HDFC Bank's Profit Up on Higher Rev

HDFC Bank(HDB) reported its fiscal fourth-quarter 2012 (ended March 31, 2012) net profit of INR14.53 billion ($0.28 billion), up 30.4% from the prior-year quarter. Likewise, for the fiscal year ended 2012, the company’s net income saw an impressive 31.4% improvement from the prior year to INR52.47 billion ($1.09 billion).

The quarterly results benefited mainly froma strong growth in net revenue and a drop in provisions and contingencies (primarily comprising loan loss provisions). However, these were partially offset by higher operating expenses. Moreover, the company reported strong growth in deposits and loans.

Behind the Headlines

HDFC Bank’s net revenue for the quarter shot up 19.2% year over year to INR48.80 billion ($0.96 billion). For the fiscal year 2012, net revenue stood at INR175.41 billion ($3.63 billion), up 17.9% from the fiscal 2011.

Net interest income improved 19.3% year over year to INR33.88 billion ($0.66 billion). The increase was primarily driven by loan growth and a stable net interest margin of 4.2%.

Non-interest revenues of INR14.92 billion ($0.29 billion) climbed 18.8% from the prior-year quarter. This was primarily led by a 23.7% increase in fees and commissions and 32.5% hike 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 INR24.67 billion ($0.48 billion), growing 23.5% from the year-ago quarter. The increase was primarily due to higher investments in the Bank’s branch distribution network and other business verticals.

The cost-to-income ratio in the reported quarter came in at 49.8% compared with 48.9% in the prior-year quarter.

Balance Sheet

HDFC Bank’s total deposits saw an 18.3% rise from the prior-year quarter to INR2.47 trillion ($0.05 trillion). Net advances grew 22.2% over March 31, 2011 to INR1.95 trillion ($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 30.8% year over year to INR2.98 billion ($0.06 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of March 31, 2012 (computed as per Basel II guidelines) remained strong at 16.5%, higher than the regulatory minimum of 9.0%. Tier-I CAR was 11.6% as of March 31, 2012.

Branch Network

HDFC Bank has a wide-spread reach, with a distribution network of 2,544 branches and 8,913 ATMs in 1,399 cities as of March 31, 2012. However, as of March 31, 2011, the company had 1,986 branches and 5,471 ATMs in 996 cities.

Dividend Payment

Concurrent with the earnings release, HDFC Bank’s board of directors announced a dividend of INR 4.30 per equity share for the year ended March 31, 2012, as against INR3.30 per equity share in the previous year. This dividend is still subject to approval by the shareholders at the next annual general meeting.

Our Viewpoint

We expect continued synergies from HDFC Bank’s exposure to the fast-growing Indian retail credit sector. Also, the company’s continuous efforts to expand its branch network will drive growth in deposits and loans. However, the company is still exposed to the threats related to higher cost of funds. Growing competition in the retail space with the re-entry of peers, like ICICI Bank Limited (IBN), UTI Bank, IDBI Bank and IndusInd Bank, is an added future concern.

HDFC Bank currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.