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HDFC Bank: Growth Steady Even as NPA Provisions Double - Views on News from Equitymaster

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  • Oct 26, 2017 - HDFC Bank: Growth Steady Even as NPA Provisions Double

HDFC Bank: Growth Steady Even as NPA Provisions Double

Oct 26, 2017

HDFC Bank declared the results for the second quarter of financial year ending March 2018 (2QFY18). The bank's net interest income (NII) and net profits grow's 22% YoY and 20% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows 22% YoY in 2QFY18 on the back of 22% YoY growth in advances.
  • NIMs continue to remain stable at 4.3%.
  • Cost to income ratio stood at 42.6% during the quarter. When compared on a year on year basis this ratio has improved significantly. It stood at 45.9% in 2QFY17. On the back of digitization measures, the company expects its cost to income ratio to further reduce to 40% in the next two-three years.
  • Gross non-performing asset (GNPA) as a percentage to advances deteriorated marginally by 0.2% on a sequential basis. The ratio stood at 1.26% as compared to 1.24% in the preceding quarter. This deterioration in asset quality was mainly on account of a project loan given to a foreign account. The same has been restructured under the 5:25 scheme and the bank has made a contingent provision of Rs 7000 million on this account. With respect to NPAs on account of farm loan waivers, the bank has not seen any meaningful change in the asset quality.
  • The provisioning increased by 97% YoY during the quarter which impacted the growth in profitability. The spurt was partially contributed by the Rs 7000 million write-off on account of the project loan to a foreign lender.
  • Capital adequacy ratio (CAR) remained comfortable at 15.1% as against a regulatory requirement of 10.25%.

    Financial Snapshot
    Rs (m) 2QFY17 2QFY18 Change 1HFY17 1HFY18 Change
    Interest income 170,699 196,703 15.2% 335,860 383,390 14.2%
    Interest expense 90,764 99,182 9.3% 178,109 192,162 7.9%
    Net Interest Income 79,936 97,521 22.0% 157,750 191,228 21.2%
    Net interest margin (%)       4.2% 4.3%  
    Other Income 29,010 36,059 24.3% 57,076 71,226 24.8%
    Other Expense 48,700 55,401 13.8% 96,389 109,075 13.2%
    Provisions and contingencies 7,490 14,762 97.1% 16,157 30,350 87.8%
    Profit before tax 52,756 63,417 20.2% 102,280 123,029 20.3%
    Tax 18,202 21,907 20.4% 35,338 42,580 20.5%
    Profit after tax/ (loss) 34,553 41,510 20.1% 66,942 80,449 20.2%
    Net profit margin (%) 20.2% 21.1%   19.9% 21.0%  
    No. of shares (m)*         2,584.0  
    Book value per share (Rs)         371.30  
    P/BV (x)*         4.8  

    *Book value as on 30th September 2017

  • Overall advances grew by a healthy 22% YoY on the back of a strong growth in retail as well as wholesale advances. Retail and wholesale advances grew by 21.5% and 23.3% YoY respectively during the quarter as compared to a year ago.
  • Retail advance growth was buoyant because of a strong growth in personal loans, credit cards and business banking.

    (Rs m) 1HFY17 % of total 1HFY18 % of total Change
    Advances 4,944,180   6,048,670   22%
    Retail 2,669,857 54.0% 3,243,490 53.6% 21.5%
    Corporate 2,274,323 46.0% 2,805,180 46.4% 23.3%
    Deposits 5,917,306   6,893,459   16.5%
    CASA 2,391,040 40.4% 2,954,800 42.9% 23.6%
    Term deposits 3,526,270 59.6% 3,938,660 57.1% 11.7%
    Credit deposit ratio 83.6%   87.7%    
  • Deposit growth for HDFC Bank at 16.5% YoY remained healthy while the overall balance sheet grew by 18.4%. CASA (low cost deposits) as a percentage to overall deposits stood at 42.9% in 2QFY18. This ratio has improved considerably from a year ago wherein CASA accounted for 40.4% of the overall deposits. A further improvement in this ratio will help the bank to lower the cost of funding which in-turn will help them in improving the net interest margins.
  • As of June 2017, the bank's distribution network was at 4,729 branches and 12,259 ATMs in 2,669 cities. 52% of the bank's branches are now in semi urban and rural areas.
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  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Equitymaster has financial interest in HDFC Bank Limited.
  3. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
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