HDFC Bank continues to report strong growth in its income as well as earnings. For 2QFY04, growth numbers are more or less in line with the trend in the last few quarters. While the topline has risen by a strong 34%, the bottomline has increased by a similar 31% on a YoY basis. A strong topline growth combined with a relatively lower rise in expenses has resulted in net interest margin improvement and consequently, operating margins. It must be noted that the strong performance in the September quarter has been achieved despite a significant fall in other income.
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The bank has reported a 44% growth in customer assets (including advances, corporate bonds) and a 29% growth in deposits in the September quarter on a YoY basis. HDFC Bank is one of the largest players in the retail credit segment. In the September quarter, retail advances have grown by 131% and now constitute 32% of total advances (23% last year). In our research model, we have assumed an advances growth rate of 45% in FY04 with net interest margins at 3.2%.
HDFC Bank has also benefited from growth in low cost retail deposits (retail savings deposits grew by 61% in the September quarter on a YoY basis). The strong growth in the same over the last few years has ensured that interest costs are low, enabling it to improve its net interest margins. Net interest margins currently stands at 3.6% compared to 3.3% in FY03.
While the bank has further expanded the scale of operations (253 branches currently compared to 231 in the same period last year), it has managed to keep operating costs under check. This is evident from the strong improvement in operating margins. Going forward, as the pace of expansion slows down, we are likely to see benefits accruing from increased productivity thus leading to improvement in operating margins.
While the bank continues to maintain its growth momentum, it has ensured that its asset quality is healthy. Net NPA to advances ratio has been maintained at a 0.4%, which is one of the lowest in the industry. We would also like to point out that the bank's strong bottomline performance has been maintained despite a significant fall in other income. This arose due to losses booked on investments in the September quarter, as against profits in the same period last year. While core fee based income has risen, fee income on forex and derivatives transactions has declined.
At the current market price of Rs 314, HDFC Bank is trading at a price to book multiple of 3.6x. While the bank has been able to maintain consistent growth momentum over the years, at the current juncture, valuation of this bank is the highest in the Indian banking sector. Considering this, investors need to look more carefully at the potential of the bank and ascertain whether such high valuations are justified in the face of rising competition.
HDFC Bank declared the results for the third quarter of financial year ending March 2017 (3QFY17). The bank has reported 18% YoY and 15% YoY growth in net interest income and net profits respectively in 3QFY17.
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