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HDFC Bank: Quality control imperative - Views on News from Equitymaster
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HDFC Bank: Quality control imperative
Jan 14, 2009

Performance summary
  • Interest income grows by 69% YoY in 9mFY09 on the back of 44% growth in advances due to the integration with CBoP.
  • NIMs remain stable despite a fall in the proportion of CASA; CASA level lower at 40%.
  • Operating expenses grow by 56% YoY due to the merger; cost to income ratio at 53%.
  • Fee income grows by 40% YoY.
  • Net NPA to advances move up from 0.2% in FY08 to 0.6% in 9mFY09. Additional slippage rate of 14% in 3QFY09.
  • Capital adequacy ratio (CAR) comfortable at 13.7%, raised Tier II capital in 3QFY09.


Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest Income 27,269 44,685 63.9% 71,588 120,814 68.8%
Interest Expense 12,893 24,892 93.1% 35,730 65,122 82.3%
Net Interest Income 14,376 19,793 37.7% 35,858 55,692 55.3%
Net interest margin (%)       4.3% 4.3%  
Other Income 6,789 9,394 38.4% 17,338 21,769 25.6%
Other Expense 10,501 14,605 39.1% 26,428 41,366 56.5%
Provisions and contingencies 4,231 5,318 25.7% 10,196 12,222 19.9%
Profit before tax 6,433 9,264 44.0% 16,572 23,873 44.1%
Tax 2,139 3,046 42.4% 5,380 7,721 43.5%
Profit after tax/ (loss) 4,294 6,218 44.8% 11,192 16,152 44.3%
Net profit margin (%) 15.7% 13.9%   15.6% 13.4%  
No. of shares (m)       354.1 425.1  
Book value per share* (Rs)         326.3  
P/BV* (x)         3.0  
* Book value as on 30th September 2008

What has driven performance in 3QFY09?
  • Although HDFC Bank’s results in the nine month period ended December 2008 are not strictly comparable with the corresponding period of FY08 (due to merger with the erstwhile Centurion Bank of Punjab, CBoP), the same do reflect some systemic risks that the bank has faced in the last few quarters. While the mix of retail and corporate assets has shown signs of tilting in favour of the latter, the same is also due to the fact that the bank has been amongst the last ones to pass on the rate cuts to customers in the past two quarters. Nevertheless, this has helped it keep its net interest margins (NIMs) stable and well within our estimates for FY09.

  • The proportion of low cost deposits (CASA) in HDFC Bank’s books has fallen to a 6-year low. While we understand that the same is primarily due the merger with CBoP, the bank needs to improve the same in order to maintain its edge over other private sector and PSU banks. The loss of savings accounts could also be attributed to the fact that customers showed preference for public sector banks over private sector ones due to the perceptive risk about the ownership (and therefore high risk of default) of the latter.

    Retail takes backseat…
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 694,510 1,000,789 44.1%
    Retail 283,270 40.8% 392,612 39.2% 38.6%
    Corporate 186,178 26.8% 242,031 24.2% 30.0%
    Deposits 993,567 1,448,620 45.8%
    CASA 505,429 50.9% 573,390 39.6% 13.4%
    Term deposits 488,137 49.1% 875,230 60.4% 79.3%
    Credit deposit ratio 69.9% 69.1%

  • HDFC Bank has been able to grow its fee income base by 40% YoY in 3QFY09. As a result, the proportion of fee to total income improved to 22% as against 20% in 3QFY08. However, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments, the absence of which would have otherwise aided the bank’s other income. Income from derivatives formed 7% of the bank’s other income in this quarter.

  • Due to the merger with CBoP, the quality of HDFC Bank’s asset book has been slightly tarnished. Having said that, the bank continued to witness additional slippages in this quarter, although its net NPA ratio has not deteriorated over that at the end of 1HFY09. We however wish to draw investors’ attention to the fact that banks like HDFC Bank that derive a premium for their sustenance of asset quality must lay larger emphasis on the same. The must be done not just by making adequate provisioning but also taking care of possible slippages. Else it may lose the edge over its peers.

  • With the integration of HDFC Bank branches and employees with that of CBoP, the cost to income ratio has increased from 50% in 3QFY08 to 53% in 3QFY09. Given the bank’s plan to continue to expand its franchise, we expect the ratio to be marginally higher in the medium term.

What to expect?
At the current price of Rs 976, the stock is valued at 1.9 times our estimated FY11 adjusted book value (after factoring in the merger with CBoP). The bank’s overall performance continues to remain largely in line with our estimates. While a higher CAR (capital adequacy) is a matter of comfort, we do envisage lower asset growth and pressure on margins in the medium term. More importantly the bank needs to work on its cost competitiveness and asset quality. We maintain our positive outlook on the bank from a long term perspective.

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