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HDFC Bank (HDB - Analyst Report) reported its fiscal first-quarter 2013 (ended June 30) net profit of INR14.17 billion ($0.26 billion), showing an improvement of 30.6% from the prior-year quarter. Higher top line was responsible for such an impressive result.

Results primarily benefited due to strong increases in net interest income and fee revenue. However, these were partially offset by higher operating expenses and a marginal rise in provisions and contingencies. Moreover, the company also reported notable growths in deposits and loans.

Performance Details

HDFC Bank’s net revenue for the quarter shot up 26.3% year over year to INR50.14 billion ($0.92 billion).

Net interest income improved 22.3% year over year to INR34.84 billion ($0.64 billion). The increase was primarily driven by strong loan growth and a stable net interest margin of 4.3% in the reported quarter.

Non-interest revenues of INR15.29 billion ($0.28 billion) grew significantly by 36.6% from the prior-year quarter. This was primarily led by a 23.9% increase in fees and commissions and 36.8% hike in foreign exchange & derivative revenues along with profit on revaluation of investments.

HDFC Bank’s operating expenses totaled INR24.32 billion ($0.45 billion), growing 25.7% from the previous-year quarter. The increase was primarily due to higher investments in the company’s branch distribution network and other business verticals along with a rise in employees cost.

The core cost-to-income ratio in the reported quarter came in at 49.2% compared with 48.3% in the prior-year quarter.

Balance Sheet

HDFC Bank’s total deposits saw an 22.0% rise from the prior-year quarter to INR2.58 trillion ($0.05 trillion). Likewise, total net advances grew 21.5% year over year to INR2.13 trillion ($0.04 trillion).

Asset Quality

Asset quality continued to show gradual improvement, with gross nonperforming assets (NPAs) to gross advances of 0.97%, down 7 basis points (bps) year over year. Similarly, net NPAs also remained healthy at 0.2% of net advances, at par with the year-ago quarter.

However, provisions and contingencies surged 9.8% year over year to INR4.87 billion ($0.09 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of June 30, 2012 (computed as per Basel II guidelines) remained strong at 15.5%, higher than the regulatory minimum of 9.0%. Additionally, Tier-I CAR was 10.9% as of June 30, 2012.

Branch Network

HDFC Bank has a wide-spread reach, with a distribution network of 2,564 branches and 9,709 ATMs in 1,416 cities as of June 30, 2012. However, as of June 30, 2011, the company had 2,111 branches and 5,998 ATMs in 1,111 cities.

Our Take

We expect continued synergies from HDFC Bank’s exposure to the fast-growing Indian retail credit sector. Also, the company’s constant efforts to expand its branch network will result in higher 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, such as ICICI Bank Limited (IBN - Analyst Report), UTI Bank, IDBI Bank and IndusInd Bank, is also an added future concern.

HDFC Bank currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

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