INTRODUCTION:

In a prime spot: HDFC Bank is one of the top mortgage lenders in India, and one of the country's fastest-growing banks. As of the end of the fiscal year ended March 31, 2006, the company had 535 branches in 228 cities nationwide, as well as 1,323 ATMs, all linked online in real time. HDFC has three divisions -- Retail Banking, Wholesale Banking, and Treasury -- offering everything from mortgages to credit cards to derivatives, and even gold trading. It also offers third-party products such as life insurance from sister company HDFC Standard Life, as well as mutual funds. HDFC has distinguished itself as an extremely efficient operator. For example, HDFC boasted an average cost of deposit of 3.3% for fiscal year 2006, down from 3.9% in 2004, and one of the lowest rates in the industry. Net interest margin stood at 4%, well ahead of the 2.4% posted by rival ICICI Bank, and up from 3.8% in 2004. Non-performing loans stood at 1.2%, lower than even many Western banks, and the company had a Tier 1 capital ratio (basically required reserves) of 8.3%, nearly twice the Reserve Bank of India's requirement of 4.5%. In simple terms, this operational efficiency, coupled with the company's growing customer base - now 9.6 million, up from 1.4 million in 2001 -- has enabled HDFC to post a compound annual earnings growth rate exceeding 30% since it went public back in July 2001. Call me a Fool, but I expect this stellar growth to continue, fuelled by the growing demand for credit from India's middle class. HDFC's card business has grown to nearly 3.9 million debit cards and 2.4 million credit cards (up 86% and 380%, respectively) and carries higher margins than the traditional loan business. Furthermore, while the company's mortgage sales have been growing strongly, there remains plenty of room for growth, since HDFC holds less than 5% of India's fragmented loan market. Shares of HDFC Bank aren't exactly inexpensive, trading at around 17 times forward earnings. I know that's pretty rich -- especially for an emerging-market bank in these uncertain times -- but it does represent a 43% discount to its projected long-term growth rate, which may likely prove conservative.

That said, don't invest your grandmother's nest egg here. I would strenuously suggest that only investors with a long-term viewpoint -- and a cast-iron tolerance of volatility -- take a long look at HDFC, and see if they'd like to make a deposit for the future.

HDFC BANKS GROWTH :

Some emerging-market stocks are more equal than others. These stocks, as a rule, are their countries' "blue-chip" companies, creating high barriers to entry by holding either a dominant share of their targeted markets -- think China Life's (NYSE: LFC ) 44% share of the life insurance market -- or a proprietary position in some other way (GrupoTelevisa's (NYSE: TV ) hold on Spanish-language programming comes to mind). That said, there are exceptions to every rule, and HDFC Bank (NYSE: HDB ) , one of India's top mortgage lenders, is one. While the company is considerably smaller than its larger privatebanking rival ICICI Bank (NYSE: IBN ) , HDFC's demonstrated operational excellence -- not to mention its focus on serving upper- and middle-class customers -- will allow it to reap substantial benefits from India's continued economic growth, and from the expansion of the country's relatively underdeveloped credit markets.

INDIA 'S ECONOMIC GROWTH: According to the International Monetary Fund's recent biannual report, World Economic Outlook, India's economy is projected to grow by roughly 7.3% in 2006 -- powered by strong performances in the manufacturing and services sectors -- and by a further 7% in 2007. As Asian Development Bank President Haruhiko Kuroda recently noted, "India's GDP will double in 10 years if there is a 7% growth rate". To risk stating the obvious, as India's economy powers ahead, the ranks of the country's 300 million middle-class consumers will continue to grow, as will demand for consumer goods. India's annual sales of passenger cars are expected to nearly double to 2 million by 2010; a current nationwide housing shortage of more than 22 million units, according to the National Real Estate Development Council, should help fuel housing growth.

How will companies fund the construction of those new power plants needed to satisfy demand, and how will that newly hired software engineer purchase a recently renovated apartment in the chic part of town?

INDIA 'S CREDIT MARKETS:

According to The Silk Road To Riches, by Mostrous, Gue, and Martchev, in 2004 India had total loans outstanding in the economy of just $221 billion. That's a mere 35% of its $649 billion in GDP. In contrast, economic rival China sported a GDP-to-loan ratio of close to 140% during that period, roughly in line with other regional economies such as Australia and Korea. In essence, China's economy was a little more than twice the size of India's, but had 10 times more loans outstanding. Aside the obvious prospects of lending to expanding corporations such as Tata Motors(NYSE: TTM ) , Indian banks have even greater opportunities for growth in the consumer market. Take card issuance and the home mortgage market, for example. According to Visa, the world's largest credit card company, fiscal 2005 was a banner year in India, with spending on its credit cards growing 66% to $3.8 billion. To put that number in perspective, American consumers spent more than $1.5 trillion on all credit cards during the same period. The scale of opportunity in the home mortgage market is similarly impressive. The National Real Estate Development council recently reported that mortgages only accounted for 2% of India's GDP, compared with 54% in the U.S. I know, I know, pretty dry stuff, but it amply illustrates that India's banks have pretty of room to grow. HDFC Bank is well-positioned to capitalize on these opportunities.

