reserve Bank of India (RBI) plans to
guidelines know-your-customer (KYC) norms to
reinforce protection for consumers.

Economy analysis
Economic and demographic drivers
■ Favorable demographics and rising income
levels.
■ Strong GDP growth (CAGR of 7 percentage
expected over 2012-17) to facilitate banking
sector expansion.
■ The sector will benefit from structural economic
stability and continued credibility of monetary
policy.

Economy analysis
Infrastructure financing
■ India currently spends 6 percent of GDP on
infrastructure; Planning Commission expects this
fraction to grow going ahead.
■ Banking sector is expected to finance part of the
USD 1 trillion infrastructure investments in the 12th
five year plan, opening a huge opportunity for the
sector.

Economy analysis
Technological innovation
■ Technological innovation will not only help to
improve products and services but also to reach
out to the masses in cost effective way.
■ Use of alternate channels like ATM, internet and
mobile hold significant potential in India.
■ Now, cloud technology and analytics also
gaining ground.

Industry analysis
■ Industry life cycle
– Profitability of an industry depends upon its
stage of growth.
– Each industry passes through 4 stages of
growth.
■ Pioneering stage
■ Expansion stage
■ Stagnation stage
■ Decay stage
■ Each stage is unique in its characteristic and hence
exhibits different type of investment opportunity.

Industry analysis
Industries in pioneering stage:
■ These are sunrise industries
■ At budding level, it is very risky to invest
■ Some firms do not survive long enough and
hence there are chances of losing money.
Industries in expansion stage:
■ These are industries which survived the
pioneering stage and have become stronger.
■ Thus, these industries are highly profitable and
also provide good dividends.

Industry analysis
Industries in stagnation stage:
■ All growth opportunities are explored.
■ The growth of the industry stagnates.
■ At this point, companies going for mergers or
diversification are a safe bet.
■ Investors need to invest very carefully
Decay stage
■ The profits decline.
■ Hence it is safe for investors to move out as soon
as possible.
■ At times short selling can be adopted.

Industry analysis
■ As we shown in economic analysis that banking
industry is now on expansion stage which lead
banking industry towards earning more profit and
dividend to their investors so there is a good
opportunity for investors to invest in banking
sector.

Industry analysis
■ Indian banking system recently on expansion
stage, the Indian banking system consists of 26
public sector banks, 20 private sector banks, 43
foreign banks, 56 regional rural banks, 1,589
urban cooperative banks and 93,550 rural
cooperative banks, in addition to cooperative credit
institutions.
■ Strong growth in savings amid rising disposable
income levels are the major factors
■ Influencing deposit growth. During FY06–16,
deposits grew at a CAGR of 11.47 per cent and
reached 1.46 trillion in FY16.

Industry analysis
■ As on September 2016, the outstanding credit to
NBFCs stood at US$ 55.27 billion, growing at 25
per cent on year-on-year basis. Bank credit to non-
banking finance companies (NBFCs) has touched
the highest in three years.
■ Indian banks are increasingly focusing on adopting
integrated approach to risk management. Most of
the banks have put in place the framework for
asset-liability match, credit and derivatives risk
management. Standard & Poor’s estimates that
credit growth in India’s banking sector would
improve to 11-13 per cent in FY17 from less than
10 per cent in the second half of CY14.

Industry analysis
■ Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) are
growing. As on November 09, 2016, US$ 6,971.68 million were
deposited, while 255.1 million accounts were opened.
■ Rising incomes are expected to enhance the need for banking
services in rural areas and therefore drive the growth of the
sector; programmes like MNREGA have helped in increasing
rural income aided by the recent Jan Dhan Yojana.

Company analysis
■ Showing growth of banking sector, following
information are regarding to HDFC bank to
analyze for investment purposes.
■ HDFC bank Market Value is 383.27 which is higher
than their competitors. (ICICI Bank Ltd with market
value 261.97, Infosys Ltd with market value
252.67, Reliance industries Ltd with 252.46, State
Bank of India with market value 246.72).

Company analysis
■ HDFC bank investment plan is on growth side.
■ HDFC’s performance of last month was 120.99
NAV with 0.91%. Last 3 months performance was
124.30 NAV with negative return 10.24%. Last
year performance was 105.77 NAV with 14.37%
return.
■ HDFC Banks 52 wks high performance 1318.20.
and 52 wks low performance 928.80.

(Compare between HDFC &
ICICI) Company analysis
Per Share Ratios 2016 2015 2016 2015
Basic EPS (Rs.) 48.84 42.15 16.75 19.32
Diluted Eps (Rs.) 48.26 41.67 16.65 19.13
Cash EPS (Rs.) 51.43 43.38 17.92 20.41
Book Value [Excl. Reval
Reserve]/Share (Rs.)
287.47 247.39 149.45 138.71
Book Value [Incl. Reval
Reserve]/Share (Rs.)
287.47 247.39 154.30 138.71
Dividend/Share (Rs.) 9.50 8.00 5.00 5.00
Operating Revenue / Share
(Rs.)
238.20 193.38 90.68 84.66
Net Profit/Share (Rs.) 48.64 40.76 16.72 19.27

Per Employee Ratios 2016 2015 2016 2015
Interest Income/
Employee (Rs.)
6,878,127.47 6,353,708.99 7,307,161.04 7,401,381.02
Net Profit/ Employee
(Rs.)
1,404,398.73 1,339,160.38 1,347,597.82 1,684,887.74
Business/ Employee
(Rs.)
115,472,348.9
1
107,003,994.6
6
118,696,176.0
3
112,938,140.2
6

Per Branch Ratios 2016 2015 2016 2015
Interest Income/
Branch (Rs.)
133,233,285.62 120,752,128.55 118,515,583.82 121,212,691
.11
Net Profit/
Branches (Rs.)
27,204,011.28 25,450,719.73 21,856,825.39 27,593,468.
89
Business/
Branches (Rs.)
2,236,765,820.
58
2,033,609,052.
57
1,925,145,282.
02
1,849,592,1
05.93

Key Performance Ratios 2016 2015 2016 2015
Net Profit Margin (%) 20.41 21.07 18.44 22.76
Operating Profit Margin (%) 2.56 2.51 -10.61 -2.03
Return on Assets (%) 1.73 1.73 1.34 1.72
Return on Equity / Net worth (%) 16.91 16.47 11.19 13.89
Net Interest Margin (X) 3.89 3.79 2.94 2.94
Cost to Income (%) 36.69 36.84 39.40 32.70
Interest Income/Total Assets (%) 8.49 8.20 7.31 7.59
Non-Interest Income/Total Assets (%) 1.51 1.52 2.12 1.88
Operating Profit/Total Assets (%) 0.21 0.20 -0.77 -0.15
Operating Expenses/Total Assets (%) 2.39 2.36 1.75 1.77
Interest Expenses/Total Assets (%) 4.60 4.41 4.37 4.65

Valuation Ratios 2016 2015 2016 2015
Enterprise Value (Rs.
Cr)
840,203.70 724,875.64 706,700.41 691,147.70
EV Per Net Sales (X) 13.95 14.96 13.40 14.08
Price To Book Value
(X)
3.73 4.13 1.58 2.27
Price To Sales (X) 4.50 5.29 2.61 3.72
Retention Ratios (%) 80.46 80.37 70.10 74.06
Earnings Yield (X) 0.05 0.04 0.07 0.06

Perform EIC Analysis of Banking Sector and HDFC bank

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Perform EIC Analysis of Banking Sector and HDFC bank