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HDFC Bank: Reflecting consolidation effect - Views on News from Equitymaster

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HDFC Bank: Reflecting consolidation effect
Jul 15, 2009

Performance summary
  • Interest income grows by 13% YoY in 1QFY10 on the back of a tepid 8% YoY growth in consolidated advances (including Centurion Bank of Punjab’s loans).
  • Net interest margin (NIM) remains stable at 4.2%; CASA (current and savings account) level improves to 45%.
  • Operating expenses grow by only 7% YoY; cost to income ratio at 48%.
  • Net NPA to advances remain at 0.6% in 1QFY10 as in 4QFY09. Provision coverage ratio at 70% in 1QFY10.
  • Capital adequacy ratio (CAR) comfortable at 15.4% in 1QFY10; Tier I at 10.6%.


Standalone numbers
Rs (m) 1QFY09 1QFY10 Change
Interest income 36,217 40,931 13.0%
Interest Expense 18,982 22,375 17.9%
Net Interest Income 17,235 18,556 7.7%
Net interest margin (%) 4.2% 4.2%
Other Income 5,934 10,436 75.9%
Other Expense 12,894 13,806 7.1%
Provisions and contingencies 3,445 6,588 91.2%
Profit before tax 6,830 8,598 25.9%
Tax 2,187 2,537 16.0%
Profit after tax/ (loss) 4,643 6,061 30.5%
Net profit margin (%) 12.8% 14.8%
No. of shares (m) 424.6 426.1
Book value per share (Rs)* 343.7
P/BV (x) 3.9
* Book value as on 30th June 2009

What has driven performance in 1QFY10?
  • In the first quarter, showing the year on year growth impact after consolidation with Centurion Bank of Punjab (CBoP), HDFC Bank’s 1QFY10 numbers are but a reflection of the consolidation effect. While the bank has successfully improvised several metrics like operating cost, CASA and NIM, it has been very cautious in terms of growth. Like the management had clarified last quarter, the bank is working on shedding some erstwhile CBoP loans – particularly those on two wheeler loans and credit cards. This has had an impact on the overall loan growth for the bank (merely 7.7% YoY in 1QFY10). We have assumed loan growth of 19% for the bank in FY10 i.e., approximately 1.1 times the average sector growth rate. This may have to be revised lower if the bank does not pick up its loan growth in the subsequent quarters of FY10.

  • The proportion of low cost deposits (CASA) in HDFC Bank’s books, which had fallen to a 6-year low in FY09 improved this quarter. The NIM, however, remained stable due to downward re-pricing of loans. The significant improvement in CASA was primarily because of term deposits maturing and getting unattractive due to lower interest rates.

    In consolidation mode...
    (Rs m) 1QFY09 % of total 1QFY10 % of total Change
    Advances 977,604   1,052,880   7.7%
    Retail 537,682 55.0% 611,300 58.1% 13.7%
    Corporate 439,922 45.0% 441,580 41.9% 0.4%
           
    Total deposits 1,309,180 1,457,320 11.3%
    CASA 354,788 27.1% 655,150 45.0% 84.7%
    Term deposits 954,392 72.9% 802,170 55.0% -15.9%
    Credit /Deposit 72.2%   74.7%    

  • HDFC Bank has been able to grow its fee income base by 27% YoY in 1QFY10. As a result, the proportion of fee to total income improved to 22% as against 20% in 1QFY09. Fees contributed 62% of the bank’s other income in 1QFY10. 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.

  • Due to the merger with CBoP, the quality of HDFC Bank’s asset book was impacted in FY09. The bank has successfully contained further slippages and the net NPA to advances ratio remains at 0.6% in 1QFY10. The NPA coverage ratio was 70%.

  • At the end of FY09, the total restructured assets in HDFC Bank’s books were to the tune of Rs 690 m. Total restructured assets including loan applications received for restructuring till date were 0.6% of the bank’s advances at the end of 1QFY10.

What to expect?
At the current price of Rs 1,357, the stock is valued at 2.3 times our estimated FY12 adjusted book value (after factoring in the conversion of HDFC’s warrants). The bank’s overall performance continues to remain largely in line with our estimates. While a higher CAR (capital adequacy) is a matter of comfort, we envisage relatively better asset growth and pressure on margins in the medium term. More importantly the bank needs to sustain its cost competitiveness and asset quality. We maintain our positive outlook on the bank from a long term perspective.

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