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HDFC Bank Ltd. (HDB - Analyst Report) reported fiscal first-quarter 2013 (ended Jun 30) net profit of INR18.44 billion ($0.33 billion), up 30.1% from the prior-year quarter.

An increase in both net interest income and fee revenues were the positives for the quarter. However, these were partially offset by higher operating expenses. Moreover, the company reported significant increases in deposits and loans, while credit quality was a mixed bag.

Performance Details

HDFC Bank’s net revenue for the quarter soared 19.6% year over year to INR63.44 billion ($1.14 billion).

Net interest income improved 21.0% year over year to INR44.19 billion ($0.79 billion). The rise was primarily driven by loan growth of 21.2% and stable net interest margin of 4.6%.
    
Non-interest revenues of INR19.26 billion ($0.35 billion) grew 16.8% from the prior-year quarter. This was due to an increase in all the components of non-interest income, except foreign exchange and derivative revenues.

HDFC Bank’s operating expenses totaled INR30.38 billion ($0.54 billion), up 15.7% from the prior-year quarter. The core cost-to-income ratio came in at 47.9%, compared with 49.5% as of Jun 30, 2012.

Balance Sheet

As of Jun 30, 2013, HDFC Bank’s total deposits increased 17.8% year over year to INR3.03 trillion ($0.05 trillion). Likewise, net advances rose 21.2% from the prior-year quarter to INR2.59 trillion ($0.04 trillion).

Asset Quality

Asset quality was a mixed bag with gross nonperforming assets (NPAs) at 1.0% of gross advances, in line with the year-ago result. Net NPAs remained healthy at 0.3% of net advances.

However, total floating provisions surged 11.0% year over year to INR18.65 billion ($0.33 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of Jun 30, 2013 (computed as per Basel III guidelines) was 15.5%, higher than the regulatory minimum of 9.0%. Additionally, Tier-I CAR was 10.5% as of Jun 30, 2013.

Further, total CAR (computed as per Basel II guidelines) was 16.0% and Tier-I CAR was 10.6% as of Jun 30, 2013.

Branch Network

HDFC Bank has significantly enhanced its distribution network over the last couple of years. As of Jun 30, 2013, the company had 3,119 branches and 11,088 ATMs in 1,891 cities, compared with 2,564 branches and 9,709 ATMs in 1,416 cities as of Jun 30, 2012.

Our Take

We expect HDFC Bank’s exposure to the fast-growing Indian retail credit sector to boost its overall growth prospects. Additionally, the company’s efforts to expand its branch network will result in higher deposits and loans.

However, rising operating expenses can dent the company’s growth in the future. Intense competition in the retail space with peers such as ICICI Bank Limited (IBN - Analyst Report), UTI Bank, IDBI Bank and IndusInd Bank is a plausible concern too.

HDFC Bank currently carries a Zacks Rank #5 (Strong Sell). However, other foreign banks such as BBVA Banco Franc (BFR - Snapshot Report) and Grupo Financiero Galicia S.A. (GGAL - Snapshot Report) are highly recommended for investment. Both the stocks carry a Zacks Rank #1 (Strong Buy).

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