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HDFC Bank: Asset Quality Deteriorates due to Farm Loan Waiver - Views on News from Equitymaster
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  • Jul 25, 2017 - HDFC Bank: Asset Quality Deteriorates due to Farm Loan Waiver

HDFC Bank: Asset Quality Deteriorates due to Farm Loan Waiver
Jul 25, 2017

HDFC Bank declared the results for the first quarter of financial year ending March 2018 (1QFY18). The bank's net interest income (NII) and net profits grow's 20.4% YoY and 20.2% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows 20.4% YoY in 1QFY18 on the back of 23.4% YoY growth in advances.
  • NIMs continue to remain stable at 4.4%.
  • Cost to income ratio remains stable at 41.7% as compared to preceding quarter. When compared on a year on year basis this ratio has improved significantly. It stood at 46.2% in 1QFY17.
  • Gross non-performing asset (GNPA) as a percentage to advances increased sequentially to 1.24% from 1.05% in the preceding quarter. This deterioration in asset quality was mainly due to farm loan waivers.
  • As a prudent measure, the bank has enhanced provisioning for its agricultural advances. The provisioning increased by 79% YoY during the quarter which impacted the growth in profitability.
  • Capital adequacy ratio (CAR) remained comfortable at 15.6%, Tier I CAR was at 13.6% at the end of June 2017.

    Financial Snapshot
    Rs (m) 1QFY17 1QFY18 Change
    Interest income 165,160 186,687 13.0%
    Interest expense 87,346 92,980 6.5%
    Net Interest Income 77,814 93,707 20.4%
    Net interest margin (%) 4.4% 4.4%  
    Other Income 28,066 35,167 25.3%
    Other Expense 47,689 53,675 12.6%
    Provisions and contingencies 8,667 15,588 79.8%
    Profit before tax 49,525 59,612 20.4%
    Tax 17,136 20,673 20.6%
    Profit after tax/ (loss) 32,389 38,938 20.2%
    Net profit margin (%) 19.6% 20.9%  
    No. of shares (m)*   2,573.9  
    Book value per share (Rs)   366.2  
    P/BV (x)*   4.8  

    *Book value as on 30th June 2017

  • Overall advances grew by a healthy 23% YoY on the back of a strong growth in retail as well as wholesale advances. Retail and wholesale advances grew by 21.9% and 25.5% YoY respectively during the quarter as compared to a year ago.
  • Retail advance growth was buoyant because of a strong growth in auto, personal loans and credit card loans segment.

    Steady as Always
    (Rs m) 1QFY17 % of total 1QFY18 % of total Change
    Advances 4,706,225   5,809,760   23.4%
    Retail 2,494,299 53.0% 3,137,270 54.0% 25.8%
    Corporate 2,211,926 47.0% 2,672,490 46.0% 20.8%
    Deposits 5,737,550   6,713,760   17.0%
    CASA 2,287,830 39.9% 2,954,054 44.0% 29.1%
    Term deposits 3,449,720 60.1% 3,759,706 56.0% 9.0%
    Credit deposit ratio 82.0%   86.5%    
  • Deposit growth for HDFC Bank at 17% YoY remained healthy while the overall balance sheet grew by 18.5%. CASA (low cost deposits) as a percentage to overall deposits stood at 44% in 1QFY18. This ratio has improved considerably from a year ago wherein CASA accounted for 39.9% of the overall deposits. A further improvement in this ratio will help the bank to lower the cost of funding which in-turn will help them in improving the net interest margins.
  • Asset quality deteriorated during the quarter on account of farm loan waivers. Gross non-performing asset (GNPA) as a percentage to gross advances came in at 1.24% during the quarter as compared to 1.05% in the preceding quarter. There is ambiguity prevailing among farmers pertaining to the farm loan waiver policy. There is confusion as to whether their loans will be waived in entirety or not. Hence, farmers are currently hesitant to repay their loans. We believe once clarity comes in on the policy front, it will help aid recoveries.
  • As of June 2017, the bank's distribution network was at 4,727 branches and 12,220 ATMs in 2,866 cities. 52% of the bank's branches are now in semi urban and rural areas.
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  2. Equitymaster has financial interest in HDFC Bank Limited.
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