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HDFC Bank: Retail assets take centre stage - Views on News from Equitymaster

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HDFC Bank: Retail assets take centre stage
Jul 13, 2012

HDFC Bank declared the results for the first quarter of financial year 2012-13 (1QFY13). The bank has reported 22% YoY growth in net interest income and 31% YoY growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows 22% YoY in 1QFY13 on the back of 22% YoY growth in advances.
  • NIMs came in marginally higher at 4.3% at the end of 1QFY13 from 4.2% in 1QFY12 and 4QFY12 (CASA at 46% of total deposits).
  • Other income grows by a healthy 37% YoY, with fees and commissions growing in excess of 24% YoY.
  • Cost to income ratio comes in higher at 49.2% in 1QFY12 against 48.3% in 1QFY12.
  • Net NPA to advances remain stable at 0.2% of advances in 1QFY13. Provision coverage ratio at 81% at the end of June 2012.
  • Capital adequacy ratio (CAR) comfortable at 15.5%, Tier I CAR at 10.9% at the end of 1QFY13.

Rs (m) 1QFY12 1QFY12 Change
Interest income 59,779 80,074 34.0%
Interest expense 31,300 45,233 44.5%
Net Interest Income 28,479 34,841 22.3%
Net interest margin (%) 4.2% 4.3%  
Other Income 11,200 15,295 36.6%
Other Expense 19,346 24,326 25.7%
Provisions and contingencies 4,437 4,873 9.8%
Profit before tax 20,333 25,810 26.9%
Tax 5,047 6,762 34.0%
Profit after tax/ (loss) 10,849 14,175 30.7%
Net profit margin (%) 18.1% 17.7%  
No. of shares (m)*   2,355.9  
Book value per share (Rs)   134.7  
P/BV (x)*   4.3  
*Book value as on 30th June 2012

What has driven performance in 1QFY13?
  • While most players in the banking sector are complaining of lower credit demand, HDFC Bank managed to sustain 22% growth in loan book in the first quarter of this fiscal. The high tenacity of demand for retail loans especially CV loans, credit cards and gold loans took centre stage. This was also backed by a similar growth in deposit base. With its customer base nearing 22 m, HDFC Bank managed to once again outpace the industry average. Backed by more than 33% YoY growth in loans to retail customers, the bank has managed the balance sheet expansion. Home, auto and personal loans to retail customers comprised 33% of HDFC Bank's loan book at the end of June 2012.

    Breakup of retail loans
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Home loans 110,410 13.2% 136,040 12.2% 23.2%
    Auto loans 232,170 27.7% 275,130 24.6% 18.5%
    CV loans 90,550 10.8% 144,400 12.9% 59.5%
    Loan against securities 10,670 1.3% 9,650 0.9% -9.6%
    Personal loans 109,800 13.1% 147,760 13.2% 34.6%
    Credit cards 54,050 6.4% 76,860 6.9% 42.2%
    Gold loans 17,090 2.0% 34,740 3.1% 103.3%
    Other retail advances 213,890 25.5% 294,190 26.3% 37.5%

    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 the fourth quarter. In fact, at 4.2%, the NIMs are well within the bank's target range of 3.9% to 4.2%. If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term.

    Retail loan growth tops sector average
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 1,755,868   2,133,380   21.5%
    Agriculture 93,061 5.3% 113,069 5.3% 21.5%
    Retail 838,630 47.8% 1,118,770 52.4% 33.4%
    SMEs 235,286 13.4% 238,939 11.2% 1.6%
    Large corporates 588,891 33.5% 662,602 31.1% 12.5%
    Deposits 2,110,910   2,575,310   22.0%
    CASA 1,072,342 50.8% 1,184,643 46.0% 10.5%
    Term deposits 1,038,568 49.2% 1,390,667 54.0% 33.9%
    Credit deposit ratio 83.2%   82.8%    

  • HDFC Bank has been able to grow its fee income base by 24% YoY in 1QFY13. Also, the proportion of fee to total income remained stable at 23%. Further, the bank had a profit on revaluation and sale of investments in this quarter as against losses in the corresponding quarter of FY12.

  • HDFC Bank has managed to contain the slippages over the past five quarters. The bank's gross NPAs dropped from 1.1% of advances in 1QFY10 to 1.0% in 1QFY13. Net NPAs were 0.2% of advances while the NPA coverage ratio was 81% in 1QFY13. 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 1QFY13. 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, CV 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.

  • HDFC Bank added 20 branches during the past 3 months taking the total network to 2,564. The bank has been aggressive in expanding to tier III to tier VI cities. However, going forward the expansion will depend upon the rate of breakeven of the new branches. The cost to income ratio has come in higher at 49.2% in 1QFY12 against 48.3% in 1QFY12.

What to expect?
At the current price of Rs 585, the stock is valued at 3.3 times our estimated FY15 adjusted book value. The bank's growth performance continues to remain largely in line with our estimates. A comfortable CAR (capital adequacy) position offers sufficient headroom for growth without additional dilution. However, we do envisage muted asset growth in the medium term.

While we reiterate an extremely positive outlook for the stock in the medium to long term, the current valuations warrant caution. Hence we would advise investors to Hold on to the stock.

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