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HDFC Bank: Lower provisions boost profits
Oct 19, 2010

HDFC Bank declared its 2QFY11 results. The bank has reported 29% YoY growth in net interest income and 33% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary
  • Interest income grows 14% YoY in 1HFY11 on the back of 38% YoY growth in advances.
  • NIMs remain stable due to marginally higher proportion of lower cost deposits (CASA 52% of deposits).
  • Other income falls by 19% YoY in 1HFY11 due to lower treasury gains. Fee income up 16% YoY.
  • Net NPA to advances improves marginally from 0.5% in 1HFY10 to 0.3% in 1HFY11. Provision coverage ratio at 78% at the end of 1HFY11 (70% in 1HFY10).
  • Capital adequacy ratio (CAR) comfortable at 17%, Tier I CAR at 12.7% at the end of 1HFY11.


Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income 39,919 48,100 20.5% 80,849 92,301 14.2%
Interest expense 20,361 22,837 12.2% 42,736 43,027 0.7%
Net Interest Income 19,558 25,263 29.2% 38,113 49,274 29.3%
Net interest margin (%)       4.2% 4.2%  
Other Income 10,535 9,607 -8.8% 21,330 19,511 -8.5%
Other Expense 14,163 16,799 18.6% 28,328 33,227 17.3%
Provisions and contingencies 5,941 4,545 -23.5% 12,529 10,095 -19.4%
Profit before tax 15,930 18,071 13.4% 31,115 35,558 14.3%
Tax 3,114 4,405 41.5% 5,651 8,225 45.5%
Profit after tax/ (loss) 6,875 9,121 32.7% 12,935 17,238 33.3%
Net profit margin (%) 17.2% 19.0%   16.0% 18.7%  
No. of shares (m)         462.6  
Book value per share (Rs)         523.2  
P/BV (x)*         4.5  
*Book value as on 30th September 2010

What has driven performance in 1HFY11?
  • Despite the slower overall growth in advances for the sector, HDFC Bank witnessed a growth of 38% in its loan book in 1HFY11 without compromising on margins and quality. Of this 10% growth in assets attributable to a one off expansion in wholesale (corporate) loans. This was nearly 2 times the average sector growth.

    What is enthusing is that the bank backed the growth in assets with growth in low cost deposits. The 31% YoY growth in savings and current accounts kept the bankís net interest margins (NIMs) stable at 4.2%. The retail loan portfolio comprised 52% of total loan book at the end of 1HFY11.

    Corporate loan kicker..
    (Rs m) 1HFY10 % of total 1HFY11 % of total Change
    Advances † 1,151,140   1,585,120   37.7%
    Agriculture ††††††† 61,010 5.3% ††††††† 84,011 5.3% 37.7%
    Retail 626,529 51.0% †††† 819,500 51.7% 30.8%
    SMEs 154,253 13.4% †††† 177,533 11.2% 15.1%
    Large corporates 348,795 30.3% †††† 507,238 32.0% 45.4%
    Deposits † 1,497,860   † 1,953,210   30.4%
    CASA 753,871 50.3% 988,324 50.6% 31.1%
    Term deposits 743,990 49.7% 964,886 49.4% 29.7%
    Credit deposit ratio 76.9%   81.2%    

    The management of HDFC Bank does not see the current NIMs being sustainable. It hopes to maintain the same in the range of 3.9% to 4.2% this fiscal. However, even for FY11 HDFC Bank sees itself outperforming the RBIís sector loan growth target of 20%.

  • HDFC Bank has been able to grow its fee income base by 16% YoY in 1HFY11. As a result, the proportion of fee to total income improved to 28% as against 24% in 1HFY10. 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 bankís other income.

  • HDFC Bank has managed to contain the slippages over the past four quarters. HDFC Bankís gross NPAs dropped from 1.8% of advances in 1HFY10 to 1.2% in 1HFY11. Net NPAs were 0.3% of advances while the NPA coverage ratio was 78% in 1HFY11. Total restructured loans were at 0.3% of gross advances of which 0.2% were restructured loans classified as NPAs at the end of 1HFY11. These are therefore not really a concern.

  • HDFC Bank will add 150 branches in FY11 and is expected to maintain its cost to income ratio at around 47% as in FY10. The cost to income ratio at the end of 1HFY11 was 47.5% as against 49.8% in 1HFY10.

What to expect?
At the current price of Rs 2,366, the stock is valued at 2.6 times our estimated FY13 adjusted book value. The bankís growth performance continues to remain largely in line with our estimates. A higher CAR (capital adequacy) is also a matter of comfort. However, we do envisage muted asset growth and pressure on margins in the medium term. While we maintain our positive outlook on the bank from a long term perspective, we believe that most of the medium term upsides are already factored into the valuations (Research Pro subscribers can view latest updates here ).

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