STATISTICS:
BANK REVENUES PROFITS ASSETS MARKET VALUES : (BILLIONS$) (BILLIONS$) (BILLIONS$) (BILLIONS$)

HDFC BANK ICICI BANK AXIS BANK

3.85 12.58 2.68

0.44 0.70 0.35

35.98 94.64 29.02

16.83 21.07 9.85

ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion (US$ 91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$ 1,155 million) for the year ended March 31, 2011. The Bank has a network of 2,533 branches and 6,301 ATMs in India, and has a presence in 19 countries, including India. CICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

Axis Bank Solid Growth with Stability:

Over the past several years Axis Bank has reflected a stupendous growth It is the third largest private sector bank in the country after ICICI bank and HDFC bank with a network of 594 branches with 2500 ATM centres. This network should cross 700 branches and 3000 ATM centres by Fy 08. Most of the new branches are likely to be set up in Tier II and Tier- III cities, which would help increase its presence in the unbanked areas.

C.M.P Market cap Adjusted Book Fy 08 Adjusted Book Fy 09 Price to B.V (Fy 09 EPS Fy 08 EPS FY09 PE Fy 08 PE Fy09 Net Fy09 CASA Fy 08 RoA (Fy 09) RoE (Fy 09) Interest

Rs 825 Rs 28,825 crores Value Rs 234

Value Rs 270

3.05 times Rs 30 Rs 45 27.5 times 18.33 times

Margin 3.2%

45% 1.2% 16.67%(affected by recent equity dilution)

Capital Adequacy ratio 17.59% (Sept 2007) CAGR Fy 08- to Fy 11 35%-40% CAGR

Consistent growth: Over the past 31 quarters the bank has grown its net profit in excess of 30% y-o-y in 29 out of those 31 quarters. Even in the two quarters that it did not grow its net profit it was more of a case of recently Axis Bank has raised capital and retired high cost debt thereby increasing its Net interest margin to 3.2% from 2.9% in the same quarter last year. The management expects to maintain NIM at around 3.2% in the quarters to come. In the last quarter CASA grew to 45.4%, an increase of 540 bps YoY. Axis compares very favourably with HDFC bank on all efficiency parameters. Though HDFC Bank is still ahead to Axis in terms of CASA, NIM, and RoA the recent trend in the results of Axis Bank indicates that within the next 12-18 months Axis should get closer to HDFC bank in terms of efficiency parameters.

Wider Business Model vs. HDFC bank: A few factors that favour such an efficiency hike in Axis bank to HDFC bank are:

While HDFC bank is retail focused Axis bank derives 24% of its business from retail clients and the bank intends to slowly increase its thrust into that segment.

Axis Bank recently applied to SEBI for setting up an AMC. Now HDFC Bank cannot set up an AMC because its parent HDFC already has one so there is a conflict of interest here. Tomorrow Axis could get into anything within the financial services space whether it is brokerage or Insurance but HDFC bank is handicapped by its parent (for conflict of interest) in terms of such an extension.

Robust fee Income growth The past few years (2002-07) has seen the company grow its fee income at a stupendous CAGR of 51 %. As the fee income grows at a higher rate to the interest income the proportion of fee income in the overall revenues is increasing at a brisk pace. This will create adequate trigger for a PE re-rating in the times to come. Declining NPAs, Increasing fee incomes, Robust CASA growth with expanding RoAs are the drivers that could catapult Axis Bank closer to the level of HDFC banks valuation.

Robust fee Income growth The past few years (2002-07) has seen the company grow its fee income at a stupendous CAGR of 51 %. As the fee income grows at a higher rate to the interest income the proportion of fee income in the overall revenues is increasing at a brisk pace. This will create adequate trigger for a PE re-rating in the times to come.

Axis Bank has already entered the insurance distribution business with MetLife as its partner. Other businesses like asset management, investment banking, Private Equity and wealth management will help the bank to maintain its growth in fee based Income growth.

The Bank sells Mutual Funds, Insurance, On-Line Broking, Portfolio Management Services (Non-discretionary) and Gold Coins to retail customers as part of its fee income initiative.

Excellent Asset Quality: The asset quality of the bank has shown a remarkable improvement Gross NPAs as a proportion of gross customer assets declined to 0.95% in Q2FY08 as compared to 1.22% in Q2FY07. Similarly, net NPAs as a proportion of net customer assets also declined to 0.55% in Q2FY08 as compared 0.74% in Q2FY07.

