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HDFC Bank: Showing its forte in retail loans
Oct 19, 2011

HDFC Bank declared the results for the second quarter and first half of financial year 2011-12 (1HFY12). The bank has reported 18% YoY growth in net interest income and 33% YoY growth in net profits for the half year period. Here is our analysis of the results.

Performance summary
  • Interest income grows 38% YoY in 1HFY12 on the back of 26% YoY growth in advances.
  • NIMs marginally affected by higher cost of deposits (CASA at 47% of total deposits).
  • Other income grows at a tepid rate of 20% YoY due to losses in the investment portfolio.
  • Net NPA to advances improves marginally from 0.3% in 1HFY11 to 0.2% in 1HFY12. Provision coverage ratio at 81.3% at the end of 1HFY12 (75% in 1HFY11).
  • Capital adequacy ratio (CAR) comfortable at 16.5%, Tier I CAR at 11.4% at the end of 1HFY12.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 48,099 67,177 39.7% 92,297 126,956 37.6%
Interest expense 22,837 37,732 65.2% 43,027 69,032 60.4%
Net Interest Income 25,262 29,445 16.6% 49,270 57,924 17.6%
Net interest margin (%)       4.2% 4.1%  
Other Income 9,607 12,116 26.1% 19,516 23,317 19.5%
Other Expense 16,799 20,304 20.9% 33,227 39,650 19.3%
Provisions and contingencies 4,545 3,661 -19.4% 10,095 8,097 -19.8%
Profit before tax 18,070 21,257 17.6% 35,559 41,591 17.0%
Tax 4,405 5,604 27.2% 8,224 10,651 29.5%
Profit after tax/ (loss) 9,120 11,992 31.5% 17,240 22,843 32.5%
Net profit margin (%) 19.0% 17.9%   18.7% 18.0%  
No. of shares (m)**         2,338.3  
Book value per share (Rs)         118.3  
P/BV (x)*         4.2  
*Book value as on 30th September 2011
**No. of shares adjusted for stock split

What has driven performance in 1HFY12?
  • Spearheading growth in asset classes across the retail loan segment, HDFC Bank managed to sustain its long term average loan growth rate. At 26% YoY, HDFC Bank’s loan growth for the first half of FY12 is hardly representative of the relatively muted credit growth in the sector. With its customer base nearing 22 m, HDFC Bank managed to once again grow well in excess of the industry average. Backed by more than 34% YoY growth and 22% YoY growth in loans to retail customers and large corporate respectively, the bank has managed the balance sheet expansion without compromising on margins and quality. The higher growth in term deposits relative to CASA (due to elevated rates on the former) marginally affected net interest margins (NIMs). However, at 4.1%, the NIMs are well within the bank’s target range of 3.9% to 4.2%. A marginal correction in NIMs cannot be ruled out in the near term. Also, the loan growth is expected to be tempered due to rising interest rates.

    Retail loan growth tops sector average
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 1,512,078   1,899,170   25.6%
    Agriculture 80,140 5.3% 100,656 5.3% 25.6%
    Retail 692,040 45.8% 928,780 48.9% 34.2%
    SMEs 202,618 13.4% 212,707 11.2% 5.0%
    Large corporates 536,788 35.5% 657,113 34.6% 22.4%
    Deposits 1,953,226   2,306,760   18.1%
    CASA 989,012 50.6% 1,091,850 47.3% 10.4%
    Term deposits 964,214 49.4% 1,214,910 52.7% 26.0%
    Credit deposit ratio 77.4%   82.3%    

  • HDFC Bank has been able to grow its fee income base by 15% YoY in 1HFY12. However, the proportion of fee to total income dropped to 23% as against 25% in 1HFY11. Further, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments due to higher bond yields, the absence of which would have otherwise aided the bank’s other income.

  • HDFC Bank has managed to contain the slippages over the past four quarters. The bank’s gross NPAs dropped from 1.2% of advances in 1HFY11 to 1.0% in 1HFY12. Net NPAs were 0.2% of advances while the NPA coverage ratio was 81% in 1HFY12. Total restructured loans were at 0.4% of gross advances of which 0.3% was restructured loans classified as NPAs at the end of 1HFY12. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has adopted a cautious stance with regard to personal loans and credit cards as well as lending against securities over the past 12 months. The fastest growth was witnessed in home loan and CV segments while auto loans suffered due to the impact of higher loan rates.

    Breakup of retail loans
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Home loans 91,760 13.3% 123,440 13.3% 34.5%
    Auto loans 207,610 30.0% 246,060 26.5% 18.5%
    CV loans 69,570 10.1% 113,480 12.2% 63.1%
    Loan against securities 10,230 1.5% 9,800 1.1% -4.2%
    Personal loans 109,800 15.9% 120,040 12.9% 9.3%
    Credit cards 54,050 7.8% 58,550 6.3% 8.3%

  • HDFC Bank added 385 branches during the past 12 months and maintained its cost to income ratio at around 49% as in 1HFY11.

What to expect?
At the current price of Rs 491, the stock is valued at 2.6 times our estimated FY14 adjusted book value. The bank’s growth performance continues to remain largely in line with our estimates. A comfortable CAR (capital adequacy) position offers sufficient headroom for growth without additional dilution. However, we do envisage muted asset growth and pressure on margins in the medium term.

We maintain our positive outlook on the bank from a long term perspective, and believe that there are reasonable upsides over the next 2 to 3 years. Please refer to the stock split adjusted target price in the latest recommendation report.

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