SWOT
Analysis of HDFC Bank
Strategic and SWOT Analysis Report on HDFC Bank
COMPANY OVERVIEW
HDFC
Bank (HDFC or "the company") is a new generation private sector bank
in India which specializes in the provision of banking and other financial
services to upper and middle income individuals and corporations. The company's
services include retail, commercial and electronic banking products. It also
provides treasury services and capital markets infrastructure. The company primarily
operates in India. HDFC Bank is headquartered in Mumbai, India and employed
about 69,065 people as on March 31, 2013.
The
company recorded revenues of INR232,985.4 million ($4,291.6 million) during the
financial year ended March 2013 (FY2013), an increase of 22.1% over FY2012.The
operating profit of the company was INR100,040.1 million ($1,842.7 million) in
FY2013, an increase of 30.5% over FY2012. The net profit was INR68,725.2
million ($1,265.9 million) in FY2013, an increase of 30.9% over FY2012.
SWOT ANALYSIS
HDFC
Bank (HDFC or “the company”) is a new generation private sector bank in India
which specializes in the provision of banking and other financial services to
upper and middle income individuals and corporations. The company's services
include retail, commercial and electronic banking products. It also provides
treasury services and capital markets infrastructure. The bank's franchise
strength and market recognition in India and abroad enables the bank to get
better and easy access to interbank markets in India and abroad as well.
However, deregulation of savings accounts interest rates could affect the
company’s deposit growth and margins.
Strengths
Franchise
strength and market recognition in India and abroad
HDFC
Bank is a new generation private sector bank which specializes in the provision
of banking and other financial services. It is the second largest private
sector bank in India. The company is a part of the HDFC group of companies.
Housing Development Finance Corporation, the flagship company of the group and
its subsidiaries, owned 16.5% of its outstanding equity shares as of March 31,
2013 .
The bank has
grown rapidly since commencing operations in January 1995. In the seven years
ended March 31,
2013, it expanded its operations from 467 branches and 1,147 ATMs in 211 cities
to 3,062 branches and 10,743 ATMs in 1,845 cities. During the same seven years,
its customer base grew from 6.8 million customers to over 28.7 million
customers. The assets have grown from INR535.5 billion ($10.3 billion) in
FY2005 to INR4,003.3 billion ($65.5 billion) in FY2013. The bank received Asian
Banker Excellence Awards 2012 - Best retail bank in India, Best Bancassurance business
in India and Best Risk Management in India. Franchise strength and market
recognition in India and abroad enables the bank to get better and easy access
to interbank markets in India and abroad as well.
Diversified
revenue streams check financial performance volatility
The
bank's revenue streams have been diversifying and the dependence on wholesale
banking has been declining over the last few years. In FY2013, the company's
dependence on wholesale banking declined to 26.2%, compared to 32.6% in FY2009
or 34% in FY2008. At the same time, contribution from retail banking increased
to 51.9% in FY2013, compared to 45.7% in FY2009 or 42% in FY2008. Diversified
revenue streams have helped the bank check volatility in financial performance.
Increasing
capital strength provides higher risk tolerance
The
company's capital position is improving year on year basis. The tier I capital
ratio, which is the measure of the core capital of a bank has improved from
10.30% in FY2008 to 11.08% in FY 2013, when calculated in line with the Basel
II framework. Consequently, total capital adequacy ratio has improved from
13.6% to 16.8% for the same period, well above the minimum regulatory
requirement of 9.0%. The increasing capital strength provides higher risk
tolerance and opportunities for further expansion.
Weaknesses
Relative
lack of scale hampering competitive strengths
HDFC
Bank lacks scale to compete with certain domestic peers. Although, it has
nation-wide presence in India, however, the number of its branches is far less
than that of State Bank of India and ICICI Bank Limited. The bank's lack of
scale is also evident from market capitalization, revenue, profits and number
of branches. For instance, in FY2013, State Bank of India recorded revenues of
INR603 ,662 million (approximately $33,990.3 million), net income of INR
141,050 million ($3,066.8 million) and has over 20325 branches. Relative lack
of scale is hampering the bank's competitive strengths against its domestic
peers.
Declining
bancassurance revenues
HDFC
Bank's bancassurance revenues have declined steeply in the last few quarters.
Bancassurance, also known as, Bank Insurance Model, is a term to describe the
partnership or relationship between a bank and an insurance company whereby the
insurance company uses the sales & distribution channel of the bank to sell
its insurance products. The Bancassurance channel which has been one of the key
contributors to the insurance business is now under the scanner of the
Insurance Regulatory and Development Authority (IRDA). In 2011, the cut in
agent's commissions led to a sharp decline in the number of agents in the life
insurance companies leading to decline in sales numbers. HDFC Bank was also
impacted. HDFC Bank's bancassurance revenues could continue to decline in the years
to come.
