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HDFC Bank: Consistent to the core! - Views on News from Equitymaster
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HDFC Bank: Consistent to the core!
Apr 17, 2006

Performance summary
Private sector banking major, HDFC Bank, announced strong results for the fourth quarter and year ended March 2006. The FY06 performance is consistent with what the bank has achieved in the past, and is buoyed by robust growth of 48% in advances and improvement in net interest margins to over 4%. The bank has outperformed our FY06 topline estimates by 13%. However, the reported net profit numbers are 1% below our estimates. The board has recommended a dividend of Rs 5.5 per share (dividend yield of 0.7%).

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 8,672 13,785 59.0% 30,935 44,753 44.7%
Other Income 2,201 3,042 38.2% 6,513 11,240 72.6%
Interest Expense 3,536 6,391 80.7% 13,156 19,295 46.7%
Net Interest Income 5,136 7,394 44.0% 17,779 25,458 43.2%
Net interest margin (%)            
Other Expenses 3,287 4,823 46.7% 10,854 16,911 55.8%
Provisions and contingencies 1,071 1,816 69.6% 3,649 7,252 98.7%
Profit before tax 2,979 3,796 27.5% 9,789 12,535 28.0%
Tax 955 1,164 21.9% 3,134 3,827 22.1%
Profit after tax/ (loss) 2,024 2,632 30.1% 6,656 8,708 30.8%
Net profit margin (%) 23.3% 19.1%   21.5% 19.5%  
No. of shares (m) 309.8 313.2   309.8 313.2  
Diluted earnings per share (Rs)         27.8  
P/E (x)         29.3  

Pioneer of retail banking
HDFC Bank, the pioneer of the retail-banking movement in India, is one of the fastest growing and most profitable banks in India with a strong urban presence. At the end of FY06, the bank had a franchise of 535 branches and 1,323 ATMs, catering to a customer base of 9.6 m (6.8 m in FY05). Strong understanding of the retail sphere (55% of gross advances) and inorganic growth initiatives has made the bank the second largest private sector bank in the country. The bank’s capital adequacy ratio stands at 11.4% at the end of FY06.

What has driven performance in FY06?
Retail driven momentum: Robust growth in HDFC Bank’s business in FY06 has been brought about by the continuance in strong growth of its retail portfolio (up 80% YoY), almost four times faster than the 22% YoY growth in wholesale/corporate portfolio. With this, the retail portfolio constituted around 55% of the bank’s gross advances. The management has indicated that one of the major reasons for this superlative growth in retail loans has been the fact that the quantum of retail loans securitised (sold to asset reconstruction company, thus off HDFC Bank’s books) during FY06 was less than half the amount (Rs 48 bn) that was securitised in FY05. HDFC Bank managed to improve its net interest margins to over 4% at the end of 4QFY06 (3.9% in 4QFY05 and 3QFY06).

Credit-Deposit ratio
(Rs m) FY05 % of total FY06 % of total Change
Deposits 363,543   557,968   53.5%
Saving A/c deposits 114,180 31.4% 161,858 29.0% 41.8%
Term & Current deposits 249,363 68.6% 396,110 71.0% 58.8%
Advances/Credit 259,369   384,126   48.1%
Retail 118,147 45.6% 212,311 55.3% 79.7%
Corporate 141,222 54.4% 171,815 44.7% 21.7%
Credit-Deposit ratio 71.3%   68.8%    

HDFC Bank raised Rs 12 bn in FY06 (Rs 4.1 bn in 3QFY06 and Rs 7.9 bn in 4QFY06) as Tier-II capital in the form of subordinated bonds at an interest rate of 7.5% per annum. The same is approximately 300 basis points higher than the bank’s average cost of funds, thus having the potential to pare its net interest margins. Nevertheless, here we would also like to state that in the wake of the current liquidity crunch and lower deposit mobilisation, our outlook for the entire sector’s margins is not positive, at least from the medium term perspective.

Reducing treasury concerns: HDFC bank’s other income grew at a robust rate of 73% YoY during FY06. Growth in the same in 4QFY06 was 38% YoY (48% YoY growth in 3QFY06), mainly driven by rise in fee and commission income. Higher market share in cash management services and sale of third party products seems to be the reason for the strong growth in commission income during the quarter and fiscal. Like other banks, HDFC Bank has been transferring its treasury investments to the ‘held-to-maturity’ (HTM) category. This shall further pare the pressure arising out of risks associated with higher interest rates.

Providing for the future: Rising contribution of the retail assets has had its impact on HDFC Bank’s net NPA to advance ratio, which has risen from around 0.2% in 4QFY05 to 0.4% in 4QFY06. This is the reason the bank has been aggressive on the provisioning front, with the same rising by 70% YoY and 99% YoY in 4QFY06 and FY06 respectively. We draw comfort from the fact that the bank has made more-than-adequate provisioning for the delinquencies, thus suggesting that it has provided for any contingency that may arise in the future.

What to expect?
At the current price of Rs 815, the stock is trading at 3.9 times our estimated FY08 adjusted book value. Despite increasing competition in the retail space, HDFC Bank has yet again managed to rake in strong growth in FY06. The acceleration in fee-based income and reduced dependence on treasury investments, as source of other income, are key positives. However, we remain circumspect with respect to the bank’s net interest margins, which have seen volatility in recent times. On an overall basis, while there is no denying the strong growth prospects of the bank, investors need to give due consideration to valuations, which are currently at the higher side.

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Feb 22, 2018 03:37 PM


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