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HDFC Bank: Margin blip - Views on News from Equitymaster
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HDFC Bank: Margin blip
Apr 23, 2009

Performance summary
  • Interest income grows by 62% YoY in FY09 on the back of 48% growth in advances due to the integration with CBoP.
  • NIMs dipped marginally due to fall in the proportion of CASA; CASA level lower at 44%.
  • Operating expenses grow by 48% YoY due to the merger; cost to income ratio at 52%.
  • Net NPA to advances move up from 0.2% in FY08 to 0.6% in FY09. Provision coverage ratio was 68% in 4QFY09.
  • Capital adequacy ratio (CAR) comfortable at 15.1%, raised Tier II capital in 3QFY09. Recommended dividend of Rs 10 per share for FY09 (yield of 0.9%).


Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest Income 29,582 42,508 43.7% 101,150 163,323 61.5%
Interest Expense 13,141 23,988 82.5% 48,871 89,111 82.3%
Net Interest Income 16,441 18,520 12.6% 52,279 74,212 42.0%
Net interest margin (%)       4.4% 4.2%  
Other Income 5,493 11,147 102.9% 22,832 32,906 44.1%
Other Expense 11,027 13,962 26.6% 37,456 55,328 47.7%
Provisions and contingencies 4,651 6,574 41.3% 14,847 18,797 26.6%
Profit before tax 6,256 9,131 46.0% 22,808 32,993 44.7%
Tax 1,525 2,822 85.0% 6,905 10,543 52.7%
Profit after tax/ (loss) 4,731 6,309 33.4% 15,903 22,450 41.2%
Net profit margin (%) 16.0% 14.8%   15.7% 13.7%  
No. of shares (m)       354.4 425.3  
Book value per share* (Rs)         344.4  
P/BV* (x)         3.2  
* Book value as on 31st March 2009

What has driven performance in 4QFY09?
  • Completing a year after the bank’s integration with Centurion Bank of Punjab (CBoP), HDFC Bank marginally (by approximately 10%) underperformed our estimates for the full year FY09 in terms of growth in advances for the merged entity. This seems to have been due to slower growth in the erstwhile CBoP balance sheet. Although HDFC Bank’s FY09 results are not strictly comparable with the corresponding period of FY08 the same do reflect some systemic risks that the bank has faced in the last few quarters.

  • The proportion of low cost deposits (CASA) in HDFC Bank’s books has fallen to a 6-year low. This has led to a blip its net interest margins (NIMs). The NIMs are, however, within our estimates for FY09. While we understand that the fall in CASA is primarily due the merger with CBoP, the bank needs to improve the same in order to maintain its edge over other private sector and PSU banks. The loss of savings accounts could also be attributed to the fact that customers showed preference for public sector banks over private sector ones due to the perceptive risk about the ownership (and therefore high risk of default) of the latter.

    Losing out on CASA…
    (Rs m) FY08 % of total FY09 % of total Change
    Advances 675,920 1,002,390 48.3%
    Retail 393,273 61.9% 611,540 59.6% 55.5%
    Corporate 282,647 41.8% 390,850 39.0% 38.3%
    Deposits 1,007,848 1,428,120 41.7%
    CASA 519,710 51.6% 633,600 44.4% 21.9%
    Term deposits 488,137 48.4% 875,230 61.3% 79.3%
    Credit deposit ratio 67.1% 70.2%

  • HDFC Bank has been able to grow its fee income base by 46% YoY in 4QFY09. As a result, the proportion of fee to total income improved to 22% as against 20% in 4QFY08. However, 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.

  • Due to the merger with CBoP, the quality of HDFC Bank’s asset book has been impacted. In 1QFY09, HDFC Bank’s gross NPAs increased from 1.3% of advances (standalone HDFC Bank) to 1.7% (merged balance sheet). The same further went up to 2% in 4QFY09 from 1.9% in 3QFY09. As per the bank, the erstwhile CBoP portfolio accounted for approximately 42% of the bank’s gross NPAs at the end of March 2009. Net NPAs were 0.6% of advances while the NPA coverage ratio was 68%.

  • At the end of FY09, the total restructured assets in HDFC Bank’s books were to the tune of Rs 690 m. In addition, the bank has received applications for loan restructuring amounting to Rs 3 bn, of which Rs 2.5 bn have been classified as NPAs. The total standard assets which have been restructured or where restructuring is under consideration were therefore 0.1% of the bank’s gross advances at the end of FY09.

  • At the end of FY09, HDFC Bank’s distribution network was at 1,412 branches and 3,295 ATMs in 528 cities as against 761 branches and 1,977 ATMs in 327 cities as of March 2008. During the year, as a result of the CBoP merger and the step-up in retail customer acquisition, deposit accounts increased from 8.7 m to over 15 m. With the integration of HDFC Bank branches and employees with that of CBoP, the cost to income ratio has increased from 50% in 4QFY08 to 52% in 4QFY09. Given the bank’s plan to continue to expand its franchise, we expect the ratio to be marginally higher in the medium term.

What to expect?
At the current price of Rs 1,017, the stock is valued at 2.0 times our estimated FY11 adjusted book value (after factoring in the merger with CBoP). The bank’s overall performance continues to remain largely in line with our estimates. While a higher CAR (capital adequacy) is a matter of comfort, we do envisage lower asset growth and pressure on margins in the medium term. More importantly the bank needs to work on its cost competitiveness and asset quality. We maintain our positive outlook on the bank from a long term perspective.

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