Wealth Management forays: The Bank also intends to enter the wealth management business in a big way and has set up a US $ 500 million offshore infrastructure fund, with a $50 million proprietary seed investment. The Bank will leverage its Corporate and SME loan book to create investment opportunities for the infrastructure fund. Direct Sales Channel: Presently Retail Assets constitute 24% of the Banks total advances, and the Bank continues to grow this field slowly .Generally Direct selling Agents (DSAs) form a large part of the distribution costs in selling retail loans. To overcome this cost centre Axis bank has set up a subsidiary (UBL Sales Ltd). This subsidiary would minimize cost and focus on better distribution of products and services as well as maintain the quality of clients so acquired.

ANALYSIS:
HDFC Bank India's Top Pick, Survey Reveals A survey by global accounting firm KPMG and Business Today reveals that HDFC Bank is India's No. 1 choice in large banks, Business Week reports. Although international investors are just now rushing into India's hot banking sector, IFC has long had a presence in India, investing in some of the country's most important institutions in banking and financial services. Since 1956, IFC has invested in 153 companies in India, providing nearly $2.8 billion in financing for its own account and $525 million for the accounts of participants in IFCs loan syndication program Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank as on 31st March, 2011 is capitalized to the extent of Rs. 410.54 crores with the public holding (other than promoters and GDRs) at 53.60%. The Bank's Registered Office is at Ahmadabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 1281 branches (including 169 Service Branches/CPCs as on 31st March, 2011). The Bank has a network of over 6270 ATMs (as on 31st March, 2011) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the India's largest private sector bank is finally here with another mega share offering. With a market-capitalisation of Rs 81,000 crores (Rs 810 billion), the highest among listed banks, ICICI Bank [ Get Quote ] is planning to raise Rs 8,750 crores (Rs 87.50 billion) with an

option to accept an additional Rs 1,300 crore (Rs 13 billion) in the domestic market. Simultaneously, the bank would also raise a similar amount in the international market through issue of American Depository Shares (ADS) taking the total money garnered to nearly a quarter of its current market value. The money collected will go as essential capital to fund its rapidly growing assets and adhere to the new banking regulations. E country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. Coming a week after a similar sized issue from real estate developer DLF got a lukewarm response from investors, investment banking sources suggest that several global investors abstained from the DLF offer considering a relatively more attractive deal from ICICI Bank. Whatever be the response to this issue, ICICI Bank appears to be a long term story with an aggressive growth strategy that would now focus on the country's poor on the one end and overseas operations on the other, apart from the traditional segments like urban retail and corporate banking. Over the next two years, the bank should be able to achieve an asset growth of 28 per cent and profits some 35 per cent, according to analysts' estimates. Despite the accelerated growth if anyone is complaining it is because ICICI Bank has been knocking at the capital market more often than its peers thus earnings a lower return on equity (ROE). Much to the dismay of analysts, ICICI Bank raised roughly Rs 10,000 crore (Rs 100 billion) over the past three years. Being in a business which requires money to make money, not all of the additional capital were to further its core business. A significant part went into feeding its babies, particularly the insurance subsidiary. According to analyst estimates, the additional capital committed towards its subsidiaries and the increased capital requirement (risk weights) for certain assets are roughly 50 per cent of the capital raised. But this is set to change. Since its insurance and asset management businesses have grown big enough to stand up on their own feet, the bank is bundling them into a separate subsidiary ICICI Financial Services. Housing ICICI Prudential Life Insurance company (where it holds 74 per cent stake), ICICI Lombard

General insurance (74 per cent) and ICICI Prudential Mutual Fund (51 per cent), this company would take care of their future funding needs. "The money raised by the bank would be used to fund the capital requirements of the bank and not of the subsidiaries", says Vishaka Mulye, group CFO of the bank. ICICI Bank intends to hold 94 per cent in the new subsidiary and has got definitive offers from various investors for a six per cent stake for Rs 2650 crore (Rs 26.50 billion). And here is the clincher: the deal spells an implied valuation of Rs 44,600 crore (Rs 446 billion) for the holding company, or more than half its current market value. The pertinent question is whether ICICI Financial Services' current valuations would be sustained when the company goes for listing about 12-24 months from now. Otherwise, investors may not realise the value made out to be built into the stock. FINANCIAL INDICATORS CAGR Rs crore FY05 FY06 FY07 CAGR

(FY05- FY08E FY09E (FY07FY07) FY09E) 567100 722900 30.2 255950 324600 28.7 311150 398300 31.5

Total business

191224 311246 426376 49.32

Advances 91405 146163 195866 46.38 Deposits 99819 165083 230510 51.96 Net interest income Other income Operating profit 3139 4181 5929 37.43 3208 4709 6636 43.83

9655

12000 34.5

8800

10775 34.8

2679

3888 2540

5874 3110

48.07 24.54

10000 12350 45 4645 5700 35.4

Net profit 2005