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HDFC Bank: Capitalizing on retail edge
Jan 18, 2013

HDFC Bank declared the results for the third quarter and first nine months of financial year 2012-13 (9mFY13).The bank has reported a 24% YoY and 30% YoY growth in net interest income and net profits respectively in 9mFY13. Here is our analysis of the results.

Performance summary
  • Net interest income grows 24% YoY in 9mFY13 on the back of 24% YoY growth in advances.
  • NIMs remain stable at 4.1% at the end of 9mFY13 (CASA at 46% of total deposits).
  • Other income grows by 25% YoY, with fees and commissions growing in excess of 24% YoY.
  • Cost to income ratio comes in lower at 45.4% in 9mFY13.
  • Net NPA to advances remain stable at 0.2% of advances in 9mFY13. Provision coverage ratio at 80% at the end of December 2012.
  • Capital adequacy ratio (CAR) comfortable at 17%, Tier I CAR at 10.9% at the end of 1HFY13.

Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 72,026 87,076 20.9% 198,983 252,396 26.8%
Interest expense 40,866 49,087 20.1% 109,898 142,251 29.4%
Net Interest Income 31,160 37,989 21.9% 89,085 110,145 23.6%
Net interest margin (%)       4.1% 4.1%  
Other Income 14,200 17,988 26.7% 37,517 46,735 24.6%
Other Expense 21,579 25,741 19.3% 61,229 75,122 22.7%
Provisions and contingencies 3,292 3,072 -6.7% 11,389 10,874 -4.5%
Profit before tax 23,781 30,236 27.1% 65,373 81,758 25.1%
Tax 6,191 8,573 38.5% 16,842 22,520 33.7%
Profit after tax/ (loss) 14,298 18,591 30.0% 37,142 48,364 30.2%
Net profit margin (%) 19.9% 21.4%   18.7% 19.2%  
No. of shares (m)*         2,368.0  
Book value per share (Rs)         149.6  
P/BV (x)*         4.4  
*Book value as on 31st December 2012

What has driven performance in 9mFY13?
  • Although its balance sheet growth was limited to 14% YoY during the third quarter of FY13, HDFC Bank managed to outdo most of its private sector peers in loan growth. At a time when most players in the banking sector are complaining of lower credit demand, HDFC Bank managed to sustain 24% growth in loan book in the first nine months of this fiscal. This was backed by demand for credit cards, gold loans and personal loans. In the retail loan segment, growth in CV loans and home loans have notably subsided, Home, auto and CV loans comprised 50% of HDFC Bank's retail loan book at the end of December 2012.

  • While the deposit base grew by 22% YoY, CASA proportion remained in excess of 45%, thus offering the cost liquidity edge to the bank.

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former) did not dampen the bank's net interest margins (NIMs) in the third quarter. In fact, at 4.1%, the NIMs are well within the bank's target range of 3.9% to 4.2%. If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term.

    Credit deposit ratio improves...
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 1,943,027   2,414,932   24.3%
    Agriculture 102,980 5.3% 127,991 5.3% 24.3%
    Retail 928,780 47.8% 1,279,914 53.0% 37.8%
    SMEs 260,366 13.4% 270,472 11.2% 3.9%
    Large corporates 650,901 33.5% 736,554 30.5% 13.2%
    Deposits 2,325,082   2,841,185   22.2%
    CASA 1,181,142 50.8% 1,289,898 45.4% 9.2%
    Term deposits 1,143,940 49.2% 1,551,287 54.6% 35.6%
    Credit deposit ratio 83.6%   85.0%    

  • HDFC Bank has been able to grow its fee income base by 24% YoY in 9mFY13. Also, the proportion of fee to total income remained stable at 23%. Further, the bank had a profit on revaluation and sale of investments in this quarter as against losses in the corresponding nine months of FY12.

  • 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 9mFY13. Net NPAs were 0.2% of advances while the NPA coverage ratio was 80% in 9mFY13. These included floating provisions of Rs 7 bn. Total restructured loans were at 0.3% of gross advances and were already classified as NPAs at the end of 9mFY13. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has been more aggressive in offering gold loans, personal loans and credit cards over the past 12 months. It has also been cautious in lending against securities over the past 12 months. The fastest growth was witnessed in gold loans while home and auto loans suffered due to the impact of higher loan rates.

    Breakup of retail loans
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Home loans 131,280 14.1% 158,960 12.4% 21.1%
    Auto loans 257,620 27.7% 300,410 23.5% 16.6%
    CV loans 126,040 13.6% 163,710 12.8% 29.9%
    Loan against securities 10,340 1.1% 10,630 0.8% 2.8%
    Personal loans 131,120 14.1% 168,090 13.1% 28.2%
    Credit cards 64,590 7.0% 100,110 7.8% 55.0%
    Gold loans 25,850 2.8% 47,030 3.7% 81.9%
    Other retail advances 181,940 19.6% 330,974 25.9% 81.9%

What to expect?
At the current price of Rs 659, the stock is richly valued at 3.6 times our estimated FY15 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. Having said that, with an employee base of around 67,000, HDFC Bank's cost efficiency will have to be under close watch. The current valuations of the bank warrant caution. We recommend subscribers not to buy any more of the stock at the current levels.

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