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HDFC Bank: Margins show signs of stability - Views on News from Equitymaster

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HDFC Bank: Margins show signs of stability
Apr 23, 2013

HDFC Bank declared the results for the fourth quarter and financial year 2012-13 (FY13).The bank has reported a 23% YoY and 30% YoY growth in net interest income and net profits respectively in FY13. Here is our analysis of the results.

Performance summary
  • Net interest income grows 23% YoY in FY13 on the back of 23% YoY growth in advances.
  • NIMs moved up to 4.5% at the end of FY13 (CASA at 47.4% of total deposits).
  • Other income grows by 19% YoY, with fees and commissions growing in excess of 10% YoY.
  • Cost to income ratio also moves up to 49.6% in FY13 against 49% in FY12.
  • Net NPA to advances remain stable at 0.2% of advances in FY13. Provision coverage ratio at 80% at the end of March 2012.
  • Capital adequacy ratio (CAR) comfortable at 16.8%, Tier I CAR at 11.1% at the end of FY13.

Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Interest income 75,610 93,239 23.3% 278,742 350,648 25.8%
Interest expense 39,997 50,286 25.7% 149,895 192,537 28.4%
Net Interest Income 35,613 42,953 20.6% 128,847 158,111 22.7%
Net interest margin (%)       4.4% 4.5%  
Other Income 16,288 18,036 10.7% 57,836 68,526 18.5%
Other Expense 26,636 31,362 17.7% 92,776 112,361 21.1%
Provisions and contingencies 4,116 3,005 -27.0% 18,774 16,770 -10.7%
Profit before tax 25,265 29,627 17.3% 93,907 114,276 21.7%
Tax 6,618 7,723 16.7% 23,460 30,243 28.9%
Profit after tax/ (loss) 14,531 18,899 30.1% 51,673 67,263 30.2%
Net profit margin (%) 19.2% 20.3%   18.5% 19.2%  
No. of shares (m)*         2,379.0  
Book value per share (Rs)         152.2  
P/BV (x)*         4.5  
*Book value as on 31st March 2013

What has driven performance in FY13?
  • The loan growth of 22.7% YoY for HDFC Bank in FY13 has largely come in on the back of growth in the corporate segment. At a time when most players in the banking sector are complaining of lower credit demand, HDFC Bank managed to sustain growth in excess of 20% this fiscal. The bank also has enough capital headroom to grow its loan book although the management believes that growth may continue to remain moderated in the near term.

    Credit deposit ratio improves...
    (Rs m) FY12 % of total FY13 % of total Change
    Advances 1,953,716   2,397,210   22.7%
    Agriculture 103,547 5.3% 127,052 5.3% 22.7%
    Retail 1,071,260 54.8% 1,299,580 54.2% 21.3%
    SMEs 261,798 13.4% 268,488 11.2% 2.6%
    Large corporates 517,111 26.5% 702,090 29.3% 35.8%
    Deposits 2,466,669   2,962,470   20.1%
    CASA 1,169,201 47.4% 1,344,961 45.4% 15.0%
    Term deposits 1,297,468 52.6% 1,617,509 54.6% 24.7%
    Credit deposit ratio 79.2%   80.9%    

  • While the deposit base grew by 20% YoY, CASA proportion remained in excess of 45%, thus offering the cost liquidity edge to the bank.

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former) did not dampen the bank's net interest margins (NIMs) in FY13. In fact, at 4.5%, the NIMs are at the higher end bank's target range of 4.0% to 4.4%. If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term. Nevertheless we have been conservative in our assumptions.

  • HDFC Bank has been able to grow its fee income base by 11% YoY in FY13. Also, the proportion of fee to total income remained stable at 23%. Further, the bank had a profit on revaluation and sale of investments as against losses in FY12.

  • 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 FY13. Net NPAs were 0.2% of advances while the NPA coverage ratio was 80% in FY13. These included floating provisions of Rs 7 bn. Total restructured loans were at 0.3% of gross advances and were already classified as NPAs at the end of FY13. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has been more aggressive in offering gold loans, personal loans and credit cards over the past 12 months. It has also been cautious in lending against securities over the past 12 months. The fastest growth was witnessed in gold loans while home and auto loans suffered due to the impact of higher loan rates.

    Breakup of retail loans
    (Rs m) FY12 % of total FY13 % of total Change
    Home loans 142,590 13.3% 167,830 12.9% 17.7%
    Auto loans 289,350 27.0% 339,500 26.1% 17.3%
    CV loans 130,500 12.2% 161,060 12.4% 23.4%
    Loan against securities 10,460 1.0% 12,100 0.9% 15.7%
    Personal loans 138,910 13.0% 175,000 13.5% 26.0%
    Credit cards 69,600 6.5% 101,140 7.8% 45.3%
    Gold loans 30,180 2.8% 49,650 3.8% 64.5%
    Other retail advances 259,670 24.2% 293,300 22.6% 13.0%

What to expect?
At the current price of Rs 687, the stock is richly valued at 3.8 times our estimated FY15 adjusted book value. The bank's management has clearly cited that the rate of loan growth seen in the past few quarters is not sustainable. However, they do not see significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. Having said that, with an employee base of around 67,000, HDFC Bank's cost efficiency will have to be under close watch. We reiterate our Sell recommendation on the stock.

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