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HDFC Bank: CASA slowdown hurts margins
Jul 22, 2014

HDFC Bank declared the results for the first quarter of financial year ended March 2015 (1QFY15). The bank has reported 17% YoY and 21% YoY growth in net interest income and net profits respectively in 1QFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows 17% YoY in 1QFY15 on the back of 21% YoY growth in advances.
  • NIMs fall slightly to 4.4% in 1QFY15 from 4.6% in 1QFY14, mainly due to the fall in CASA proportion.
  • Other income falls by 3.9% YoY, with fees and commissions growing at 9.5% YoY.
  • Cost to income ratio drops from 47.9% in 1QFY14 to 45.3% in 1QFY15.
  • Net NPA to advances move up from at 0.2% of advances in 1QFY14 to 0.3% in 1QFY15. Restructured loans were also 0.2% of loan book at the end of June 2014.
  • Capital adequacy ratio (CAR) comfortable at 15.1%, Tier I CAR at 11.1% at the end of June 2014.

Financial snapshot
Rs (m) 1QFY14 1QFY15 Change
Interest income 96,629  112,200 16.1%
Interest expense 52,442 60,484 15.3%
Net Interest Income 44,187 51,716 17.0%
Net interest margin (%) 4.6% 4.4%  
Other Income 19,256 18,505 -3.9%
Other Expense 30,382 31,784 4.6%
Provisions and contingencies 5,271 4,827 -8.4%
Profit before tax 33,061 38,437 16.3%
Tax 9,351 11,279 20.6%
Profit after tax/ (loss) 18,439 22,331 21.1%
Net profit margin (%) 19.1% 19.9%  
No. of shares (m)*   2,427.2  
Book value per share (Rs)   188.3  
P/BV (x)*   4.4  
*Book value as on 30th June 2014

What has driven performance in 1QFY15?
  • HDFC Bank's profit performance in the first quarter of FY15, though consistently healthy, seems to have come in a tad lower in comparison to that over previous few quarters. The growth in loan book and deposits has been impacted as the growth in foreign currency loans buoyed growth in FY14. Adjusted for the one time increase in foreign currency (FCNR) deposits swapped with RBI under the special window, and the related foreign currency loans, core deposits and advances growth for 1QFY15 was 20.7% and 22.7% respectively.

    Investors must note that most of the loan growth has come in on the back of growth in low yield assets in the corporate 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 23% YoY, is also above sector average. This was fuelled by demand for term deposits. CASA (low cost deposits) as a share of total deposits fell from 47.4% in 1QFY14 to 43% in 1QFY15.

    Corporate loan overweigh
    (Rs m) 1QFY14 % of total 1QFY15 % of total Change
    Advances 2,585,824   3,121,090   20.7%
    Retail 1,404,410 54.3% 1,502,470 48.1% 7.0%
    Corporate 1,181,414 45.7% 1,618,620 51.9% 37.0%
    Deposits 303,239   372,074   22.7%
    CASA 143,735 47.4% 159,992 43.0% 11.3%
    Term deposits 159,504 52.6% 212,082 57.0% 33.0%
    Credit deposit ratio 852.7%   838.8%    

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former), however, did dampen the bank's net interest margins (NIMs) in the first quarter. Nevertheless, at 4.4%, the NIMs are at the higher end of the 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. Having said that, since the lending to corporate can also fetch lower yields, we have been conservative in our assumptions.

  • HDFC Bank has been able to grow its fee income base by 9.5% YoY in 1QFY15. Also, the proportion of fee to total income remained stable at 23%. The fall in other income can be attributed to the fact that the bank booked a lower profit on revaluation and sale of investments in 1QFY15 as against that in 1QFY14. Given the volatility in bond markets, we would prefer to be conservative about treasury gains in FY15.

  • 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 1QFY15. Net NPAs, however moved up marginally to 0.3% of advances while the NPA coverage ratio was 80% in 1QFY15. Total restructured loans were at 0.2% of gross advances and were already classified as NPAs at the end of FY14. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has sharply cut down CV loans, gold loans and loan against securities. However, home loans personal loans and credit cards have aided retail loan growth over the past 12 months. The substantial fall witnessed in gold loans seems to have been affected by regulatory restrictions, while the CV loans seem to have been impacted by economic slowdown.

    Breakup of retail loans
    (Rs m) 1QFY14 % of total 1QFY15 % of total Change
    Home loans 171,460 12.2% 195,740 13.0% 14.2%
    Auto loans 323,100 23.0% 347,940 23.2% 7.7%
    CV loans 168,480 12.0% 133,150 8.9% -21.0%
    Loan against securities 9,910 0.7% 9,740 0.6% -1.7%
    Personal loans 185,860 13.2% 214,610 14.3% 15.5%
    Credit cards 105,710 7.5% 132,720 8.8% 25.6%
    Gold loans 47,570 3.4% 38,510 2.6% -19.0%
    Other retail advances 392,320 27.9% 430,060 28.6% 9.6%
What to expect?
At the current price of Rs 827, the stock is valued at 2.6 times our estimated FY17 adjusted book value. We have reviewed our estimates for the stock and have arrived at a target price of Rs 1,115 from FY17 perspective. Going forward we do not see the bank facing significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. That HDFC Bank is keeping a close watch on its cost to income ratio is also encouraging. At the current valuations we recommend investors to hold on to the stock.

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