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HDFC Bank: No margin pressure - Views on News from Equitymaster

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HDFC Bank: No margin pressure

Jan 27, 2011

HDFC Bank declared its 3QFY11 results. The bank has reported 25% YoY growth in net interest income and 33% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Interest income grows 19% YoY in 9mFY11 on the back of 33% YoY growth in advances.
  • NIMs remain stable due to marginally higher proportion of lower cost deposits (CASA 51% of deposits).
  • Other income remains stagnant due to lower treasury gains. Fee income up 23% YoY.
  • Net NPA to advances improves marginally from 0.5% in 9mFY10 to 0.2% in 9mFY11. Provision coverage ratio at 81% at the end of 9mFY11 (72% in 9mFY10).
  • Capital adequacy ratio (CAR) comfortable at 16.3%, Tier I CAR at 12.1% at the end of 9mFY11.


Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interestincome    40,348     52,299 29.6%     121,198     144,601 19.3%
Interest expense    18,109     24,533 35.5%       60,846       67,560 11.0%
Net Interest Income    22,239     27,766 24.9%       60,352       77,041 27.7%
Net interest margin (%)       4.2% 4.2%  
Other Income      8,991     11,278 25.4%       30,322       30,789 1.5%
Other Expense    14,993     18,318 22.2%       43,321       51,546 19.0%
Provisions and contingencies      4,477       4,659 4.1%       17,006       14,754 -13.2%
Profit before tax    16,237     20,726 27.6%       47,353       56,284 18.9%
Tax      3,575       5,190 45.2%         9,226       13,415 45.4%
Profit after tax/ (loss)      8,185     10,877 32.9%       21,121       28,115 33.1%
Net profit margin (%) 20.3% 20.8%   17.4% 19.4%  
No. of shares (m)                 464.3  
Book value per share (Rs)                 524.2  
P/BV (x)*         3.9  
*Book value as on 31st December 2010

What has driven performance in 9mFY11?
  • Acceleration in credit offtake to large corporate helped HDFC Bank retain loan growth in excess of 32% even during difficult times. Backed by 40% YoY growth in loans to large corporate, the bank saw its advance book grow by 33% YoY. Of this 10% growth in assets attributable to a one off expansion in wholesale (corporate) loans. What is enthusing is that the loan growth was without compromising on margins and quality.

    The 31% YoY growth in savings accounts kept the bank's CASA proportion and net interest margins (NIMs) stable at 51% and 4.2% respectively.

    Corporate loan kicker...
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Advances   1,210,392     1,606,190   32.7%
    Agriculture 64,151 5.3% 85,128 5.3% 32.7%
    Retail 626,529 51.0% 819,500 51.0% 30.8%
    SMEs 162,193 13.4% 179,893 11.2% 10.9%
    Large corporates 366,749 30.3% 513,981 32.0% 40.1%
    Deposits   1,547,520     1,922,020   24.2%
    CASA 740,366 47.8% 970,620 50.5% 31.1%
    Term deposits 807,154 52.2% 951,400 49.5% 17.9%
    Credit deposit ratio 78.2%   83.6%    

    The management of HDFC Bank does not see the current NIMs being sustainable. It hopes to maintain the same in the range of 3.9% to 4.2% in FY12. Also the loan growth is expected to be tempered due to rising interest rates.

  • HDFC Bank has been able to grow its fee income base by 23% YoY in 9mFY11. However, the proportion of fee to total income dropped to 24% as against 25% in 9mFY10. Further, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments, 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. HDFC Bank's gross NPAs dropped from 1.6% of advances in 9mFY10 to 1.1% in 9mFY11. Net NPAs were 0.2% of advances while the NPA coverage ratio was 81% in 9mFY11. Total restructured loans were at 0.3% of gross advances of which 0.2% were restructured loans classified as NPAs at the end of 9mFY11. These are therefore not really a concern.

  • HDFC Bank added 55 branches in 9mFY11 and maintained its cost to income ratio at around 47% as in 9mFY10.

What to expect?
At the current price of Rs 2,045, the stock is valued at 2.2 times our estimated FY13 adjusted book value. The bank's growth performance continues to remain largely in line with our estimates. A higher CAR (capital adequacy) is also a matter of comfort. 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. Research Pro subscribers can view latest updates here.

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