HDFC Bank's Profit Steps Up - Analyst Blog

HDFC Bank's (HDB) fiscal third quarter 2011 (ended December 31, 2010) net earnings of INR63.58 billion (US$1.40 billion), increased 28.9% from the prior-year quarter. Results improved primarily due to strong growth in net revenue, partially offset by an increase in operating expenses and higher provisions and contingencies (primarily comprising loan loss provisions).

HDFC Bank's net interest income for the quarter shot up 24.9% year over year to INR27.77 billion (US$0.61 billion). The growth was driven by an increase in average assets and net interest margin, which remained flat sequentially at 4.2%.                                       

The Quarter That Was

Non-interest revenues summed up to INR11.28 billion (US$0.25 billion), up 25.4% from the prior-year quarter. While fees and commissions as well as foreign exchange/derivative revenues rose from the prior-year quarter, the company experienced a year-over-year increase in loss on revaluation/sale of investments in the quarter.

The largest component of non-interest revenues was fees and commissions of INR9,428 million (US$208.03 million), up 22.5% over the year-ago quarter.

HDFC Bank's operating expenses for the quarter totaled INR18.32 billion (US$0.40 billion), up 22.2% from the year-ago quarter. However, operating expenses improved to 46.5% of net revenue as against 47.6% in the prior-year quarter. Provisions and contingencies for the quarter were INR4,477 million (US$98.79 million), up 4.1% year over year.

HDFC Bank's total deposits saw a sharp increase of 24.2% from the prior-year quarter to INR1.9 trillion (US$0.04 trillion). Gross advances grew 32.7% over December 31, 2009 to INR1.6 trillion (US$0.03 trillion).

Asset Quality

Asset quality improved with gross non-performing assets (NPAs) to gross advances coming at 1.1%, down 50 basis points (bps) year over year. Net NPAs also remained healthy at 0.2% of net advances, down 30 bps from the year-ago quarter.

Capital Ratios

HDFC Bank's total capital adequacy ratio (CAR) as of December 31, 2010 (computed as per Basel 2 guidelines) remained strong at 16.3%, higher than the regulatory minimum of 9.0%, but down from 18.3% recorded at December 31, 2009. Tier-I CAR was 12.1% as of December 31, 2010.

HDFC Bank has broadened its network and its distribution network stood at 1,780 branches and 5,121 ATMs in 833 cities at December 31, 2010. As of December 31, 2009, the company had 1,725 branches and 3,898 ATMs in 771 cities.

Our Viewpoint

We expect the company to face increasing competition in the retail space with competitors' re-entry. We are also concerned about HDFC Bank's highly competitive operating environment.Nevertheless, we expect continued synergies from the company's exposure to the fast growing Indian retail credit sector. The continuation of branch expansion is also expected to drive growth in savings deposits in the upcoming years.

HDFC Bank currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

HDFC Bank's close competitor – ICICI Bank Limited (IBN) reported a 30.5% jump in fiscal third quarter 2011 profit. Results for the reported quarter were primarily driven by higher fee income and a substantial decrease in loan loss provisions.

 
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