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HDFC Bank: Every effort to sustain margins
Jan 19, 2012

HDFC Bank declared the results for the third quarter and first nine months of financial year 2011-12 (9mFY12). The bank has reported 16% YoY growth in net interest income and 32% YoY growth in net profits for the nine month period. Here is our analysis of the results.

Performance summary
  • Interest income grows 38% YoY in 9mFY12 on the back of 22% YoY growth in advances.
  • NIMs marginally affected by higher cost of deposits (CASA at 48% of total deposits).
  • Other income grows at a tepid rate of 22% YoY due to losses in the investment portfolio.
  • Net NPA to advances remain stable at 0.2% of advances in 9mFY12. Provision coverage ratio at 80.3% at the end of December 2011 (81.3% in 1HFY11).
  • Capital adequacy ratio (CAR) comfortable at 16.3%, Tier I CAR at 11.2% at the end of 9mFY12.

Financial performance snapshot (IFRS)
Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 52,299 72,076 37.8% 144,596 198,983 37.6%
Interest expense 24,533 40,867 66.6% 67,560 109,898 62.7%
Net Interest Income 27,766 31,209 12.4% 77,036 89,085 15.6%
Net interest margin (%)       4.2% 4.1%  
Other Income 11,278 14,200 25.9% 30,794 37,517 21.8%
Other Expense 18,318 21,580 17.8% 51,546 61,230 18.8%
Provisions and contingencies 4,659 3,292 -29.3% 14,754 11,390 -22.8%
Profit before tax 20,726 23,829 15.0% 56,284 65,372 16.1%
Tax 5,189 6,191 19.3% 13,414 16,842 25.6%
Profit after tax/ (loss) 10,878 14,346 31.9% 28,116 37,140 32.1%
Net profit margin (%) 20.8% 19.9%   19.4% 18.7%  
No. of shares (m)**         2,338.3  
Book value per share (Rs)         126.1  
P/BV (x)*         3.8  
*Book value as on 30th December 2011

What has driven performance in 9mFY12?
  • Although its growth in loan book marginally exceeded the overall growth rate projected for the sector by RBI for the September to December 2011 quarter, HDFC Bank made every effort to sustain margins. At 22% YoY, HDFC Bank’s loan growth for the first nine months of FY12 is representative of the relatively muted credit offtake in the sector. However, with its customer base nearing 22 m, HDFC Bank managed to once again outpace the industry average. Backed by more than 34% YoY growth in loans to retail customers, the bank has managed the balance sheet expansion. However, in a bid to ensure that its re-prices its loans effectively, the bank seems to have gone slow on incremental lending to corporate during the third quarter.

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former) marginally affected net interest margins (NIMs). However, at 4.1%, the NIMs are well within the bank’s target range of 3.9% to 4.2%. If savings deposit costs move higher, a marginal correction in NIMs cannot be ruled out in the medium term.

    Retail loan growth tops sector average
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 1,591,836   1,943,027   22.1%
    Agriculture 84,367 5.3% 102,980 5.3% 22.1%
    Retail 692,040 43.5% 928,780 51.3% 34.2%
    SMEs 213,306 13.4% 217,619 11.2% 2.0%
    Large corporates 565,102 35.5% 625,655 32.2% 10.7%
    Deposits 1,953,226   2,306,760   18.1%
    CASA 989,012 50.6% 1,091,850 47.3% 10.4%
    Term deposits 964,214 49.4% 1,214,910 52.7% 26.0%
    Credit deposit ratio 81.5%   84.2%    

  • HDFC Bank has been able to grow its fee income base by 20% YoY in 9mFY12. However, the proportion of fee to total income dropped to 23% as against 25% in 9mFY11. Further, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments due to higher bond yields, the absence of which would have otherwise aided the bank’s other income.

  • HDFC Bank has managed to contain the slippages over the past four quarters. The bank’s gross NPAs dropped from 1.1% of advances in 9mFY11 to 1.0% in 9mFY12. Net NPAs were 0.2% of advances while the NPA coverage ratio was 80.3% in 9mFY12. Total restructured loans were at 0.4% of gross advances of which 0.3% was restructured loans classified as NPAs at the end of 1HFY12. 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 and credit cards over the past 9 months. However, given the low proportion of these relatively high risk assets in the bank’s loan book, we do not think that the asset quality is at stake. It has also been cautious in lending against securities over the past 12 months. The fastest growth was witnessed in CV loans while home and auto loans suffered due to the impact of higher loan rates.
    Breakup of retail loans
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Home loans 109,330 15.8% 123,440 13.3% 12.9%
    Auto loans 221,670 32.0% 257,620 27.7% 16.2%
    CV loans 87,480 12.6% 126,040 13.6% 44.1%
    Loan against securities 11,610 1.7% 10,340 1.1% -10.9%
    Personal loans 98,330 14.2% 131,120 14.1% 33.3%
    Credit cards 45,540 6.6% 64,590 7.0% 41.8%

  • HDFC Bank added 420 branches during the past 12 months and maintained its cost to income ratio at around 47% for 9mFY12.

What to expect?
At the current price of Rs 485, the stock is valued at 2.6 times our estimated FY14 adjusted book value. The bank’s growth performance continues to remain largely in line with our estimates. A comfortable CAR (capital adequacy) position offers sufficient headroom for growth without additional dilution. However, we do envisage muted asset growth and pressure on margins in the medium term.

We maintain our positive outlook on the bank from a long term perspective, and believe that there are reasonable upsides over the next 2 to 3 years. Please refer to the stock split adjusted target price in the latest recommendation report.

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