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HDFC Bank: Loan Growth Camouflages Bad Loan Risks - Views on News from Equitymaster

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HDFC Bank: Loan Growth Camouflages Bad Loan Risks
Jan 22, 2018

HDFC Bank declared the results for the third quarter of financial year ending March 2018 (3QFY18). The bank's net interest income (NII) and net profits grow's 24.1% YoY and 20.1% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows 24.1% YoY in 3QFY18 on the back of 27.5% YoY growth in advances.
  • NIMs continue to remain stable at 4.3%.
  • Cost to income ratio stood at 41.2% during the quarter. When compared on a year on year basis this ratio has improved considerably. It stood at 43.8% in 3QFY17. On the back of digitization measures, the company expects its cost to income ratio to further reduce to 40% in the next two-three years.
  • Gross non-performing asset (GNPA) as a percentage to advances deteriorated to 1.29% as compared to 1.05% a year ago. On an absolute basis, the GNPA rose by 57% from the preceding year. The bad loan problem seems to be worsening at the bank since last year. This deterioration in asset quality was mainly on account of slippages in advances in the agriculture sector. Healthy growth in the loan book is keeping the ratio of GNPA as a share of advances at a subdued level. If not for the high growth in their loan book, the Gross NPA ratio could have been on the higher side.
  • The NPA provisioning increased by 89% YoY during the quarter which impacted the growth in profitability.
  • Capital adequacy ratio (CAR) remained comfortable at 15.5% as against a regulatory requirement of 10.25%.

    Financial Snapshot
    Rs (m) 3QFY17 3QFY18 Change 9MFY17 9MFY18 Change
    Interest income 176,056 205,813 16.9% 511916 589203 15.1%
    Interest expense 92,965 102,669 10.4% 271074 294831 8.8%
    Net Interest Income 83,091 103,143 24.1% 240841 294371 22.2%
    Net interest margin (%)       4.10% 4.30%  
    Other Income 31,427 38,692 23.1% 88502 109917 24.2%
    Other Expense 48,425 57,322 18.4% 144814 166397 14.9%
    Provisions and contingencies 7,158 13,514 88.8% 23,315 43,864 88.1%
    Profit before tax 58,935 70,999 20.5% 161,215 194,028 20.4%
    Tax 20,281 24,573 21.2% 55,619 67,153 20.7%
    Profit after tax/ (loss) 38,653 46,426 20.1% 105,596 126,875 20.2%
    Net profit margin (%) 22.0% 22.6%   20.6% 21.5%  
    No. of shares (m)*         2590.1  
    Book value per share (Rs)         390.18  
    P/BV (x)*         5.0  
    *Book value as on 30th December 2017
  • Overall advances grew by a healthy 27.5% YoY on the back of a strong growth in retail as well as wholesale advances. Both, retail and wholesale advances grew by 27.5% during the quarter as compared to a year ago.
  • Retail advance growth was buoyant because of a strong growth in personal loans, credit cards, business banking and auto loans.

    (Rs m) 9MFY17 % of total 9MFY18 % of total Change
    Advances 4,950,433   6,312,150   27.5%
    Retail 2,722,738 55.0% 3,471,683 55.0% 27.5%
    Corporate 2,227,695 45.0% 2,840,468 45.0% 27.5%
    Deposits 6,347,046   6,990,260   10.1%
    CASA 2,878,730 45.4% 3,071,190 43.9% 6.7%
    Term Deposits 3,468,316 54.6% 3,919,070 56.1% 13.0%
    Credit deposit ratio 78.0%   90.3%    
  • Deposit growth for HDFC Bank at 10.1% YoY remained subdued mainly on the back of high base in the same quarter of preceding year on account of the demonetisation effect.
  • CASA (low cost deposits) as a percentage to overall deposits stood at 43.9% in 3QFY18. A further improvement in this ratio will help the bank to lower the cost of funding which in-turn will help them in improving the net interest margins.
  • As of September 2017, the bank's distribution network was at 4,734 branches and 12,333 ATMs in 2,669 cities. 52% of the bank's branches are now in semi urban and rural areas.
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  2. Equitymaster has financial interest in HDFC Bank.
  3. Equitymaster’s investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
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