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HDFC Bank: No stress on margins, quality

Oct 12, 2012

HDFC Bank declared the results for the second quarter and first half of financial year 2012-13 (1HFY13). The bank has reported 25% YoY growth in net interest income and 30% YoY growth in net profits for the first half. Here is our analysis of the results.

Performance summary
  • Net interest income grows 25% YoY in 1HFY13 on the back of 23% YoY growth in advances.
  • NIMs came in marginally higher at 4.2% at the end of 1HFY13 from 4.1% in 1HFY12 and 4QFY12 (CASA at 46% of total deposits).
  • Other income grows by 23% YoY, with fees and commissions growing in excess of 22% YoY.
  • Cost to income ratio comes in higher at 49.4% in 1HFY12 against 48.3% in 1HFY12.
  • Net NPA to advances remain stable at 0.2% of advances in 1HFY13. Provision coverage ratio at 82% at the end of September 2012.
  • Capital adequacy ratio (CAR) comfortable at 17%, Tier I CAR at 11.4% at the end of 1HFY13.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 67,177 85,246 26.9% 126,957 165,321 30.2%
Interest expense 37,732 47,929 27.0% 69,032 93,163 35.0%
Net Interest Income 29,445 37,317 26.7% 57,925 72,158 24.6%
Net interest margin (%)       4.1% 4.2%  
Other Income 12,116 13,451 11.0% 23,317 28,746 23.3%
Other Expense 20,303 25,055 23.4% 39,650 49,381 24.5%
Provisions and contingencies 3,660 2.929 -20.0% 8,097 7,802 -3.6%
Profit before tax 21,258 25,713 21.0% 41,592 51,523 23.9%
Tax 5,604 7,184 28.2% 10,651 13,947 30.9%
Profit after tax/ (loss) 11,994 15,600 30.1% 22,844 29,774 30.3%
Net profit margin (%) 17.9% 18.3%   18.0% 18.0%  
No. of shares (m)*         2,361.7  
Book value per share (Rs)         141.3  
P/BV (x)*         4.5  
*Book value as on 30th September 2012

What has driven performance in 1HFY13?
  • While the credit portfolio of the sector as a whole grew in low single digits in the first half of FY12, it is evident that HDFC Bank outpaced that growth rate by several notches. At a time when most players in the banking sector are complaining of lower credit demand, HDFC Bank managed to sustain 23% growth in loan book in the first half of this fiscal. This was backed by demand for retail loans especially CV loans, credit cards, gold loans and home loans took centre stage. This was also backed by a similar growth in deposit base. With more than 32% YoY growth in loans to retail customers, the bank has managed the balance sheet expansion. Home, auto and personal loans to retail customers comprised 49% of HDFC Bank's retail loan book at the end of September 2012.

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former) did not dampen the bank's net interest margins (NIMs) in the fourth quarter. In fact, at 4.2%, the NIMs are well within the bank's target range of 3.9% to 4.2%. If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term.

    Credit deposit ratio improves...
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 1,884,858   2,316,490   22.9%
    Agriculture 99,897 5.3% 122,774 5.3% 22.9%
    Retail 928,780 49.3% 1,231,510 53.2% 32.6%
    SMEs 252,571 13.4% 259,447 11.2% 2.7%
    Large corporates 603,609 32.0% 702,759 30.3% 16.4%
    Deposits 2,307,492   2,741,300   18.8%
    CASA 1,172,206 50.8% 1,258,257 45.9% 7.3%
    Term deposits 1,135,286 49.2% 1,483,043 54.1% 30.6%
    Credit deposit ratio 81.7%   84.5%    

  • HDFC Bank has been able to grow its fee income base by 22% YoY in 1HFY13. Also, the proportion of fee to total income remained stable at 23%. Further, the bank had a profit on revaluation and sale of investments in this quarter as against losses in the corresponding half of FY12.

  • HDFC Bank has managed to contain the slippages over the past five quarters. The bank's gross NPAs dropped from 1.0% of advances in 1HFY12 to 0.9% in 1HFY13. Net NPAs were 0.2% of advances while the NPA coverage ratio was 82% in 1HFY13. These included floating provisions of Rs 7 bn. Total restructured loans were at 0.3% of gross advances and were already classified as NPAs at the end of 1HFY13. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has been more aggressive in offering gold loans, CV loans and credit cards over the past 12 months. It has also been cautious in lending against securities over the past 12 months. The fastest growth was witnessed in gold loans while home and auto loans suffered due to the impact of higher loan rates.

    Breakup of retail loans
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Home loans 123,430 13.3% 155,460 12.6% 25.9%
    Auto loans 246,060 26.5% 290,040 23.6% 17.9%
    CV loans 113,480 12.2% 164,690 13.4% 45.1%
    Loan against securities 9,800 1.1% 9,680 0.8% -1.2%
    Personal loans 120,040 12.9% 158,530 12.9% 32.1%
    Credit cards 58,550 6.3% 86,100 7.0% 47.1%
    Gold loans 21,520 2.3% 39,930 3.2% 85.5%
    Other retail advances 235,900 25.4% 327,080 26.6% 38.7%

What to expect?
At the current price of Rs 630, the stock is valued at 3.5 times our estimated FY15 adjusted book value. The bank's management has clearly cited that the rate of loan growth seen in the past few quarters is not sustainable. However, they do not see significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. Having said that, with an employee base of around 67,000, HDFC Bank's cost efficiency will have to be under close watch. While we reiterate an extremely positive outlook for the stock in the medium to long term, the current valuations warrant caution. Hence we would advise investors to Hold on to the stock.

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