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HDFC Bank: Substituting growth with margins
Apr 24, 2010

HDFC Bank declared its FY10 results. The bank has reported 1% YoY fall in interest income and 31% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Interest income falls marginally on YoY basis despite 27% YoY growth in advances.
  • NIMs improve marginally due 50% low cost deposits (CASA). Operating expenses lowered in FY10, cost to income ratio at 47% as against 52% in FY09.
  • Net NPA to advances improves marginally from 0.6% in FY09 to 0.3% in FY10. Provision coverage ratio at 75% at the end of FY10.
  • Capital adequacy ratio (CAR) comfortable at 17.4%, Tier I CAR at 13.3% in FY10.
  • Declared dividend of Rs 12 per share (dividend yield 0.6%).


Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Interest Income 42,508 40,531 -4.7% 163,323 161,729 -1.0%
Interest Expense 23,988 17,018 -29.1% 89,111 77,863 -12.6%
Net Interest Income 18,520 23,513 27.0% 74,212 83,866 13.0%
Net interest margin (%)       4.2% 4.4%  
Other Income 11,147 9,036 -18.9% 32,906 38,076 15.7%
Other Expense 13,962 15,605 11.8% 55,328 57,645 4.2%
Provisions and contingencies 6,574 4,399 -33.1% 18,797 21,406 13.9%
Profit before tax 9,131 12,545 37.4% 32,993 42,891 30.0%
Tax 2,822 4,178 48.1% 10,543 13,404 27.1%
Profit after tax/ (loss) 6,309 8,367 32.6% 22,450 29,487 31.3%
Net profit margin (%) 14.8% 20.6%   13.7% 18.2%  
No. of shares (m)       425.3 457.7  
Book value per share* (Rs)         470.2  
P/BV* (x)         4.1  
* Book value as on 31st March 2010

What has driven performance in FY10?
  • HDFC Bank managed to outperform the sector average growth in advances even in tough times. Notwithstanding the slower growth in the erstwhile CBoP assets, the bank grew its loan assets by 27% YoY. This was nearly 1.5 times the average sector growth. What is enthusing is that the bank backed the growth in assets with growth in low cost deposits. The 43% YoY growth in savings accounts and 31% YoY growth in current accounts led to the bank’s margins improving from 4.2% to 4.4%. The stagnancy in interest income, however, stems from the rising cost of low duration funds. While home loans comprised 25%, personal loans and credit cards comprised 5% each of the bank’s retail loan portfolio at the end of FY10.

    In the results conference call the management of HDFC Bank stated that it does not see the current NIMs being sustainable. It hopes to maintain the same in the range of 3.9% to 4.2% this fiscal. However, even for FY11 HDFC Bank sees itself outperforming the RBI’s sector loan growth target of 20%.

    Building up on CASA…
    (Rs m) FY09 % of total FY10 % of total Change
    Advances 1,002,063   1,272,620   27.0%
    Retail 620,277 61.9% 758,482 59.6% 22.3%
    Corporate 381,786 38.1% 514,138 40.4% 34.7%
    Deposits 1,428,362   1,674,040   17.2%
    CASA 573,245 40.0% 799,720 50.0% 39.5%
    Term deposits 855,117 59.9% 874,320 52.2% 2.2%
    Credit deposit ratio 70.2%   76.0%    

  • HDFC Bank has been able to grow its fee income base by 7% YoY in 4QFY10. As a result, the proportion of fee to total income improved to 28% as against 24% in 4QFY09. 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.

  • HDFC Bank has managed to contain the slippages over the past three quarters. HDFC Bank’s gross NPAs dropped from 2.0% of advances in FY09 to 1.4% in FY10. 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 0.3% of advances while the NPA coverage ratio was 75% in FY10. Total restructured loans were at 0.3% of gross advances of which 0.1% were restructured loans classified as NPAs at the end of FY10. These are therefore not really a concern.

  • HDFC Bank will add 150 branches in FY11 and is expected to maintain its cost to income ratio at around 47% as in FY10.

What to expect?
At the current price of Rs 1,944, the stock is valued at 3.2 times our estimated FY12 adjusted book value. While, the bank’s growth performance continues to remain largely in line with our estimates, we may have to revise our profit estimates higher. 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. While we maintain our positive outlook on the bank from a long term perspective, we believe that the valuations factor in most of the medium term upsides.

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