• APRIL 15, 2003

HDFC Bank: Where to from here?

HDFC Bank, has reported a strong fourth quarter performance in FY03 with a 29% rise in net profits while its interest income has increased by nearly 21%. The FY03 performance has been even better with a 31% rise in net profit while its topline has grown by nearly 19%.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Income from operations 4,620 5,572 20.6% 17,030 20,23018.8%
Other Income 1,040 1,289 23.9% 3,333 4,731 42.0%
Interest expense 2,766 3,108 12.3% 10,737 11,92011.0%
Net interest income 1,854 2,464 32.9% 6,293 8,31032.1%
Other expenses 1,186 1,715 44.6% 4,180 5,91841.6%
Operating Profit 668 749 12.1% 2,113 2,392 13.2%
Operating Profit Margin (%)14.5%13.4% 12.4%11.8% 
Provisions and contingencies 512 344-32.9% 1,192 1,41418.7%
Profit before Tax 1,196 1,69441.7% 4,254 5,70934.2%
Tax 293 52880.1% 1,283 1,83342.8%
Profit after Tax/(Loss) 902 1,16629.2% 2,970 3,87630.5%
Net profit margin (%)19.5%20.9% 17.4%19.2% 
No. of Shares (m) 281.4 282.1   281.4 282.1  
Diluted Earnings per share (Rs)*12.816.5 10.513.7 
P/E Ratio (x)    17.6 

Topline growth was mainly fueled by the healthy growth in advances. During the year, the bank's total advances grew by nearly 73% to Rs 118 bn primarily due to 121% rise in retail portfolio (Rs 32 bn). The proportion of retail loans to total loans has increased to 29% in FY03 from 21% last year. The bank's continuous efforts to launch new products fueled its number of retail clients to 3.1 m from 2.2 m as in FY02. The impact the of new products offerings like credit cards and two wheeler finance, launched in FY02, has started to reflect in FY03. The bank has also widened its reach by increasing number of branches to 231 (from 171 in FY02) and doubling its ATM network to 732 (from 479). The bank’s core customer assets (including advances, commercial paper, corporate debentures) also grew at a healthy rate of 38% in FY03. This is substantial in an environment where overall credit off-take has been below par.

Revenue mix
(Rs m)4QFY024QFY03ChangeFY02FY03Change
Interest on advances 1,616 2,261 39.9% 6,239 7,867 26.1%
Income on investments 2,405 3,067 27.5% 8,640 11,130 28.8%
Interest on balance with RBI 595 236 -60.3% 2,140 1,204 -43.7%
Others 4 8 105.1% 11 29 156.6%
Total 4,620 5,572 20.6% 17,030 20,230 18.8%

HDFC Bank has also reported a healthy rise in net interest income. This is primarily due to the robust increase in advances as well as improvement in net interest margins (NIM). NIM has improved to 3.3% compared to 3.1% in FY02. Improvement in NIM could be attributed to the bank benefiting from a low interest rate regime (this enables the bank to borrow incremental loans at a lower rate). Total deposits of the bank increased by 27%, of which savings deposits increased by a whopping 58%. Consequently, savings account deposits alone accounted for nearly 21% of the bank's deposits in FY03 (17% last year). Thus, this has provided a fillip to the NIM.

The bank has witnessed a significant increase in its operating expenses. The aggressive expansion of its branches as well as ATMs could be the key factors. Cost to income ratio has risen to 45% from 43% in FY02. While the bank's loss and NPA provisioning was lower by nearly 33% in 4QFY03, for the whole year i.e. FY03, provisioning grew by 19%. This has led to a further improvement in net NPA to total advances ratio from 0.5% to 0.4% in FY03, which is one of the lowest in the industry.

Net profit has been significantly buoyed by the growth in other income (higher 42% for FY03). This was primarily due to a 47% rise in the bank's commission and fee income. As the bank's size increases, it is able to take on bigger clients and thus fee-based income and commission seem to have shifted to a new level. Foreign exchange and derivatives revenues were also up by 48.8% in FY03, while gains from the bank’s securities trading and debt distribution businesses increased by 27.6%. HDFC Bank's other income contribution to total income increased to 23% from 20% in FY02.

At the current market price of Rs 241, HDFC Bank is trading at a P/E of 18x and a price to book value ratio of over 3. The bank's premium valuations are due to its strong growth rates, superior quality of assets and better interest margins (capital adequacy ratio is at a healthy level of 11.1% as on March 2003). The bank has done well to stave off increasing competition from other private as well as public sector banks. But with its peers slowly getting their act together, it will be very difficult for HDFC Bank to maintain such high growth rates. Thus, the upside for the stock seems limited due to its already stretched valuations.

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