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HDFC Bank: Cutting down on high risk retail loans - Views on News from Equitymaster

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HDFC Bank: Cutting down on high risk retail loans
Oct 27, 2014

HDFC Bank declared the results for the second quarter of financial year ended March 2015 (2QFY15). The bank has reported 20% YoY and 21% YoY growth in net interest income and net profits respectively in 1HFY15. Here is our analysis of the results.

Performance summary
  • Net interest income grows 20% YoY in 1HFY15 on the back of 21.8% YoY growth in advances.
  • NIMs move up slightly to 4.5% in 1HFY15 from 4.3% in 1HFY14, despite the fall in CASA proportion.
  • Other income grows by 3.4% YoY, with fees and commissions growing at 13.4% YoY.
  • Cost to income ratio drops from 47.2% in 1HFY14 to 45.8% in 1HFY15.
  • Net NPA to advances move up from at 0.2% of advances in 1HFY14 to 0.3% in 1HFY15. Restructured loans were slightly lower at 0.1% of loan book at the end of September 2014.
  • Capital adequacy ratio (CAR) comfortable at 15.7%, Tier I CAR at 11.8% at the end of September 2014.

Rs (m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Interest income 100,933 118,476 17.4% 197,563 230,677 16.8%
Interest expense 56,168 63,366 12.8% 108,610 123,851 14.0%
Net Interest Income 44,765 55,110 23.1% 88,953 106,826 20.1%
Net interest margin (%)       4.3% 4.5%  
Other Income 18,443 20,471 11.0% 37,699 38,976 3.4%
Other Expense 29,342 34,979 19.2% 59,724 66,763 11.8%
Provisions and contingencies 3,859 4,558 18.1% 9,130 9,387 2.8%
Profit before tax 33,866 40,602 19.9% 66,928 79,039 18.1%
Tax 10,184 12,228 20.1% 19,535 23,507 20.3%
Profit after tax/ (loss) 19,823 23,816 20.1% 38,263 46,145 20.6%
Net profit margin (%) 19.6% 20.1%   19.4% 20.0%  
No. of shares (m)*         2,416.0  
Book value per share (Rs)         201.6  
P/BV (x)*         4.5  
*Book value as on 30th September 2014

What has driven performance in 1HFY15?
  • HDFC Bank has clearly shown a preference for low risk loans in the first six months of FY15. Investors must note that most of the loan growth has come in on the back of growth in low yield assets in the corporate segment. The bank also has enough capital headroom to grow its loan book although the management believes that growth may continue to remain moderated in the near term. Deposit growth at 24.8% YoY, is above sector average. This was fuelled by demand for term deposits. CASA (low cost deposits) as a share of total deposits fell from 47.4% in 1HFY14 to 43.2% in 1HFY15.

    Corporate loan overweigh
    (Rs m) 1HFY14 % of total 1HFY15 % of total Change
    Advances 2,686,970   3,272,730   21.8%
    Retail 1,439,770 53.6% 1,581,280 48.3% 9.8%
    Corporate 1,247,200 46.4% 1,691,450 51.7% 35.6%
    Deposits 3,130,465   >3,906,820   24.8%
    CASA 1,483,840 47.4% 1,687,746 43.2% 13.7%
    Term deposits 1,646,624 52.6% 2,219,074 56.8% 34.8%
    Credit deposit ratio 85.8%   83.8%    

  • The higher growth in term deposits relative to CASA (due to elevated rates on the former), however, did not dampen the bank's net interest margins (NIMs). If term deposit costs move lower, a marginal improvement in NIMs cannot be ruled out in the medium term. Having said that, since the lending to corporate can also fetch lower yields, we have been conservative in our assumptions.

  • HDFC Bank has managed to contain the slippages over the past five quarters. The bank's gross NPAs were at 1.0% of advances in 1HFY15. Net NPAs, however moved up marginally to 0.3% of advances while the NPA coverage ratio was 80% in 1HFY15. Total restructured loans were at 0.1% of gross advances and were already classified as NPAs at the end of FY14. These are therefore not really a concern.

  • The detailed breakup of retail loan portfolio shows that the bank has sharply cut down incremental lending in high risk loan categories like CV loans, personal loans and credit cards.

    Breakup of retail loans
    (Rs m) 1HFY14 % of total 1HFY15 % of total Change
    Home loans 163,720 11.4% 195,580 12.4% 19.5%
    Auto loans 325,160 22.6% 377,780 23.9% 16.2%
    CV loans 169,560 11.8% 138,570 8.8% -18.3%
    Loan against securities   9,420 0.7%   9,740 0.6% 3.4%
    Personal loans 231,370 16.1% 193,140 12.2% -16.5%
    Credit cards 140,050 9.7% 108,620 6.9% -22.4%
    Gold loans 38,600 2.7% 44,200 2.8% 14.5%
    Other retail advances 361,890 25.1% 513,650 32.5% 41.9%

  • As of September 2014, the bank's distribution network was at 3,600 branches and 11,515 ATMs in 2,272 cities, an increase of 197 branches and 259 ATMs during this fiscal year so far. Number of employees increased from 69,662 as of September, 2013 to 75,339 as of September, 2014
What to expect?
At the current price of Rs 900, the stock is valued at 2.8 times our estimated FY17 adjusted book value. We have reviewed our estimates for the stock and have arrived at a target price of Rs 1,094 from FY17 perspective. Going forward we do not see the bank facing significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. That HDFC Bank is keeping a close watch on its cost to income ratio is also encouraging. At the current valuations we recommend investors to hold on to the stock.

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