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HDFC Bank: Consistency is the key! - Views on News from Equitymaster
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HDFC Bank: Consistency is the key!
Jul 14, 2005

Performance Summary
Not disappointing investors of their expectations, HDFC Bank has maintained a commendable consistency in its bottomline performance by posting 31% YoY growth for 1QFY06. The same has been achieved on the back of 27% growth in topline and 31% growth in net interest income. The bloat in operating overheads (grew 55% YoY) has also been offset by 144% growth in other income. While the bank remains steady in terms of asset quality, capital crunch is a looming concern.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 7,026 8,941 27.3%
Other Income 1,080 2,636 144.1%
Interest Expense 3,038 3,704 21.9%
Net Interest Income 3,988 5,237 31.3%
Other Expense 2,308 3,580 55.1%
Operating Profit 1,680 1,657 -1.4%
Operating profit margin (%) 23.9% 18.5% -22.5%
Provisions and contingencies 690 1,659 140.4%
Profit before tax 2,070 2,634 27.2%
Tax 670 799 19.3%
Profit after tax/ (loss) 1,400 1,835 31.1%
Net profit margin (%) 19.9% 20.5%  
No. of shares (m) 285.8 309.7  
Diluted earnings per share (Rs)* 19.6 23.7  
P/E (x)   26.7  
* (annualised)

Pioneer of retail banking
HDFC Bank, the pioneer of the retail-banking movement in India, is one of the fastest growing and most profitable banks in India with a strong urban presence. At the end of FY05, the bank had a franchise of 495 branches and 1,150 ATMs. Strong understanding of the retail sphere (40% of total advances) and inorganic growth initiatives has made the bank the second largest private sector bank in the country. Despite having raised capital in the form of ADS issue during 4QFY05 the capital adequacy ratio stands at 11.9% at the end of 1QFY06.

What has driven performance in 1QFY06?
Half is retail: HDFC Bank has continued to focus on its retail loan book that has grown by an impressive 71% YoY during the quarter. With this, the bank’s total retail portfolio has surmounted the corporate segment to comprise 51% of the total advance portfolio. On the other hand, the growth in wholesale assets remains consistent at 17% YoY. While most of these are working capital loans, the bank believes that the benefit of the turnaround in corporate capex cycle is yet to filter in. In contravention to speculations, the bank has been able to sustain its net interest margins (NIMs) at 3.9% (one of the highest in the sector) despite the pressure on spreads.

(Rs m) FY05 % of total 1QFY06 % of total Change
Retail 116,960 45.7% 147,610 50.5% 26.2%
Corporate 138,700 54.3% 144,687 49.5% 4.3%
Total advances 255,660 292,297 14.3%
CASA 220,201 60.6% 232,450 60.6% 5.6%
Term deposits 143,339 39.4% 151,090 39.4% 5.4%
Total deposits 363,540 383,540 5.5%

Concerns on treasury: With interest rates keeping an upward bias and its negative repercussions taking a toll on the bank’s treasury portfolio, HDFC Bank has continued to witness significant losses on the treasury side. To exercise caution on the same, the bank had transferred a portion of its SLR securities from the AFS (available for sale) category to the HTM (held to maturity) category in 3QFY05. However, the bank currently has only 45% of its investments in the HTM category and this calls for additional caution on the treasury portfolio due to rising interest rates. The bank’s high provisioning can be explained by this.

Un-arrested overheads: The bank’s other expenses continue to mount with the same having grown 55% YoY during 1QFY06. This can be attributed to a significant increase in infrastructure investments, including a 50% increase in the branch network and a 26% increase in number of ATMs. However, operating expenses as a proportion of net revenues has remained stable at 45% in 1QFY06, as was the case in 1QFY05.

Healthy quality: The bank remains consistent on asset quality with net NPA to advances ratio being sustained at 0.3% despite the asset growth. It also continues to be conservative on provisioning, which grew by 140% YoY during the first quarter.

What to expect?
At a current price of Rs 632, HDFC Bank’s stock is trading at 3.8 times our estimated FY07 adjusted book value. The valuations, from the medium term perspective, are at the higher end of the spectrum. While HDFC Bank has historically enjoyed premium valuations over its peers due to its growth potential and asset quality, it has also lived up to the investor expectations. Given the strong prospects in the mortgage financing industry on which the bank has a stronghold (due to parent HDFC) and its capability to garner low cost deposits, we believe that the bank will be able to sustain its NIMs and asset quality going forward.

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