HDFC Bank v/s Axis Bank

HDFC Bank and Axis Bank both have shown consistency in their earnings for the past several years. HDFC Bank has grown at a CAGR of 38% from FY98-FY08. Axis Bank has grown at a CAGR of over 30% from FY99-FY08. So the question is which one should the investor bet on.
 
Market Cap (Rs):
HDFC Bank- 41,645crs
Axis Bank- 17,930crs
 
Lets compare both the banks on the basis of H1FY09 financial performance. Since the numbers are not comparable year-on year for HDFC Bank as they merged CBoP, its better to compare them on performance parameters rather than profit/income growth.
 
Return on Equity (Annualized) (%)
HDFC Bank- 16
Axis Bank-  17
 
Return on Assets (Annualized) (%)
HDFC Bank- 1.2
Axis Bank- 1.26
 
CASA Deposits (%)
HDFC Bank- 44
Axis Bank- 40.3
 
Net NPA (One of the parameters for evaluating Quality of Assets) (%)
HDFC Bank- 0.6
Axis Bank- 0.45
 
Fee Income to Total Income: (%)
HDFC Bank- 23
Axis Bank- 35
 
Capital Adequacy Ratio (CAR): (%)
HDFC Bank- 11.4 (Should not be an issue as HDFC will invest $900mn by Dec’09)
Axis Bank- 12.2 (Around Rs 1500crs will be raised through subordinated debt)
 
Cost to Income Ratio: (Parameter for evaluating productivity and efficiency)(%)
HDFC Bank- 55.45
Axis Bank- 45
 
Net Interest Margins (NIMs) (%):
HDFC Bank- 4.2
Axis Bank- 3.43
Cost of Funds (%):
HDFC Bank- 6.2
Axis Bank- 6.17
 
Branches:
HDFC Bank- 1412
Axis Bank- 729
Book Value (Rs):
HDFC Bank- 326.3
Axis Bank- 253.1
 
It can be observed from above, except for NIMs and CASA deposits, Axis Bank scores above HDFC Bank on most parameters. Still Axis trades at a historical P/BV of 2 whereas HDFC Bank trades at a P/ABV of 3. So is the price premium of HDFC Bank over Axis due to better NIMs and higher CASA deposits. I believe the premium valuations will narrow going forward. My bet is on Axis Bank! No wonder, Axis has outperformed HDFC Bank with a CAGR of 53% over 1998-2008 whereas HDFC returned 39% during the same period.
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5 responses to “HDFC Bank v/s Axis Bank

  1. Kumar Diwesh

    Detailed analysis I must say.
    However, management quality also plays a key role in valuations.
    No one who’s going to replace Nayak while Aditya Puri will still be there.
    Do you have any info on credit/deposit ratio as it would be an indicator of future growth.
    The lower the ratio, the better the prospects for growth.

  2. I believe a bank is not run by one man. If you look at ICICI Bank, would you say its KV Kamath who rules the bank. To me, Kamath, Chanda Kocchar, Vaidyanathan, Chatterjee are all equally responsible for the banks functioning. So I would not pay much attention who’s going to replace Nayak. One can sense management quality from performance ratios.

    Credit/Deposit ratio of Axis is 67% whereas HDFC has C/D ratio of 76%. Does higher C/D ratio means higher NIMs ??

  3. Kumar Diwesh

    Yes, you made a good point.
    A higher C/D ratio should mean Higher NIMs as you’re paying for the deposit but not lending it.
    If C/D is low you can also lend more without stretching your balance sheet or raising more capital.
    HDFC Bank’s branch network is highly underutilized and it’s getting money next year.
    That should enhance its performance.

  4. Low C/D ratio also means less NPA’s where Axis scores over HDFC. In short,its a case of balancing NIMs and NPA’s.

    I expect 50% growth in Net Profit for Axis in Q3.

  5. Kumar Diwesh

    I think NPAs will more be a function of which segment you lend to rather than the C/D ratio.
    A higher C/D ratio means relaxed lending norms and this might increase NPAs.

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