A Safe Deposit

HDFC Bank has recently lost Rs 10 on the news that its strategic alliance partner, NatWest Markets, may divest its 20 per cent stake. For an investor, this is an excellent opportunity to enter

The banking industry is witnessing a sea change with the financial institutions also entering the banking industrys turf of short term funding. Another factor that has started to worry most bankers is the increasing disintermediation by corporates forcing banks to consider investing in low yielding commercial papers, debentures and preference shares.

The current year also saw the interest rates in a southward journey putting tremendous pressure on the fund based business of banks which is the bread and butter of this industry. Another trend that is worrying the bankers is the increasing levels of non performing assets (NPAs).

 

In the second half of 1997-98, the banking industry faced turbulent times with the Reserve Bank of India going back on almost all the policy decisions announced in its monetary policy for the second half due to the turbulence witnessed in the foreign exchange market. This came as a severe shock for most banks, and its impact on banks bottomlines will be seen only at the end of the year.

The public sector banks have also woken up to the reality with the entry of the private sector which has resulted in service improvements in the industry and margins coming under pressure.

This can be seen from the decreasing trends in the spreads available to the banks. In this scenario, HDFC Bank a new entrant has been performing well since its started its operations and looks like one of the best banks to invest in at the current times. Moreover, the news of its partner NatWest Markets, UK, looking to divest its 20 per cent stake in HDFC Bank has pulled the stock price down from Rs 75 to Rs 65. At this price, it is worth investing. Heres why.

HDFC Bank, promoted by the countrys leading housing finance company HDFC, has been one of the leaders among the private sector banks. It started its operations in the beginning of 1995 and is currently in its third year of operations. It came out with its maiden public issue in March 1995 at par mobilising around Rs 50 crore. Prior to this issue it came out with a preferential issue for the HDFC shareholders at par aggregating Rs 30.92 crore. The bank has a strategic alliance with NatWest Markets which has also picked up a equity stake of 20 per cent of paid up capital amounting to Rs 40 crore.

HDFC Bank has been mainly concentrating in the metropolitan cities and is currently expanding into the next level of cities like Ahmedabad, Bangalore. It concentrates mainly in four major business areas; corporate banking, treasury, capital markets infrastructure and retail banking. Currently, 85 per cent of its income comes from corporate banking.

Treasury operations contribute nearly 10 to 12 per cent of the total income. The capital markets infrastructure business provides custodial services and is also a a depository participant.

It has been a consistent performer since its commencement. The first half of 1997-98 has been good with interest income increasing 54 per cent to Rs 113.74 crore over September 1996, while the interest expenses have increased 35 per cent to Rs 56.6 crore.

In March 1997, interest income increased 41 per cent to Rs 161.74 crore while interest expenses grew only 23 per cent to Rs 87.18 crore. In 1996-97, the personnel cost increased 117.7 per cent to Rs 10.19 crore, mainly due to the increase in the number of branches from 10 to 20 branches.

In 1996-97, HDFC Banks deposits grew 87 per cent to Rs 1279.07 crore. A good sign in the break-up of deposits is the growth in the savings deposits which gives the bank float funds at very low interest rate. Nearly 62 per cent of the deposits come from term deposits and about 31 per cent of total deposits is from demand deposits.

This deposit structure enables the bank in financial planning and in reducing the asset liability mismatches. It has increased its presence in the retail segment which is the main source of funds for banks and is aggressively pushing itself in this segment which is necessary to sustain in the long run. Also the bank has been setting very high service standards which will definitely attract the retail customers in the future.

The first half results of the bank have been impressive with the interest income grew 54 per cent to Rs 113.74 crore while interest expenses grew only by about 35 per cent to Rs 56.6 crore. The advances grew 18 per cent to Rs 683 crore over March 1997.

Deposits grew 15 per cent to Rs 1475 crore and net profit increased 75 per cent to Rs 33.5 crore. Anand Shanbag, analyst, Kotak Securities, says, Net profit for 1997-98 will fall short of the 60 per cent growth that appeared possible after the exceedingly good first half net profit growth of 75 per cent to Rs 33 crore. However the bank is still capable of posting a net profit growth of about 50 per cent to Rs 60 crore.

The NPA levels of HDFC Bank is among the lowest in the industry at 0.5 per cent of advances at the gross level and nil at the net level for 1996-97. According to Shanbag, There may be pressure on the asset quality due to the general economic downturn however the NPA ratio at the end of the fiscal year may be around 1 per cent, which will be much lower than the NPA levels of other new private sector banks.