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HDFC Bank: Higher NIMs uphold profits
Jul 17, 2013

HDFC Bank declared the results for the first quarter of financial year 2013-14 (1QFY14).The bank has reported 21% YoY and 30% YoY growth in net interest income and net profits respectively in 1QFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows 21% YoY in 1QFY14 on the back of 21.2% YoY growth in advances.
  • NIMs remain stable at 4.6% at the end of 1QFY14, higher than sector average (CASA at 44.7% of total deposits).
  • Other income grows by 17% YoY, with fees and commissions growing in excess of 11% YoY.
  • Cost to income ratio drops from 49.5% in 1QFY13 to 47.9% in 1QFY14.
  • Net NPA to advances move up from at 0.2% of advances in FY13 to 0.3% in 1QFY14. Restructured loans were also 0.2% of loan book at the end of June 2013.
  • Capital adequacy ratio (CAR) comfortable at 15.5%, Tier I CAR at 10.5% at the end of 1QFY14.


Rs (m) 1QFY13 1QFY14 Change
Interest income 81,757 96,629 18.2%
Interest expense 45,233 52,443 15.9%
Net Interest Income 36,524 44,186 21.0%
Net interest margin (%) 4.6% 4.6%  
Other Income 16,494 19,256 16.7%
Other Expense 26,265 30,382 15.7%
Provisions and contingencies 5,815 5,272 -9.3%
Profit before tax 26,753 33,060 23.6%
Tax 6,762 9,351 38.3%
Profit after tax/ (loss) 14,176 18,437 30.1%
Net profit margin (%) 17.3% 19.1%  
No. of shares (m)*   2,386.1  
Book value per share (Rs)   159.5  
P/BV (x)*   4.2  

What has driven performance in 1QFY14?
  • As has been the case for 36 odd quarters, HDFC Bank's profit growth for 1QFY14 hardly ventured too far from the target of around 25-30% YoY growth. The tepid loan growth, at 21.2% YoY however, reflected the underlying sentiment in the credit market. That too, most of its has come in on the back of growth in the retail segment. The bank also has enough capital headroom to grow its loan book although the management believes that growth may continue to remain moderated in the near term. Deposit growth at 17.8% YoY, although above sector average, was fuelled by demand for term deposits. CASA (low cost deposits) as a share of total deposits fell from 47.4% in 1QFY13 to 44.7% in 1QFY14.

    Credit deposit ratio improves...
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 2,133,573   2,585,890   21.2%
    Agriculture 113,079 5.3% 137,052 5.3% 21.2%
    Retail 1,118,770 52.4% 1,404,410 54.3% 25.5%
    SMEs 285,899 13.4% 289,620 11.2% 1.3%
    Large corporates 615,825 28.9% 754,808 29.2% 22.6%
    Deposits 2,574,830   3,033,150   17.8%
    CASA 1,220,470 47.4% 1,355,818 44.7% 11.1%
    Term deposits 1,354,361 52.6% 1,677,332 55.3% 23.8%
    Credit deposit ratio 82.9%   85.3%    

  • 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 1QFY14. In fact, at 4.6%, the NIMs are at the higher end bank's target range of 4.0% to 4.4%. If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term. Nevertheless we have been conservative in our assumptions.

  • HDFC Bank has been able to grow its fee income base by 11% YoY in 1QFY14. Also, the proportion of fee to total income remained stable at 23%. Further, the bank had a profit on revaluation and sale of investments as against losses in 1QFY13. Given the volatility in bond markets, we would prefer to be conservative about treasury gains in FY14.

  • HDFC Bank has managed to contain the slippages over the past five quarters. The bank's gross NPAs were at 1.0% of advances in 1QFY14. Net NPAs, however moved up marginally to 0.3% of advances while the NPA coverage ratio was 80% in 1QFY14. Total floating provisions were Rs 18.6 bn. Total restructured loans were at 0.2% of gross advances and were already classified as NPAs at the end of 1QFY14. 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, home loans and credit cards over the past 12 months. The rise in lending against securities, although a very small proportion is a concern. The fastest growth was witnessed in gold loans while CV and auto loans suffered due to the impact of higher loan rates.

    Breakup of retail loans
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Home loans 136,040 12.2% 171,460 12.2% 26.0%
    Auto loans 275,130 24.6% 323,100 23.0% 17.4%
    CV loans 144,400 12.9% 168,480 12.0% 16.7%
    Loan against securities 9,650 0.9% 12,100 0.9% 25.4%
    Personal loans 147,760 13.2% 175,000 12.5% 18.4%
    Credit cards 76,860 6.9% 101,140 7.2% 31.6%
    Gold loans 34,740 3.1% 49,650 3.5% 42.9%
    Other retail advances 294,190 26.3% 403,480 28.7% 37.1%

What to expect?
At the current price of Rs 663, the stock is richly valued at 2.7 times our estimated FY16 adjusted book value. The bank's management has clearly cited that the rate of loan growth seen in the past few quarters is not sustainable. However, they do not see significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. Having said that, with an employee base of around 67,000, HDFC Bank's cost efficiency will have to be under close watch. We reiterate our Sell recommendation on the stock.

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