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HDFC Bank Ltd. (HDB - Analyst Report) reported fiscal third-quarter 2014 (ended Dec 31) net profit of INR23.26 billion ($0.38 billion), up 25.1% from the prior-year quarter.

An increase in both net interest income and fee revenues were positives for the quarter. However, these were partially offset by higher operating expenses. Moreover, deposit and loan balances as well as credit quality showed improvement.

Performance Details

HDFC Bank’s net revenue for the quarter increased 14.8% year over year to INR67.83 billion ($1.10 billion).

Net interest income rose 16.4% year over year to INR46.35 billion ($0.75 billion). The rise was primarily driven by loan growth of 22.9%, partially offset by a 10-bps decline in interest margin to 4.2%.

Non-interest revenues of INR21.48 billion ($0.35 billion) grew 11.4% from the prior-year quarter. The improvement was driven by increase in fees & commissions, foreign exchange & derivatives revenues and miscellaneous income, partially offset by lower gain on revaluation/sale of investments.

Operating expenses totaled INR28.95 billion ($0.47 billion), up 3.8% from the prior-year quarter. The cost-to-income ratio came in at 42.7%, compared with 47.2% as of Dec 31, 2012.

As of Dec 31, 2013, total deposits increased 22.9% year over year to INR3.49 trillion ($0.06 trillion). Likewise, advances rose 22.9% to INR2.97 trillion ($0.05 trillion) year over year.

Asset Quality

Asset quality continued to show improvement with provisions and contingencies declining 4.0% year over year to INR3.88 billion ($0.06 billion). Further, gross nonperforming assets remained stable at 1.0% of gross advances.

Additionally, total restructured loans were 0.2% of gross advances as of Dec 31, 2013 down from 0.3% as of Dec 31, 2012.

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of Dec 31, 2013 (computed as per Basel III guidelines) was 14.7%, higher than the regulatory minimum of 9.0%. Moreover, Tier-I CAR was 9.9% as of Dec 31, 2013.

Growth in Network

HDFC Bank has significantly enhanced its distribution network over the last few of years. During the reported quarter, the bank added 274 branches, taking the total number of branches to 3,336 as of Dec 31, 2013 in 2,104 cities, compared with 2,776 branches in 1,568 cities as of Dec 31, 2012. Further, total number of ATMs increased to 11,473 as of Dec 31, 2013 from 10,490 in the last year quarter.

Our Take

We expect HDFC Bank’s initiatives on expanding its branch network to drive higher deposits and loans, thereby boosting growth going forward. However, 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.

HDFC Bank currently carries a Zacks Rank #3 (Hold). Some better-ranked foreign banks include Barclays PLC (BCS - Analyst Report) and The Royal Bank of Scotland Group plc (RBS - Snapshot Report). Both of these carry a Zacks Rank #2 (Buy).

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