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HDFC Bank: Retail holds the key

Apr 16, 2001

HDFC Bank has recorded a growth of 75% in profits and 85% in interest income for the year ended March '01. However, due its merger with Times Bank, HDFC Bank's financials are not strictly comparable. Due to increasing pressure on margins, the bank's OPM declined by 480 basis points to 40.2%. This is partly due to the merger with Times Bank, which had comparatively lower margins. Although, HDFC Bank's OPM are among the best in the industry, future margins are likely to fall given the slowdown in the industrial sector, low credit offtake and the reduction in the business of loans against shares.

(Rs m) 4QFY00 4QFY01 Change FY00 FY01 Change
Interest Income 2,560 3,623 41.5% 6,799 12,595 85.3%
Other Income 451 575 27.7% 1,254 1,855 48.0%
Interest Expenditure 1,233 2,184 77.1% 3,743 7,538 101.4%
Operating Profit (EBDIT) 1,327 1,440 8.5% 3,056 5,057 65.5%
Operating Profit Margin (%) 51.8% 39.7% 44.9% 40.2%
Other Expenditure 723 860 18.9% 1,714 3,096 80.6%
Profit before Tax 1,055 1,155 9.5% 2,596 3,817 47.0%
Provisions & contingencies 385 229 -40.5% 647 666 2.9%
Tax 285 318 11.8% 748 1,049 40.3%
Profit after Tax/(Loss) 386 609 57.8% 1,200 2,101 75.0%
Net profit margin (%) 15.1% 16.8% 17.7% 16.7%
No. of Shares (eoy) 243.3 243.3 243.3 243.3
Diluted Earnings per share* 6.3 10.0 4.9 8.6  
P/E (at current price) 23 27

The retail thrust of HDFC Bank helped in maintaining high margins. The bank's total number of retail accounts increased from 825,000 in FY00 to over 1.4 m as on March '01. Its saving account deposits jumped by 69% to Rs 19 bn (16% of total deposits). On the liability side also the figures are impressive. Retail portfolio accounted for 18% of total advances. During the year, the bank made significant progress in expanding its retail banking franchise for deposits and loan products (131 branches and 207 ATMs).

On the wholesale banking front, the bank consolidated its position as one of the leaders in cash management services with total value of throughputs in excess of Rs 1,100 bn in FY01. HDFC Bank is the leading provider of cash settlement services to various stock exchanges. The degree of volatility in the revenues is however low as the market sensitive income accounted for only 3.6% of total income in FY01.

HDFC Bank's advances and deposits witnessed a growth of 34% and 38% respectively during the year ended March '01. Its balance sheet size increased by 33% and consequently capital adequacy ratio declined to 11.1% (from 12.2% in FY00). To facilitate the future growth the bank is planning to raise fresh capital either through domestic or overseas markets.

The quality of the bank's loan portfolio is one of the best in the banking sector. The ratio of net non-performing assets to advances stood at 0.5% down from 0.8% in FY00. Its policies on both specific and general loan loss provision continue to be conservative. Total general provisions were about 1% of all standard assets more than the regulatory requirement of 0.25%. Current year's net profit is after making provision relating to exposures for guarantees invoked, stock exchange receivables and for lending against shares.

At the current price of Rs 232 HDFC Bank is trading at a P/E of 27 times FY01 earnings. Its Price/Book value ratio of 6 times is comparatively higher than its peers. The future growth of the bank is likely to be impacted as it derives over 50% of revenues from investment income. Currently, HDFC Bank's funded and non-funded exposure to capital markets is around 9% of total customers assets. This business has been extremely profitable for the bank. However, based on the recommendation given by the joint committee (RBI and SEBI), the RBI in its credit policy on 19 April '01, may change the capital market exposure norms for banks to 5% of total advances. As a result, HDFC Bank will need to reduce its capital market exposure and consequently in the short term growth may slowdown. But considering the diversified revenues portfolio of the bank, reduction in one stream of revenues is likely to be compensated by increase in revenues from services like lending to corporates and cash managment products.

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