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HDFC Bank: Focus firmly on margins

Jan 17, 2014

HDFC Bank declared the results for the third quarter and nine months ended December 2013 (9mFY14). The bank has reported 18% YoY and 27% YoY growth in net interest income and net profits respectively in 9mFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows 18% YoY in 9mFY14 on the back of 16% YoY growth in advances.
  • NIMs remain stable at 4.2% at the end of 9mFY14, albeit slightly lower than 4.3% in the corresponding quarter of FY13.
  • Other income grows by 17% YoY, with fees and commissions growing at 11% YoY.
  • Cost to income ratio drops from 48.9% in 9mFY13 to 45.6% in 9mFY14.
  • Net NPA to advances move up from at 0.2% of advances in 9mFY13 to 0.3% in 9mFY14. Restructured loans were also 0.2% of loan book at the end of December 2013.
  • Capital adequacy ratio (CAR) comfortable at 14.7%, Tier I CAR at 9.9% at the end of 9mFY14.

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 88,904 105,906 19.1% 257,409 303,469 17.9%
Interest expense 49,087 59,559 21.3% 142,251  168,198 18.2%
Net Interest Income 39,817 46,347 16.4% 115,158  135,271 17.5%
Net interest margin (%)       4.3% 4.2%  
Other Income 19,277 21,483 11.4% 50,489 59,182 17.2%
Other Expense 27,880 28,950 3.8% 80,999 88,674 9.5%
Provisions and contingencies 4,049 3,888 -4.0% 13,765 13,019 -5.4%
Profit before tax 31,214 38,880 24.6% 84,648 105,779 25.0%
Tax 8,573 11,734 36.9% 22,520 31,242 38.7%
Profit after tax/ (loss) 18,592 23,258 25.1% 48,363 61,518 27.2%
Net profit margin (%) 20.9% 22.0%   18.8% 20.3%  
No. of shares (m)*         2,386.1  
Book value per share (Rs)         177.6  
P/BV (x)*         3.8  
*Book value as on 31st December 2013

What has driven performance in 9mFY14?
  • HDFC Bank's performance during the first nine months of FY14 clearly shows that the bank's focus has been on profits. Be it growth in high yield assets or term deposits or curtailment of operating costs, the bank has managed to put in efforts to sustain lending and operating margins.

    HDFC Bank's above average loan growth, of 22.9% YoY did not reflect the underlying subdued sentiment in the credit market. Investors must note that most of the loan growth has come in on the back of growth in high yield assets in the retail segment. The bank also has enough capital headroom to grow its loan book although the management believes that growth may continue to remain moderated in the near term. Deposit growth at 22.9% YoY, is also above sector average. This was fuelled by demand for term deposits. CASA (low cost deposits) as a share of total deposits fell from 47% in 9mFY13 to 44% in 9mFY14.

    Good balancing act
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Advances 2,414,500   2,967,420   22.9%
    Retail 1,299,580 53.8% 1,476,250 49.7% 13.6%
    Corporate 1,114,920 46.2% 1,491,170 50.3% 33.7%
    Deposits 2,841,456   3,492,150   22.9%
    CASA 1,346,850 47.4% 1,526,070 43.7% 13.3%
    Term deposits 1,494,606 52.6% 1,966,080 56.3% 31.5%
    Credit deposit ratio 85.0%   85.0%    

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former), however, did not dampen the bank's net interest margins (NIMs) substantially. In fact, at 4.2%, the NIMs are within the bank's target range of 4.0% to 4.4%. If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term. Nevertheless we have been conservative in our assumptions.

  • HDFC Bank has been able to grow its fee income base by 11% YoY in 9mFY14. Also, the proportion of fee to total income remained stable at 23%. Further, the bank booked a bigger loss on revaluation and sale of investments in 9mFY14 as against the losses in 9mFY13. Given the volatility in bond markets, we would prefer to be conservative about treasury gains in FY14.

  • HDFC Bank has managed to contain the slippages over the past five quarters. The bank's gross NPAs were at 1.0% of advances in 9mFY14. Net NPAs, however moved up marginally to 0.3% of advances while the NPA coverage ratio was 80% in 9mFY14. Total restructured loans were at 0.2% of gross advances and were already classified as NPAs at the end of 9mFY14. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has been more aggressive in offering personal loans, auto loans and credit cards over the past 12 months. The substantial fall witnessed in gold loans seems to have been affected by regulatory restrictions.

    Breakup of retail loans
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Home loans 158,960 12.2% 161,260 10.9% 1.4%
    Auto loans 300,410 23.1% 335,940 22.8% 11.8%
    CV loans 163,710 12.6% 167,450 11.3% 2.3%
    Loan against securities 10,630 0.8% 10,190 0.7% -4.1%
    Personal loans 168,090 12.9% 200,830 13.6% 19.5%
    Credit cards 100,110 7.7% 117,130 7.9% 17.0%
    Gold loans 47,030 3.6% 41,110 2.8% -12.6%
    Other retail advances 350,640 27.0% 442,340 30.0% 26.2%
What to expect?
At the current price of Rs 673, the stock is valued at 2.8 times our estimated FY16 adjusted book value. The bank's management has clearly cited that the rate of loan growth seen in the past few quarters is not sustainable. However, they do not see significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. That HDFC Bank is keeping a close watch on its cost to income ratio is also encouraging. At the current valuations we recommend investors to hold on to the stock.

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