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HDFC Bank: Adequate capital headroom - Views on News from Equitymaster
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HDFC Bank: Adequate capital headroom
Feb 21, 2015

HDFC Bank declared the results for the third quarter of financial year ended March 2015 (3QFY15). The bank has reported 20% YoY and 21% YoY growth in net interest income and net profits respectively in 9mFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows 20% YoY in 1HFY15 on the back of 17% YoY growth in advances.
  • NIMs move up slightly to 4.5% in 9mFY15 from 4.3% in 9mFY14, despite the fall in CASA proportion.
  • Other income grows by 3.4% YoY, with fees and commissions growing at 13.4% YoY.
  • Cost to income ratio drops from 47% in 9mFY14 to 46% in 9mFY15.
  • Net NPA to advances move up from at 0.2% of advances in 9mFY14 to 0.26% in 9mFY15. Restructured loans were slightly lower at 0.1% of loan book at the end of December 2014.
  • Capital adequacy ratio (CAR) comfortable at 15.7%, Tier I CAR at 11.9% at the end of December 2014.

Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Interest income 100,933 118,476 17.4% 197,563 230,677 16.8%
Interest expense 56,168 63,366 12.8% 108,610 123,851 14.0%
Net Interest Income 44,765 55,110 23.1% 88,953 106,826 20.1%
Net interest margin (%)       4.3% 4.5%  
Other Income 18,443 20,471 11.0% 37,699 38,976 3.4%
Other Expense 29,342 34,979 19.2% 59,724 66,763 11.8%
Provisions and contingencies 3,859 4,558 18.1% 9,130 9,386 2.8%
Profit before tax 33,866 40,602 19.9% 66,928 79,039 18.1%
Tax 10,184 12,228 20.1% 19,535 23,507 20.3%
Profit after tax/ (loss) 19,823 23,816 20.1% 38,263 46,146 20.6%
Net profit margin (%) 19.6% 20.1%   19.4% 20.0%  
No. of shares (m)*         2,416.0  
Book value per share (Rs)         201.6  
P/BV (x)*         5.3  
*Book value as on 31st December 2014

What has driven performance in 9mFY15?
  • Most of HDFC Bank's growth in the first nine months of FY15 has come on the back of low risk loans and collateralized loans. Investors must note that most of the loan growth has come in on the back of growth in low yield assets in the corporate segment. The bank has recently also raised capital through QIP to grow its loan book although the management believes that growth may continue to remain moderated in the near term. Deposit growth at 18.6% YoY, is in line with sector average. This was fuelled by demand for term deposits. CASA (low cost deposits) as a share of total deposits fell from 43.5% in 9mFY14 to 40.9% in 9mFY15. This is worrisome as it could put pressure on the bank's lending margins going forward.

    Corporate loans lead growth
    (Rs m) 9mFY14 % of total 9mFY15 % of total Change
    Advances 2,975,111   3,480,880   17.0%
    Retail 1,476,250 49.6% 1,648,340 47.4% 11.7%
    Corporate 1,498,861 50.4% 1,832,540 52.6% 22.3%
    Deposits 3,491,804   4,141,280   18.6%
    CASA 1,518,935 43.5% 1,693,784 40.9% 11.5%
    Term deposits 1,972,869 56.5% 2,447,496 59.1% 24.1%
    Credit deposit ratio 85.2%   84.1%    

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former), however, did not dampen the bank's net interest margins (NIMs). If term deposit costs move lower, improvement in CASA base and a marginal improvement in NIMs cannot be ruled out in the medium term. Having said that, since the lending to corporate can also fetch lower yields, we have been conservative in our assumptions.

  • HDFC Bank has managed to contain the slippages over the past five quarters. The bank's gross NPAs were at 1.0% of advances in 9mFY15. Net NPAs, however moved up marginally to 0.3% of advances while the NPA coverage ratio was 80% in 9mFY15. Total restructured loans were at 0.1% of gross advances and were already classified as NPAs at the end of FY14. These are therefore not really a concern.

  • As of December 2014, the bank's distribution network was at 3,659 branches and 11,633 ATMs in 2,287 cities, an increase of 323 branches and 160 ATMs over 12 months. Number of employees increased from 68181 as of December, 2013 to 76,253 as of December, 2014

  • In February 2015, HDFC Bank raised Rs 98 bn through (qualified institutional placements) QIPs and American Depository receipts (ADRs). Through an ADR issue in the US, the bank raised Rs 78 bn; while Rs 20 bn was raised through a domestic QIP issue.

  • The company offered 22 m ADRs at US$ 57.76 each - with each ADR representing three equity shares. As for the domestic QIP issue, the same was issued at Rs 1,067 per share with about 18.74 m shares issued. In effect, the total numbers of shares issued were about 84.7 m. This development has come in after the bank received approval from the Foreign Investment Promotion Board (FIPB) to maintain its 74% permissible foreign holding limits of its paid up share capital. Further the bank also received approval to issue equity shares aggregating to an amount up to Rs 100 bn to NRIs/FIIs/FPIs not exceeding 74% of the post issue paid up capital of the bank.
What to expect?

At the current price of Rs 1,073, the stock is valued at 3.2 times our revised estimated FY17 adjusted book value (after factoring in the QIP issue). We have reviewed our estimates for the stock post the QIP and have arrived at a target price of Rs 1,184 from FY17 perspective. Going forward we do not see the bank facing significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. That HDFC Bank is keeping a close watch on its cost to income ratio is also encouraging. At the current valuations we recommend investors to hold on to the stock.

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