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HDFC Bank Ltd. (HDB - Analyst Report) reported fiscal second-quarter 2014 (ended Sep 30) net profit of INR19.82 billion ($0.32 billion), up 27.1% 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, there was considerable improvement in the company’s deposits and loans as well as credit quality.

Performance Details

HDFC Bank’s net revenue for the quarter rose 18.1% year over year to INR 63.20 billion ($1.02 billion).

Net interest income increased 15.3% year over year to INR44.77 billion ($0.72 billion). The rise was primarily driven by loan growth of 16.0%, partially offset by a 10-bps decline in interest margin to 4.3%.

Non-interest revenues of INR18.44 billion ($0.30 billion) grew 25.3% from the prior-year quarter. This was due to increase in fees & commissions, foreign exchange & derivatives revenues as well as miscellaneous income, partially offset by a rise in loss on revaluation/sale of investments.

HDFC Bank’s operating expenses totaled INR29.34 billion ($0.47 billion), up 9.3% from the prior-year quarter. The cost-to-income ratio came in at 46.4%, compared with 50.2% as of Sep 30, 2012.

Balance Sheet

As of Sep 30, 2013, HDFC Bank’s total deposits increased 17.8% year over year to INR3.13 trillion ($0.05 trillion). Likewise, net advances rose 16.0% to INR2.69 trillion ($0.04 trillion) year over year.

Asset Quality

Asset quality was a mixed bag with gross nonperforming assets (NPAs) at 1.09% of gross advances, compared with 1.04% in the year-ago quarter. Net NPAs remained healthy at 0.3% of net advances.

Moreover, provisions and contingencies dipped 1.0% year over year to INR3.86 billion ($0.06 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of Sep 30, 2013 (computed as per Basel III guidelines) was 14.6%, higher than the regulatory minimum of 9.0%. Additionally, Tier-I CAR was 9.9% as of Sep 30, 2013.

Branch Network

HDFC Bank has significantly enhanced its distribution network over the last couple of years. As of Sep 30, 2013, the company had 3,251 branches and 11,177 ATMs in 2,022 cities, compared with 2,620 branches and 10,316 ATMs in 1,454 cities as of Sep 30, 2012.

Our Take

Persistently rising operating expenses, intense competition in the retail space with local peers such as ICICI Bank Ltd. (IBN - Analyst Report), UTI Bank, IDBI Bank and IndusInd Bank remain causes of concern.

On the bright side, we expect the company’s initiatives on expanding its branch network to drive higher deposits and loans, thereby boosting growth going forward.

HDFC Bank currently carries a Zacks Rank #5 (Strong Sell). However, other foreign banks such as Credit Suisse Group AG (CS - Snapshot Report) and Deutsche Bank AG (DB - Analyst Report), both with a Zacks Rank #1 (Strong Buy) are highly recommended for investment.

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