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HDFC: Higher provisions restrict profits

Oct 30, 2014 | Updated on Oct 30, 2019

HDFC declared its results for the second quarter (2QFY15) and first half of the financial year (1HFY15). The institution has reported 13.5% YoY growth in net interest income while net profits have grown by modest 7.2% YoY during 2QFY15. The profits for 1HFY15 were up by 10.8% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 13.5% YoY in 2QFY15 on the back of healthy loan book expansion. The individual loan book reports 23% YoY growth and total loan book reports 15% YoY.
  • Net interest margin remain s stable at 4.0% for 2QFY15.
  • Other income increases by staggering 45.5% YoY on the back of superior investment gains.
  • Net profit remains restricted to 7.2% YoY for 2QFY15 on account of higher provisions.
  • Capital adequacy and gross NPAs stand at 17.9% and 0.7% respectively at the end of June 2015.

Standalone financial performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Interest income 58,592 65,327 11.5% 114,161 129,786 13.7%
Interest Expense 40,457 44,739 10.6% 78,090 88,044 12.7%
Net Interest Income 18,135 20,589 13.5% 36,072 41,743 15.7%
Net interest margins       4.0% 4.0%  
Other Income 948 1,380 45.5% 1,028 1,533 49.1%
Other Expense 1,720 1,803 4.8% 3,355 3,513 4.7%
Provisions and contingencies 150 350 133.3% 450 700 55.6%
Profit before tax 17,213 19,816 15.1% 33,294 39,062 17.3%
Tax 4,550 5,407 18.8% 8,900 10,463 17.6%
Effective tax rate 26.4% 27.3%   26.7% 26.8%  
Deferred Tax Liability 832.7     1,577.1  
Profit after tax/ (loss) 12,663 13,576 7.2% 24,394 27,022 10.8%
Net profit margin (%) 21.6% 20.8%   21.4% 20.8%  
No. of shares (m)         1,569  
Book value per share (Rs)*         196.0  
P/BV (x)         5.3  
* On a trailing 12-months basis

What has driven performance in 2QFY15?
  • Driven by rapid growth in retail loans, stable margins and improved asset quality, HDFC reported a benign profitability growth for 2QFY15. The profits for the quarter have grown by 7.2% YoY purely on the back of higher non-interest income. Provisions for the quarter have increasingly gone up restricting the earnings growth, but asset quality remains stable for HDFC. The profitability for 1HFY15 also grew by modest 10.8% YoY due to higher provisions.

  • On account of growing demand for loans for home buying by individuals, HDFC's loan book reported a healthy growth. While the demand for retail loans has remained strong, 81% of the incremental growth in loan book during the quarter has come from individual loan portfolio. The institution reported healthy 15% YoY growth in total loan book and the individual loan book has grown by robust 23% YoY. The individual loan disbursements continue to grow at a rapid pace. Overall, the individual loans comprise 71% of the total loan book.

  • The net interest income growth has remained steady for the quarter gone by. The spreads have moved up to 2.3% levels; albeit moderately during 2QFY15. Hence, the net interest margins (NIMs) have remained flat at 4%.

  • The other income has stood on the higher side on the back of higher reporting 45.5% YoY growth during 2QFY15 and 49.1% YoY growth during 1HFY15 on the back of strong investment gains.

  • The operating costs have remained subtle during the quarter. The cost-income ratio at 8% has remained benign and stands as one of the lowest in the industry.

  • The provisions for the quarter have swelled. While the provisions spiked 133.3% YoY for 2QFY15, for 1HFY5 they were up by 55.6% YoY.

  • The gross non-performing assets (GNPAs) stood at 0.7% of the portfolio as at Septmeber 30, 2014 as against 0.79% a year ago. The individual portfolio has reported 0.53% as GNPAs; while the non-individual portfolio stood at 1.02%. Nonetheless, the asset quality of HDFC Ltd continues to be one of the best in the industry.
What to expect?
At the current price of Rs 1047, the stock is trading at 4.1 times our estimated FY17 adjusted book value.

The higher provisions during the first half of FY15 dented the profts for HDFC Ltd. That said, we are particularly enthused with the stability in asset quality and spreads despite the testing times. Led by strong demand from the retail customers, HDFC's loan book is poised to grow. We expect the business growth to remains strong and margins stable for the company going forward.

HDFC Ltd has moved up steadily and the stock has witnessed significant momentum. Hence, we reiterate HOLD rating for the stock and reckon it as a good long-term bet given the resilient balance sheet, sustained margins and impeccable asset quality.

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Aug 11, 2020 09:05 AM