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HDFC Bank: A sound but cautious beginning - Views on News from Equitymaster

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HDFC Bank: A sound but cautious beginning
Jul 19, 2011

HDFC Bank declared the results for the first quarter of financial year 2011-12 (1QFY12). The bank has reported 19% 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 35% YoY in FY11 on the back of 29% YoY growth in advances.
  • NIMs marginally affected by higher cost of deposits (CASA at 49% of total deposits).
  • Other income grows at a tepid rate of 13% YoY due to losses in the investment portfolio.
  • Net NPA to advances improves marginally from 0.3% in 1QFY11 to 0.2% in 1QFY12. Provision coverage ratio at 83% at the end of 1QFY12 (75% in 1QFY11).
  • Capital adequacy ratio (CAR) comfortable at 16.9%, Tier I CAR at 11.4% at the end of 1QFY12.
  • The record date for stock split in the ratio of 1:5 was July 16, 2011.

Rs (m) 1QFY11 1QFY12 Change
Interest income 44,197 59,779 35.3%
Interest expense 20,190 31,300 55.0%
Net Interest Income 24,007 28,479 18.6%
Net interest margin (%) 4.3% 4.2%  
Other Income 9,909 11,200 13.0%
Other Expense 16,429 19,346 17.8%
Provisions and contingencies 5,550 4,436 -20.1%
Profit before tax 17,487 20,333 16.3%
Tax 3,819 5,047 32.2%
Profit after tax/ (loss) 8,118 10,850 33.7%
Net profit margin (%) 18.4% 18.2%  
No. of shares (m)**   2,333.5  
Book value per share (Rs)   108.8  
P/BV (x)*   4.7  
*Book value as on 30th June 2011
**No. of shares adjusted for stock split

What has driven performance in 1QFY12?
  • At 29% YoY, HDFC Bank's loan growth for the first quarter of FY12 is hardly representative of the relatively muted credit growth in the sector. With its customer base nearing 22 m, HDFC Bank managed to once again grow well in excess of the industry average. Backed by more than 28% YoY growth and 36% YoY growth in loans to retail customers and large corporate respectively, the bank has managed the balance sheet expansion without compromising on margins and quality. The 15% YoY growth in CASA deposits kept the net interest margins (NIMs) stable at 4.2% (4.3% in 1QFY10) despite the rise in interest costs.

    Balancing between corporate and retail..
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 1,370,751   1,769,640   29.1%
    Agriculture 72,650 5.3% 93,791 5.3% 29.1%
    Retail 651,940 47.6% 838,630 47.4% 28.6%
    SMEs 183,681 13.4% 198,200 11.2% 7.9%
    Large corporates 415,338 30.3% 566,285 32.0% 36.3%
    Deposits 1,830,330   2,085,860   14.0%
    CASA 896,862 49.0% 1,035,960 49.1% 15.5%
    Term deposits 933,468 51.0% 1,049,900 50.9% 12.5%
    Credit deposit ratio 74.9%   84.8%    

    The management of HDFC Bank hopes to maintain the NIMs in the range of 3.9% to 4.2% in FY12. Also, the loan growth is expected to be tempered due to rising interest rates.

  • HDFC Bank has been able to grow its fee income base by 16% YoY in 1QFY12. However, the proportion of fee to total income dropped to 23% as against 25% in 1QFY11. Further, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments due to higher bond yields, the absence of which would have otherwise aided the bank's other income.

  • HDFC Bank has managed to contain the slippages over the past four quarters. The bank's gross NPAs dropped from 1.2% of advances in 1QFY11 to 1.0% in 1QFY12. Net NPAs were 0.2% of advances while the NPA coverage ratio was 83% in 1QFY12. Total restructured loans were at 0.4% of gross advances of which 0.2% was restructured loans classified as NPAs at the end of 1QFY12. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has adopted a cautious stance with regard to home and auto loans as well as lending against securities over the past 12 months.

    Breakup of retail loans
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Home loans 95,640 14.7% 110,410 13.2% 15.4%
    Auto loans 195,030 29.9% 232,170 27.7% 19.0%
    Loan against securities 9,790 1.5% 10,670 1.3% 9.0%
    Personal loans 88,850 13.6% 109,800 13.1% 23.6%
    Credit cards 39,500 6.1% 54,050 6.4% 36.8%

  • HDFC Bank added 125 branches during the quarter and maintained its cost to income ratio at around 48% as in FY11.

  • The record date for the stock split was July 16, 2011. The face value of the stock was subdivided from Rs 10 to Rs 2 post the stock split.

What to expect?
At the current price of Rs 514, the stock is valued at 2.5 times our estimated FY14 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 and pressure on margins in the medium term.

We maintain our positive outlook on the bank from a long term perspective, and believe that there are reasonable upsides over the next 2 to 3 years.

Please refer to the stock split adjusted target price in the recommendation report itself.

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