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Analyst Blog

HDFC Bank’s (HDB - Analyst Report) fiscal first quarter 2012 (ended June 30, 2011) net profit of INR10.85 billion (US$0.24 billion) saw an impressive 33.7% increase over the prior-year quarter. Results improved primarily on strong growth in net revenue and a decline in provisions and contingencies (primarily comprising loan loss provisions), partially offset by higher operating expenses.

HDFC Bank’s net revenue for the quarter shot up 17.0% year over year to INR39.68 billion (US$0.88 billion).                                  

Quarter in Detail

Net interest income for the quarter increased 18.6% year over year to INR28.48 billion (US$0.63 billion). The increase was primarily driven by growth in average assets and net interest margin.

Non-interest revenues of INR11.20 billion (US$0.25 billion), were up 13.0% from the prior-year quarter. This was primarily led by a 15.9% increase in fees and commissions and a 33.9% increase in foreign exchange/derivative revenues. However, the company experienced a loss on revaluation/sale of investments in the quarter owing to higher bond yields.

HDFC Bank’s operating expenses totaled INR19.35 billion (US$0.43 billion), up 17.8% from the year-ago quarter. The cost-to-income ratio came in at 48.3% compared with 48.7% in the prior-year quarter. Provisions and contingencies were INR4,437 million (US$98.83 million), down 20.0% year over year. The decrease was led by an improvement in asset quality.

HDFC Bank’s total deposits saw a sharp 15.4% increase from the prior-year quarter to INR2.1 trillion (US$0.05 trillion). Gross advances grew 29.1% over June 30, 2010 to INR1.8 trillion (US$0.04 trillion).

Asset Quality

Asset quality improved, with gross non-performing assets (NPAs) to gross advances at 1.04%, down 17 basis points (bps) year over year. Net NPAs also remained healthy at 0.18% of net advances, down 10 bps from the year-ago quarter.

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of June 30, 2011 (computed as per Basel II guidelines) remained strong at 16.9%, higher than the regulatory minimum of 9.0% as well as 16.3% recorded as at June 30, 2010. Tier-I CAR was 11.4% at quarter-end.

HDFC Bank has a wide-spread reach, with a distribution network of 2,111 branches and 5,998 ATMs in 1,111 cities at June 30, 2011. As of June 30, 2010, the company had 1,725 branches and 4,393 ATMs in 780 cities.

Our Viewpoint

We expect continued synergies from the company’s exposure to the fast-growing Indian retail credit sector. Continued branch expansion will also drive growth in deposits. Nevertheless, increasing competition in the retail space with the re-entry of peers is a concern. Also, rising operating expenses are expected to keep the bottom line under pressure.

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 - Analyst Report) retains a Zacks #4 Rank (a short-term ‘Sell’ rating).

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