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HDFC Bank: Margins stable despite slowdown - Views on News from Equitymaster

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HDFC Bank: Margins stable despite slowdown
Oct 15, 2013

HDFC Bank declared the results for the second quarter and first half of financial year 2013-14 (1HFY14). The bank has reported 18% YoY and 28% YoY growth in net interest income and net profits respectively in 1HFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows 18% YoY in 1HFY14 on the back of 16% YoY growth in advances.
  • NIMs remain stable at 4.3% at the end of 1HFY14, albeit slightly lower than 4.4% in the corresponding quarter of FY13.
  • Other income grows by 21% YoY, with fees and commissions growing at 11% YoY.
  • Cost to income ratio drops from 49.9% in 1HFY13 to 47.2% in 1HFY14.
  • Net NPA to advances move up from at 0.2% of advances in 1HFY13 to 0.3% in 1HFY14.
  • Restructured loans were also 0.2% of loan book at the end of September 2013.
  • Capital adequacy ratio (CAR) comfortable at 14.6%, Tier I CAR at 9.9% at the end of 1HFY14.

Consolidated Financial Snapshot
Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 86,748 100,933 16.4% 168,505 197,563 17.2%
Interest expense 47,930 56,168 17.2% 93,163 108,611 16.6%
Net Interest Income 38,818 44,765 15.3% 75,342 88,952 18.1%
Net interest margin (%)       4.4% 4.3%  
Other Income 14,718 18,443 25.3% 31,213 37,699 20.8%
Other Expense 26,853 29,342 9.3% 53,119 59,724 12.4%
Provisions and contingencies 3,899 3,859 -1.0% 9,714 9,130 -6.0%
Profit before tax 26,683 33,866 26.9% 53,436 66,927 25.2%
Tax 7,184 10,184 41.8% 13,946 19,535 40.1%
Profit after tax/ (loss) 15,600 19,823 27.1% 29,776 38,262 28.5%
Net profit margin (%) 18.0% 19.6%   17.7% 19.4%  
No. of shares (m)*         2,386.1  
Book value per share (Rs)         167.8  
P/BV (x)*         3.9  
*Book value as on 30th September 2013

What has driven performance in 1HFY14?
  • That the bank's profit growth in September quarter has been the lowest quarterly growth in a decade has made headlines. However, we do not find HDFC Bank's performance in the second quarter or first half of FY14 as a major setback to its long term fortunes. As has been the case for 36 odd quarters, HDFC Bank's profit growth for 2QFY14 hardly ventured too far from the target of around 25-30% YoY growth. The tepid loan growth, at 16% YoY however, reflected the underlying sentiment in the credit market. That too, most of it has come in on the back of growth in the retail 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 14.2% YoY, although in line with sector average, was fuelled by demand for term deposits. CASA (low cost deposits) as a share of total deposits fell from 47% in 1HFY13 to 45% in 1HFY14.

    Visible slowdown in credit offtake
    (Rs m) 1HFY13 % of total 1HFY14 % of total Change
    Advances 2,315,664   2,686,170   16.0%
    Retail 1,231,510 53.2% 1,439,770 53.6% 16.9%
    Corporate 1,084,154 46.8% 1,246,400 46.4% 15.0%
    Deposits 2,740,902   3,130,110   14.2%
    CASA 1,299,188 47.4% 1,408,550 45.0% 8.4%
    Term deposits 1,441,714 52.6% 1,721,561 55.0% 19.4%
    Credit deposit ratio 84.5%   85.8%    

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former), however, did not dampen the bank's net interest margins (NIMs) substantially. In fact, at 4.3%, the NIMs are within 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. Nevertheless we have been conservative in our assumptions.

  • HDFC Bank has been able to grow its fee income base by 11% YoY in 1HFY14. Also, the proportion of fee to total income remained stable at 23%. Further, the bank booked a bigger loss on revaluation and sale of investments in 1HFY14 as against the losses in 1HFY13. Given the volatility in bond markets, we would prefer to be conservative about treasury gains in FY14.

  • 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 1HFY14. Net NPAs, however moved up marginally to 0.3% of advances while the NPA coverage ratio was 80% in 1HFY14. Total restructured loans were at 0.2% of gross advances and were already classified as NPAs at the end of 1HFY14. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has been more aggressive in offering personal loans, auto loans and credit cards over the past 12 months. The growth earlier witnessed in gold loans seems to have been affected by regulatory restrictions.

    Breakup of retail loans
    (Rs m) 1HFY13 % of total 1HFY14 % of total Change
    Home loans 155,460 12.6% 163,720 11.4% 5.3%
    Auto loans 290,040 23.6% 325,160 22.6% 12.1%
    CV loans 164,690 13.4% 169,560 11.8% 3.0%
    Loan against securities 9,680 0.8% 9,420 0.7% -2.7%
    Personal loans 158,530 12.9% 193,140 13.4% 21.8%
    Credit cards 86,100 7.0% 108,620 7.5% 26.2%
    Gold loans 39,930 3.2% 44,200 3.1% 10.7%
    Other retail advances 327,080 26.6% 425,950 29.6% 30.2%

What to expect?

At the current price of Rs 648, the stock is valued at 2.7 times our estimated FY16 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. We had recommended HDFC Bank amongst the top 5 stocks to buy in our last StockSelect report. At the current valuations we recommend investors to hold on to the stock.

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