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HDFC Bank: Other income lingers behind
Jul 19, 2010

HDFC Bank declared its 1QFY11 results. The bank has reported 29% YoY growth in net interest income and 34% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Interest income grows 8% YoY in 1QFY11 on the back of 40% YoY growth in advances. Of this 10% growth in assets attributable to a one off expansion in wholesale loans.
  • NIMs improve marginally due to lower cost of deposits (CASA 49% of deposits). Operating expenses remain stable, cost to income ratio at 48% same as in 1QFY10.
  • Other income falls by 10% YoY due to lower treasury gains. Fee income up 15% YoY.
  • Net NPA to advances improves marginally from 0.6% in 1QFY10 to 0.3% in 1QFY11. Provision coverage ratio at 77% at the end of 1QFY11 (70% in 1QFY10).
  • Capital adequacy ratio (CAR) comfortable at 16.3%, Tier I CAR at 12.4% in 1QFY11.


Rs (m) 1QFY10 1QFY11 Change
Interest income †† 40,931 44,201 8.0%
Interest expense †† 22,375 20,190 -9.8%
Net Interest Income 18,556 ††† 24,011 29.4%
Net interest margin (%) 4.2% 4.3%  
Other Income †† 10,436 ††††† 9,398 -9.9%
Other Expense †† 13,805 15,923 15.3%
Provisions and contingencies †††† 6,588 ††††† 5,550 -15.8%
Profit before tax †† 15,187 ††† 17,486 15.1%
Tax †††† 2,537 ††††† 3,819 50.5%
Profit after tax/ (loss) †††† 6,062 ††††† 8,117 33.9%
Net profit margin (%) 14.8% 18.4%  
No. of shares (m)   ††††† 459.6  
Book value per share (Rs)   ††††† 485.9  
P/BV (x)*   †††††††††† 4.2  
*Book value as on 30th June 2010

What has driven performance in 1QFY11?
  • HDFC Bank managed a stellar growth in advances in the first quarter of this fiscal without compromising on margins and quality. Notwithstanding the slower growth in the erstwhile CBoP assets, the bank grew its loan assets by 40% YoY. Of this 10% growth in assets attributable to a one off expansion in wholesale (corporate) loans. This was nearly 2 times the average sector growth.

    What is enthusing is that the bank backed the growth in assets with growth in low cost deposits. The 37% YoY growth in savings and current accounts led to the bankís margins improving from 4.2% to 4.3%. The retail loan portfolio comprised 52% of total loan book at the end of 1QFY11.

    Corporate loan kicker..
    (Rs m) 1QFY10 % of total 1QFY11 % of total Change
    Advances 1,052,924   1,476,200   40.2%
    Agriculture 55,805 5.3% 78,239 5.3% 40.2%
    Retail 611,479 51.0% 760,680 51.5% 24.4%
    SMEs 141,092 13.4% 165,334 11.2% 17.2%
    Large corporates 319,036 30.3% 472,384 32.0% 48.1%
    Deposits 1,457,269   1,830,330   25.6%
    CASA 657,316 45.1% 900,522 49.2% 37.0%
    Term deposits 799,954 54.9% 929,808 50.8% 16.2%
    Credit deposit ratio 72.3%   80.7%    

    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 RBIís sector loan growth target of 20%.

  • HDFC Bank has been able to grow its fee income base by 15% YoY in 1QFY11. As a result, the proportion of fee to total income improved to 28% as against 24% 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 bankís other income.

  • HDFC Bank has managed to contain the slippages over the past four quarters. HDFC Bankís gross NPAs dropped from 2.1% of advances in 1QFY10 to 1.2% in 1QFY11. Net NPAs were 0.3% of advances while the NPA coverage ratio was 77% in 1QFY11. Total restructured loans were at 0.3% of gross advances of which 0.2% were restructured loans classified as NPAs at the end of 1QFY11. 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 2,050, the stock is valued at 2.7 times our estimated FY13 adjusted book value. While, the bankís growth performance continues to remain largely in line with our estimates, we may have to revise our profit estimates higher. A higher CAR (capital adequacy) is a matter of c is a matter of comfort. However;, 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 that the valuations (Research Pro subscribers can view latest updates here) factor in most of the upsides.

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