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HDFC Bank 3QFY2014 performance highlights and results update

January 20, 2014, Monday, 06:34 GMT | 01:34 EST | 11:04 IST | 13:34 SGT
Contributed by Angel Broking

HDFC Bank reported healthy earnings performance for the quarter, which was in-line with revised expectations of 25%+ yoy growth, while asset quality performance too remained healthy. Absolute gross and net NPA levels for the bank increased by 3-4% qoq each, which was quite moderate increase in the context of current macro challenges and low base for the bank.
FCNR (B) deposits aid Balance sheet growth; Asset quality remains healthy: During 3QFY2014, the bank’s business (both advances and deposits) grew at a healthy pace of 22.9% yoy, largely aided by FCNR (B) deposit flow. Adjusting for the same, the bank’s advances grew at 18.3% yoy, while deposits grew by 15.5% yoy. Within the retail loan portfolio, a healthy buildup was witnessed in Personal loans and Credit cards segments, which grew by 19.5% and 17.0% yoy respectively. Savings deposits grew at a healthy pace at 15.6% yoy. CASA ratio, adjusted for FCNR (B) deposits declined 130bp qoq to 43.7%. Reported NIMs declined by around 10bp sequentially to 4.2%, primarily as negligible overseas spreads were realized when overseas borrowings were lent to NRIs for purpose of being remitted as FCNR (B) deposits which were then swapped with RBI at a concessional rate. The bank’s non-interest income (excl. treasury) grew at a healthy pace of 17.0% yoy, aided by robust forex income performance, which grew at 29.1% yoy. Fees and commission income grew at a moderate pace of 12.3% yoy, largely dragged by a 26% yoy decline in fee income from distribution of third party investment products (both insurance and mutual funds). On the asset quality front, the impeccable track record continued as the Gross NPA ratio declined 9bp qoq to 1.0%, while the Net NPA ratio remained flat qoqat 0.3%. PCR (excl. write-offs) too remained stable qoq at 73.6%. Restructured advances remained flat at 0.2% of gross advances.
Outlook and valuation: With minimal NPA issues over the past couple of years, unlike other banks, the bank has had substantial management bandwidth to continue laying the building blocks for organic growth and market share gains. The bank’s branch network has grown by more than 50% over the last ten quarters. Though the current earnings trajectory at 25%+ yoy is lower than its illustrious track record of 30%+ earnings growth, still in light of the current macro environment, it is impressive and much better than other large private peers, which in our view, justifies a premium valuation multiple. At CMP, the bank is trading at a one-year forward P/ABV of 3.2x (3.1x FY2015E ABV). We recommend an Accumulate rating on the stock, with a target price of Rs.752.