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HDFC Bank: Balancing act! - Views on News from Equitymaster

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HDFC Bank: Balancing act!

Jan 21, 2008

Performance summary
  • Interest income grows by 60% YoY on the back of 49% YoY growth in advances

  • A healthy mix of CASA (low cost deposits) retained despite 52% YoY growth in deposits.

  • Net interest margins improve to 4.3% from 4.0% in FY07.

  • Fee income growth at 39% YoY

  • Capital Adequacy Ratio comfortable at 13.8%.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest Income 16,989 27,269 60.5% 47,213 71,588 51.6%
Interest Expense 8,307 12,893 55.2% 23,074 35,734 54.9%
Net Interest Income 8,682 14,376 65.6% 24,139 35,854 48.5%
Net interest margin (%)       4.0% 4.3%  
Other Income 3,733 6,789 81.9% 11,218 17,338 54.6%
Other Expense 6,050 10,501 73.6% 17,368 26,428 52.2%
Provisions and contingencies 2,060 4,231 105.4% 6,581 10,196 54.9%
Profit before tax 4,305 6,433 49.4% 11,408 16,568 45.2%
Tax 1,349 2,139 58.6% 3,429 5,380 56.9%
Profit after tax/ (loss) 2,956 4,294 45.3% 7,979 11,188 40.2%
Net profit margin (%) 17.4% 15.7%   16.9% 15.6%  
No. of shares (m) 315.1 354.0   315.1 354.0  
Book value per share* (Rs)         300.1  
P/BV* (x)         5.0  
* Book value as on 30th September 2007

What has driven performance in 3QFY08?
Smooth sailing growth: Sustaining a judicious mix of retail and corporate assets (50:50), HDFC Bank’s balance sheet showed no signs of a slowdown in incremental lending at the end of 9mFY08. The bank managed to clock growth rates in both advances and deposits that are nearly double the sector’s average growth rate so far. What is infact more enthusing is that the bank’s net interest margins improved by 0.3% in the nine month period as it continues to enjoy the distinction of having the highest proportion of low cost deposits in its books (50.9% in 9mFY08). The increase in net interest margin of the bank have also been attributed to higher transactional floats, an increase in lending rates and a move to reduce bulk fixed deposits due to the prevailing high interest rates and availability of other sources of funds. We have estimated the full year FY08 NIMs at 4.5% for the bank.

Balanced show…
(Rs m) 9mFY07 % of total 9mFY08 % of total Change
Advances 480,074   713,870   48.7%
Retail 258,962 53.9% 375,496 52.6% 45.0%
Corporate 221,111 46.1% 338,374 47.4% 53.0%
Deposits 667,475   993,870   48.9%
CASA 333,737 50.0% 505,880 50.9% 51.6%
Term deposits 333,737 50.0% 487,990 49.1% 46.2%
Credit deposit ratio 71.9%   71.8%    

Fees show hope: HDFC Bank has been able to grow its fee income base by 39% YoY in 3QFY08. However, the proportion of fee to total income has dropped to 22% against 27% in 3QFY07. Also, the loss on the treasury side has been compensated with higher forex gains which otherwise would have dented the bank’s other income. The bank’s other income has been impacted by the higher amortisation of available-for-sale (AFS) securities in its investment book.

Quality differentiation: As against most of its peers, the quality of HDFC Bank’s asset book has remained untarnished. The net NPA to advance ratio for the bank has remained stable (0.4% at the end of 3QFY08). We also draw comfort from the fact that the bank has made adequate provisioning for possible delinquencies in the event of unexpected hardening in interest rates.

Expensive expansion: The bank added 171 branches and 435 ATMs in the last 12 months taking the network to 754 branches and 1,471 ATMs in 327 cities. Resultantly, the cost to income ratio has increased to 50% from 49% in 3QFY07. Given the bank’s plan to continue to expand its franchise, we expect the ratio to stabilise at these levels.

What to expect?
At the current price of Rs 1,500, the stock is reasonably valued at 3.6 times our estimated FY10 adjusted book value (after factoring in the capital dilution). The bank’s overall performance continues to remain largely in line with our estimates including our stance with regards to the sustenance of NIMs. Having said that, the higher operating costs, increased provisioning requirements for treasury as well as relatively lower contribution of fee income are our lingering concerns with regard to the bank. We believe that the valuations leave little room for a substantial upside and that any investment in the stock needs to be viewed with caution.

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Mar 26, 2019 (Close)


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