Opportunities
Linking government subsidies to Unique
Identification Authority of India or Aadhar project likely to expand customer
base
Government
of India announced its decision to link government subsidies to Unique
Identification Authority of India or Aadhar project. For instance, in 2012, the
Indian government announced to reimburse subsidy on domestic gas cylinders to
households based on Aadhar cards through nationalized banks. Financial services
companies including banks and insurance stand to gain an estimated combined new
customer base of over 125 million. Several banks including Allahabad Bank,
Indian Bank, Indian Overseas Bank, have signed memorandum of understanding
(MoU) with the Unique Identification Authority of India (UIDAI) to conduct
proof of concept (POC) studies, pilot test the working of the technology and
process of enrolment into the UID data base and subsequently full roll out of
the UID project. These banks will directly credit INR100 to BPL customers added
through Aadhar project. Moreover, Aadhar project could help banks roll-out
their business correspondent (BC) kiosks successfully. Aadhar project could
also enhance the success of non-traditional service channels, such as mobile
banking, point of sale, ATMs etc, engaged by financial institutions.
Government
initiatives and support for Indian banking industry
The Government
of India (GoI) has announced plans to strengthen Indian banking sector. In its
Budget
for 2012-13, the GoI has earmarked a capital of INR158,880 million ($ 3.11
billion) to be infused in public sector banks, regional rural banks and other
financial institutions, including Nabard (National Bank for Agriculture and
Rural Development). Apart from this, the GoI is also planning to set up a
financial holding company that will raise funds for public sector banks. Taking
a step closer towards mobile banking, the RBI has allowed banks to facilitate
cross-border remittance between bank accounts through mobiles, subject to
clearance from the local regulator. Banks will stand responsible for ensuring
quality of funds, adherence to know-your-customer (KYC) and other standards during
the process. Furthermore, the RBI has liberalized regulations pertaining to
FCAs to provide operational flexibility to Indian entities making overseas
direct investments. After satisfying stipulated requirements and conditions,
Indian entities can open, hold and maintain FCAs abroad that would simplify the
process of making overseas direct investments. Government initiatives and
support for Indian banking industry could prove beneficial.
Growing Indian financial services sector
Since
liberalization in 1991, Indian financial services sector has maintained double
digit growth. The financial sector is projected to grow around 20% during
2009-14. Several factors could contribute to this growth. For instance,
technological advancements like mobile, SMS, and internet banking will help
banking sector to maintain the high growth rate in the coming decade. Another
initiative, Unique Identity (UID) project, renamed Aadhaar, which is intended
to provide 16 digit identity number to more than a billion Indians, is likely
to spur the growth of a business ecosystem around it. The Aadhaar number is
likely to be rolled out to around 600 million citizens in the next 4-5 years
ending 2014. Financial services companies including banks and insurance stand
to gain an estimated combined new customer base of over 125 million. Aadhaar
project could also enhance the success of non-traditional service channels,
such as mobile banking, point of sale, ATMs etc, engaged by financial
institutions. HDFC is the second largest private sector bank in India and the
growing Indian banking sector could help the bank to exploit the opportunities.
Threats
Weakening economic prospects in India
Indian
economic prospects seem to be weakening in the months to come. According
International Monetary Fund (IMF), India recorded 4% growth in 2012, declining
from 7% growth in 2011. IMF projects Indian economy to grow at 5.7% in 2103.
Indian economy recorded a growth of 4.7% in the first quarter of 2013-14. The
delayed monsoon, coupled with weaknesses in the agricultural supply chains and
rising costs of fertilizers and irrigation, are likely to result in subdued
agricultural growth and sustain pressure on food prices. Industrial output is
expected to remain subdued in the 2013-14, with only a modest improvement next
year. Weakening economic prospects in India could affect credit off-take both
by retail and corporate customers.
Intense competition likely to erode
margins
Competition
in Indian banking sector is becoming intense as new players with greater
financial muscle are entering. For instance, National Australia Bank has
recently opened its branch in Mumbai, India. The bank would not only support
existing institutional corporate and business banking customers operating or
trading with India but would also act as a mediator for Indian clients who want
to expand or invest in Australia or New Zealand. Meanwhile, Development Bank of
Singapore infused INR5,000 million ($92.1 million) for operations of its
wholly-owned subsidiary DBS Bank India. Similarly, Deutsche Bank infused
INR4,550 million ($83.8 million) in India to enhance its business. The entity is
committed to establish a universal banking franchise in India and looking
forward to become a WoS to achieve the same.
Deregulation of savings accounts
interest rates could affect deposit growth and margins
Regulation
of savings deposit interest rate in India has imparted rigidity as savings
deposit interest rate has not been changed since March 1, 2003 although other
interest rates have moved in either direction. However, towards the end of
October 2011, RBI, deregulated savings deposit interest rates. This means that
banks are now free to set the rate they want instead of the 4% that was fixed for
all banks earlier. The main condition that RBI has put forth is that interest
rates for all account holders with less than INR0.1 million will remain
uniform. It has been observed that 49 banks, which have below average CASA
deposits, constitute about 50% of total asset of the banking sector. Therefore,
given the attractiveness of savings deposits, deregulation may lead to unhealthy
competition amongst banks. This could lead to higher cost of CASA deposits.
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