X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
HDFC Bank: Cost and integration issues - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

HDFC Bank: Cost and integration issues
Apr 24, 2008

Performance summary
  • Interest income grows by 52% YoY in FY08 on the back of 35% YoY growth in advances.
  • Healthy mix of CASA (low cost deposits) retained despite 47% YoY growth in deposits.

  • Net interest margins improve to 4.4% in FY08, from 4.3% in FY07.

  • Fee income growth at 38% YoY.

  • Capital adequacy ratio (CAR) comfortable at 13.6%.

  • Board recommends dividend of Rs 8.5 per share (dividend yield of 0.6%).

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest Income 19,265 29,562 53.4% 66,479 101,150 52.2%
Interest Expense 8,720 13,140 50.7% 31,794 48,871 53.7%
Net Interest Income 10,545 16,422 55.7% 34,685 52,279 50.7%
Net interest margin (%)       4.3% 4.4%  
Other Income 3,944 5,493 39.3% 15,162 22,831 50.6%
Other Expense 6,839 11,027 61.2% 24,208 37,456 54.7%
Provisions and contingencies 2,670 4,651 74.2% 9,252 14,848 60.5%
Profit before tax 4,980 6,237 25.2% 16,387 22,806 39.2%
Tax 1,544 1,524 -1.3% 4,973 6,905 38.8%
Profit after tax/ (loss) 3,436 4,713 37.2% 11,414 15,901 39.3%
Net profit margin (%) 17.8% 15.9%   17.2% 15.7%  
No. of shares (m)       319.5 354.6  
Book value per share* (Rs)         324.2  
P/BV* (x)         4.5  
* Book value as on 31st March 2008

What has driven performance in FY08?
  • No major hiccups in growth: While the overall banking sector’s growth slowed down to about 22% YoY in FY08, HDFC Bank’s advances grew by 35% YoY with a balanced growth in both retail and corporate segments. However, the same is grossly lower than the rates clocked in the previous three quarters of FY08 and lower than our estimate of 44%. Sustaining a judicious mix of retail and corporate assets (60:40), HDFC Bank’s balance sheet showed very little signs of slowdown in incremental lending at the end of FY08. The bank managed to clock growth rates in both advances and deposits that are nearly 1.5 times the sector’s average growth rate so far. What is in fact more enthusing is that the bank sustained its net interest margins, which are one of the best in the sector. This is because it continues to enjoy the distinction of having the highest proportion of low cost deposits on its books (54.5% in FY08). The increase in net interest margin of the bank has also been attributed to higher transactional floats (on intra-day and overnight borrowing and lending), an increase in lending rates and a move to reduce bulk fixed deposits due to the prevailing high interest rates and availability of other sources of funds.

    Balanced show…
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 469,448   634,644   35.2%
    Retail 283,270 60.3% 392,612 61.9% 38.6%
    Corporate 186,178 39.7% 242,031 38.1% 30.0%
    Deposits 683,180   1,007,690   47.5%
    CASA 341,590 50.0% 549,191 54.5% 60.8%
    Term deposits 341,590 50.0% 458,499 45.5% 34.2%
    Credit deposit ratio 68.7%   63.0%    

  • ‘Fee’ jerks: HDFC Bank has not divulged the break up of other income for the full year FY08. The bank has been able to grow its fee income base by 38% YoY in 4QFY08. However, the proportion of fee to total income has dropped to 22%, against 25% in 4QFY07. Also, the gains on the treasury side has been eroded by the lower forex / derivative gains which otherwise would have added to the bank’s other income. The bank’s other income has also been impacted by the higher amortisation of available-for-sale (AFS) securities in its investment book. We expect lower forex revenue to continue to impact the bank’s fee income in FY09.

    Other income
      4QFY07 % of total 4QFY08 % of total Growth
    Fees & commissions 3,563 90.4% 4,904 87.2% 38%
    Forex / derivative 1,033 26.2% 604 10.7% -42%
    Reval. / sale of investments (656)   114    
    Total 3,940   5,622   43%

  • Quality differentiation: As against most of its peers, the quality of HDFC Bank’s asset book has remained untarnished. The net NPA to advance ratio for the bank has remained stable (0.4% at the end of FY08). We also draw comfort from the fact that the bank has made adequate provisioning for possible delinquencies in the event of unexpected hardening in interest rates.

  • Expensive expansion: The bank added 77 branches and 372 ATMs in the last 12 months taking the network to 761 branches and 1,977 ATMs in 320 cities. As a result, the cost to income ratio has increased to 50% from 49% in FY07. Given the bank’s plan to continue to expand its franchise (150 new branches by 1QFY09) and the cost of integration with Centurion Bank of Punjab (CBoP), we expect the ratio to be marginally higher in the medium term.

What to expect?
At the current price of Rs 1,451, the stock is reasonably valued at 3 times our estimated FY10 adjusted book value (after factoring in the merger with Centurion Bank of Punjab - CBoP). The bank’s overall performance continues to remain largely in line with our estimates including our stance with regards to the sustenance of NIMs.

The time and cost of setting up branches that HDFC Bank has managed to save with the merger with CBoP is certainly something that will stand in good stead for the bank in the longer term. With its conservative approach towards growth and the necessity of acquiring size and scale prior to FY09, this is one of the best options that the bank could have opted for. Further, the diversification in asset profile and franchise will be very favourable for the bank in the medium to long term. Having said that, the higher operating costs, increased provisioning requirements for treasury as well as relatively lower contribution of fee income are our lingering concerns with regard to the bank.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

HDFC BANK SHARE PRICE


Nov 16, 2018 11:09 AM

TRACK HDFC BANK

  • Track your investment in HDFC BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

HDFC BANK - BANDHAN BANK LTD COMPARISON

COMPARE HDFC BANK WITH

MARKET STATS