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HDFC: Continues to see loan growth

Oct 18, 2011

HDFC declared its results for the second quarter of the financial year 2011-12 (2QFY11). The institution has reported a 38% growth in interest income while net profits have grown by 21% YoY, during the half. Here is our analysis of the results.

Performance summary
  • Interest income grows 38.1% YoY, in 1HFY12 on the back of 19.5% YoY growth in advances.
  • Net interest margin (NIM) is sustained at 4% in 1HFY12.
  • Other income sees a sharp 65% increase on account of profits from the sale of investments.
  • Net profit grows by 21% YoY, mainly on account of higher other income, but higher interest costs took its toll. Profit margin falls slightly to 27.8% from 28.5% previously.
  • Capital adequacy stands at 13.8% and HDFC had nil Net NPAs (non-performing assets) at the end of 1HFY12.

Standalone numbers
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income  29,066 40,771 40.3% 57,037 78,777 38.1%
Interest Expense 17,176 26,905 56.6% 34,371 52,054 51.4%
Net Interest Income 11,890 13,865 16.6% 22,665 26,723 17.9%
Net interest margin       4.0% 4.0%  
Other Income 637 921 44.6% 685 1,130 65.0%
Other Expense 1,147 1,361 18.6% 2,265 2,628 16.0%
Provisions and contingencies 44 48 9.5% 84 93 10.3%
Profit before tax 11,335 13,377 18.0% 21,001 25,132 19.7%
Tax 3,260 3,670 12.6% 5,980 6,980 16.7%
Effective tax rate 28.8% 27.4%   28.5% 27.8%  
Profit after tax/ (loss) 8,075 9,707 20.2% 15,021 18,152 20.8%
Net profit margin (%) 27.8% 23.8%   26.3% 23.0%  
No. of shares (m)       1460.1 1472.2  
Book value per share (Rs)*         127.0  
P/BV (x)         5.3  

What has driven performance in 1HFY12?
  • HDFC's loan book grew at a strong pace (up 19.5% YoY) in 1HFY12. Inclusive of loans sold, the growth clocked was 24%. Due to higher interest rates on loans, the company saw a 38.1% increase in interest income during the first half. Its benchmark prime lending rate now stands at 16.5% (after a 0.5% rate hike in August). This is the highest lending rate in HDFC's operating history.

  • The quarterly performance was also robust with the company seeing a 40.3% YoY increase in interest income in 2QFY12. Profits also grew by over 20%

    Loan book break up...
    (Rs m) 1HFY11 1HFY12 Change
    Individuals 682,635 802,680 17.6%
    % of total 64.2% 63.2%  
    Corporate Bodies 365,226 451,442 23.6%
    % of total 34.4% 35.5%  
    Others 15,014 15,802 5.3%
    % of total 1.4% 1.2%  
    Total loans 1,062,875 1,269,924 19.5%

  • Net interest income grew at a relatively muted 18% YoY, compared to the robust growth in interest income. This was on account of higher interest costs.

  • HDFC's other income grew by 65% in 1HFY12. Although it had sold its 5% stake in Intelenet Global Services some time back, it only received the money in this quarter. This helped contribute towards the bottom line.

  • HDFC's gross NPAs (loans outstanding for more than 90 days) aggregated to 0.82% of the loan portfolio in 1HFY12 (0.86% previously). The balance in the provision for contingencies account is 1.2% of the overall loan portfolio.

  • HDFC's capital adequacy ratio (CAR) stands at 13.8%, as against the minimum requirement of 12%, ensuring sufficient capital to grow in the medium term without any equity dilution. Tier 1 capital was a robust 11.7% against a minimum of 6%.

  • At the end of September 2011 the unrealised gains on HDFC's listed investments amounted to Rs 144.9 per share as against Rs 159 per share at the end of September 2010.

What to expect?

At the current price of Rs 673, the stock is trading at 3.7 times our estimated FY14 consolidated adjusted book value. HDFC's loan growth in 1HFY12 has come in slightly higher than our estimates. In the current rising interest rate scenario and on a higher base of individual home loans, growth for HDFC is unlikely to come in at a sharp clip going forward. The management is however confident of maintaining an 18-20% loan growth target for FY12. However, we have been slightly more conservative in this regard.

HDFC was able to maintain its margins at around 4% in the first half, but one could see some pressure on its net interest income (NII). Margins are also expected to be subject to some pricing pressures going forward, and the RBI's interest rate policy will have to be watched for further tightening. We continue to maintain our negative view on the stock at current levels.

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