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HDFC Bank’s (HDB - Analyst Report) fiscal third quarter 2012 (ended December 31, 2011) net profit of INR14.30 billion (US$0.26 billion) saw an impressive 31.4% increase over the prior-year quarter. The results improved mainly due to a strong growth in net revenue and a decline in provisions and contingencies (primarily comprising loan loss provisions). However, these were partially offset by higher operating expenses.

Net revenue for the quarter shot up 16.2% year over year to INR45.36 billion (US$0.88 billion).

Quarter in Detail

Net interest income improved 12.2% year over year to INR31.16 billion (US$0.60 billion). The increase was primarily driven by growth in average assets and net interest margin.

Non-interest revenues of INR14.20 billion (US$0.28 billion), were up 25.9% from the prior-year quarter. This was primarily led by a 19.6% increase in fees and commissions and 68.6% increase in foreign exchange/derivative revenues. However, the company suffered a significant loss on revaluation/sale of investments from higher bond yields.

HDFC Bank’s operating expenses totaled INR21.58 billion (US$0.42 billion), increasing 17.8% from the year-ago quarter. The increase was primarily due tohigher investments in the Bank’s branch distribution network and other business verticals.The cost-to-income ratio came in at 46.7%.

HDFC Bank’s total deposits saw 21% rise from the prior-year quarter to INR2.33 trillion (US$0.05 trillion). Gross advances grew 21.9% over December 31, 2010 to INR1.96 trillion (US$0.04 trillion).

Asset Quality

Asset quality improved, with gross non-performing assets (NPAs) to gross advances at 1.0%, down 10 basis points (bps) year over year. Net NPAs also remained healthy at 0.2% of net advances, at par with the year-ago quarter. Furthermore, provisions and contingencies declined 29.3% year over year to INR3.29 billion (US$0.06 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of December 31, 2011 (computed as per Basel II guidelines) remained strong at 16.3%, higher than the regulatory minimum of 9.0%. Tier-I CAR was 11.2% at quarter end.

HDFC Bank has a wide-spread reach, with a distribution network of 2,201 branches and 7,110 ATMs in 1,174 cities at December 31, 2011. However, at December 31, 2010, the company had 1,780 branches and 5,121 ATMs in 833 cities.

Our Viewpoint

We expect continued synergies from the company’s exposure to the fast-growing Indian retail credit sector. Also, the continuation of branch expansion will drive growth in deposits. However, the company is still exposed to the threat related to higher cost of funds. Growing competition in the retail space with the re-entry of peers including ICICI Bank Limited (IBN - Analyst Report), UTI Bank, IDBI Bank and IndusInd Bank is an added future concern. 

HDFC Bank currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

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