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HDFC Bank: NPAs in line with expectations - Views on News from Equitymaster

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HDFC Bank: NPAs in line with expectations
Jul 22, 2015

HDFC Bank declared the results for the first quarter of financial year ending March 2016 (1QFY16). The bank has reported 23.5% YoY and 20.7% YoY growth in net interest income and net profits respectively in 1QFY16. Here is our analysis of the results.

Performance summary
  • Net interest income grows 23.5% YoY in 1QFY16 on the back of 22.4% YoY growth in advances.
  • NIMs remain stable at 4.4% due to lower deposit costs.
  • Other income grows by a robust 33% YoY, with fees and commissions growing at 22% YoY.
  • Cost to income ratio remains stable at 45%.
  • Net NPA to advances come in marginally higher at 0.27% of advances in 1QFY16 as gross NPAs too move slightly higher to 0.95% of advances.
  • Capital adequacy ratio (CAR) comfortable at 15.7%, Tier I CAR at 12.8% at the end of June 2015.

Rs (m) 1QFY15 1QFY16 Change
Interest income 112,200 140,410 25.1%
Interest expense 60,485 76,522 26.5%
Net Interest Income 51,715 63,888 23.5%
Net interest margin (%) 4.4% 4.4%  
Other Income 18,505 24,619 33.0%
Other Expense 31,784 40,008 25.9%
Provisions and contingencies 4,828 7,280 50.8%
Profit before tax 38,436 48,499 26.2%
Tax 11,280 14,262 26.4%
Profit after tax/ (loss) 22,328 26,957 20.7%
Net profit margin (%) 19.9% 19.2%  
No. of shares (m)*   2,506.5  
Book value per share (Rs)   258.1  
P/BV (x)*   4.3  
*Book value as on 30th June 2015

What has driven performance in 1QFY16?
  • HDFC Bank had a decent start to FY16 with 22% YoY growth in loan book and 30% YoY growth in deposits. Home and personal loans continued to occupy the bulk of retail loans which seems to have been the bank's focus area over the past few quarters. This has also helped the bank sustain margins despite the downward movement in interest rates. Deposit growth at 30% YoY, is higher than sector average. CASA (low cost deposits) as a share of total deposits stood at 39.6% in 1QFY16.

    Focus back onto retail
    (Rs m) 1QFY15 % of total 1QFY16 % of total Change
    Advances 3,120,997   3,820,100   22.4%
    Retail 1,894,460 60.7% 2,388,590 62.5% 26.1%
    Corporate 1,226,537 39.3% 1,431,510 37.5% 16.7%
    Deposits 3,721,553   4,841,740   30.1%
    CASA 1,618,875 43.5% 1,917,329 39.6% 18.4%
    Term deposits 2,102,677 56.5% 2,924,411 60.4% 39.1%
    Credit deposit ratio 83.9%   78.9%    

  • Although HDFC Bank had managed to contain the slippages for most of FY15, the first quarter of FY16 saw both gross and net NPA levels move up slightly. The bank's gross NPAs were at 0.95% of advances in 1QFY16. Net NPAs were at 0.27% of advances while the NPA coverage ratio was 80%. Total restructured loans were at 0.1% of gross advances and were already classified as NPAs at the end of 1QFY16. Although the NPAs are slightly higher this quarter they are well within our estimates and therefore not really a concern.

  • As of March 2015, the bank's distribution network was at 4,101 branches and 11,962 ATMs in 2,464 cities. 55% of the bank's branches are now in semi urban and rural areas.
What to expect?

At the current price of Rs 1,099, the stock is valued at 3.0 times our revised estimated FY18 adjusted book value. We have reviewed our estimates for the stock and have arrived at a target price of Rs 1,293 from FY18 perspective, as mentioned in the latest StockSelect Performance review. 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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