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HDFC: Retail loan growth remains strong - Views on News from Equitymaster

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HDFC: Retail loan growth remains strong
Jan 22, 2013

HDFC declared its results for the third quarter of the financial year 2012-13 (3QFY13) results. The institution has reported a 17.5% YoY growth in interest income while net profits have grown by 16% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 24% YoY in 9mFY13 on the back of 22% YoY growth in advances.
  • Net interest margin falls by 0.2% to 4.1% in 9mFY13 from 4.3% in 9mFY12.
  • Other income increases by 14% YoY in 9mFY13 on the back of higher gains booked on sale of investments.
  • Net profit grows by 18% YoY for 9mFY13 which was in line with the increase in net interest income. For 3QFY13, profits grew by 16% YoY on higher other expenses.
  • Capital adequacy and gross NPAs stand at 17.5% and 0.75% respectively at the end of 3QFY13.

Standalone numbers
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 43,793 51,457 17.5% 122,571 152,358 24.3%
Interest Expense 30,124 35,215 16.9% 82,179 104,511 27.2%
Net Interest Income 13,669 16,243 18.8% 40,392 47,847 18.5%
Net interest margin       4.3% 4.1%  
Other Income 932 1,047 12.4% 2,062 2,342 13.6%
Other Expense 1,265 1,780 40.7% 3,893 5,294 36.0%
Provisions and contingencies 54 59 9.5% 147 163 11.0%
Profit before tax 13,283 15,451 16.3% 38,415 44,731 16.4%
Tax 3,470 4,050 16.7% 10,450 11,800 12.9%
Effective tax rate 26.1% 26.2%   27.2% 26.4%  
Profit after tax/ (loss) 9,813 11,401 16.2% 27,965 32,931 17.8%
Net profit margin (%) 22.4% 22.2%   22.8% 21.6%  
No. of shares (m)         1541.0  
Book value per share (Rs)*         166.0  
P/BV (x)         4.9  
* (Standalone book value as on 31st December 2012)

What has driven the performance in 9mFY13?
  • HDFC's loan book grew at a strong pace (up 22% YoY) in 9mFY13. Inclusive of loans sold (securitized), the growth clocked was 26% YoY. The retail loan book (individual loans) grew by 25% YoY in 9mFY13, and inclusive of loans sold it clocked in a 31% YoY growth.

  • The company saw a 24% increase in interest income and an 18.5% growth in net interest income during 9mFY13. The quarterly performance saw a similar robustness. The company was able to maintain its margins even in a difficult environment with its net interest margin (NIM) fell to 4.1% compared to 4.3% in 9mFY13.

    Loan book break up...
    (Rs m) 9mFY12 9mFY13 Change
    Loans      
    Individuals 842,999 1,052,372 24.8%
    % of total 63.8% 65.4%  
    Corporate Bodies 461,609 539,349 16.8%
    % of total 34.9% 33.5%  
    Others 17,472 17,692 1.3%
    % of total 1.3% 1.1%  
    Total loans 1,322,079 1,609,413 21.7%

  • HDFC's other income increased by 14% in 9mFY13 on higher profit on sale of investments.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.75% of the loan portfolio in 9mFY13 (0.82% previously). The balance in the provision for contingencies account is around 1.2% of the overall loan portfolio.

  • HDFC's capital adequacy ratio (CAR) stood at 17.5%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution.

  • At the end of December 2012, the unrealised gains on HDFC's listed investments amounted to Rs 221.4 per share as against Rs 124.2 per share at the end of December 2011 on account of the robust performance of equity markets over the past twelve months. In 2012, the India's benchmark index the BSE-Sensex was up 26%.

  • Net profits increased by 18% in 9mFY13 on higher NII growth and other income. In 3QFY13, net profits grew by 16%. This was mainly due to an increase in other expenses.

What to expect?
At the current price of Rs 814.5, the stock is trading at 3.8 times our estimated FY15 adjusted book value. In the current environment and on a higher base of individual home loans, growth for HDFC is unlikely to come in at a sharp clip going forward. HDFC was able to maintain its margins at 4.1% in the first 9 months, but can still see some pressure on its net interest income (NII) on higher costs of funds. However, with the RBI expected to cut rates soon, HDFC should soon be able to capitalize on the same. The stock breached our target price as per our latest quarterly performance review, post which it has corrected slightly. Given the expensive valuations and limited upside from current levels we recommend a sell on the stock.

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