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HDFC Bank: Wielding pricing power
Oct 16, 2008

Performance summary
  • Interest income grows by 72% YoY in 1HFY09 on the back of 64% growth in advances due to the integration with CBoP.
  • NIMs improve by 0.2% at the end of 1HFY09 despite a fall in the proportion of CASA; CASA level lower at 45%.
  • Operating expenses grow by 68% YoY due to the merger; cost to income ratio at 55%.
  • Fee income grows by 50% YoY.
  • Net NPA to advances move up from 0.2% in FY08 to 0.6% in 1HFY09.
  • Capital adequacy ratio (CAR) at 11.4%.


Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest Income 23,628 39,912 68.9% 44,319 76,129 71.8%
Interest Expense 12,000 21,248 77.1% 22,837 40,230 76.2%
Net Interest Income 11,628 18,664 60.5% 21,482 35,899 67.1%
Net interest margin (%)       4.0% 4.2%  
Other Income 4,824 6,431 33.3% 10,549 12,365 17.2%
Other Expense 8,183 13,867 69.5% 15,928 26,761 68.0%
Provisions and contingencies 2,894 3,460 19.6% 5,965 6,905 15.8%
Profit before tax 5,375 7,768 44.5% 10,138 14,598 44.0%
Tax 1,688 2,488 47.4% 3,241 4,675 44.2%
Profit after tax/ (loss) 3,687 5,280 43.2% 6,897 9,923 43.9%
Net profit margin (%) 15.6% 13.2%   15.6% 13.0%  
No. of shares (m)       353.4 425.0  
Book value per share* (Rs)         326.4  
P/BV* (x)         3.3  
* Book value as on 30th September 2008

What has driven performance in 2QFY09?
  • HDFC Bank’s results continue to be heavily influenced by the impact of merger with the erstwhile Centurion Bank of Punjab (CBoP) and therefore are not comparable with the corresponding numbers of FY08 to that extent. While the mix of retail and corporate assets continue to remain 55:45 (earlier 60:40), HDFC Bank’s balance sheet showed very little signs of slowdown in incremental lending at the end of 1HFY09, thanks to the merger.

  • In line with our expectations, the proportion of low cost deposits (CASA) dropped to 44.9% from 54.5% at the end of 2QFY08. Nonetheless, this has not adversely impacted the bank’s net interest margins (NIMs), which have infact improved in the past 12 months due to its pricing power. We have estimated the bank’s NIMs at 4.0% at the end of FY09.

    CASA bears the brunt of merger…
    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 622,780   1,022,223   64.1%
    Retail 283,270 45.5% 392,612 38.4% 38.6%
    Corporate 186,178 29.9% 242,031 23.7% 30.0%
    Deposits 910,686   1,337,805   46.9%
    CASA 496,324 54.5% 589,170 44.9% 18.7%
    Term deposits 414,362 45.5% 748,635 56.0% 80.7%
    Credit deposit ratio 68.4%   76.4%    

  • HDFC Bank has been able to grow its fee income base by 50% YoY in 2QFY09. As a result, the proportion of fee to total income improved to 26% as against 18% in 2QFY08. However, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments, the absence of which would have otherwise aided the bank’s other income.

  • Due to the merger with CBoP, the quality of HDFC Bank’s asset book has been slightly tarnished. The net NPA to advance ratio for the bank has moved up from 0.2% in FY08 to 0.6% in 2QFY09. We however draw comfort from the fact that the bank has been making adequate provisioning to take care of possible slippages.

  • With the integration of HDFC Bank branches and employees to that of CBoP, the cost to income ratio has increased from 50% in 2QFY08 to 55% in 2QFY09. Given the bank’s plan to continue to expand its franchise, we expect the ratio to be marginally higher in the medium term.

What to expect?
At the current price of Rs 1,076, the stock is valued at 2.0 times our estimated FY11 adjusted book value (after factoring in the merger with CBoP). The bank’s overall performance continues to remain largely in line with our estimates. Although the merger with CBoP has partially impacted the bank’s fundamentals, we see these as temporary blips and expect the bank to correct the same by the end of this fiscal. While a lower CAR (capital adequacy) is a matter of concern, with its conservative approach towards growth and margins, we see the bank efficiently sailing through the difficult times. We retain our positive outlook on the bank.

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