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HDFC Bank (HDB - Analyst Report) reported its fiscal second-quarter 2013 (ended September 30) net profit of INR15.60 billion ($0.29 billion), exhibiting an improvement of 30.1% from the prior-year quarter. Higher top line was the main reason behind the bank’s impressive results.

Improvements in net interest income and fee revenue were among the positives during the quarter. However, these were partially offset by higher operating expenses. Moreover, the company reported notable hikes in deposits and loans.

Performance Details

HDFC Bank’s net revenue for the quarter surged 22.2% year over year to INR50.77 billion ($0.96 billion).

Net interest income improved 26.7% year over year to INR37.32 billion ($0.70 billion). The increase was primarily driven by strong loan growth of 22.9% and a stable net interest margin of 4.2% in the reported quarter.

Non-interest revenues of INR13.45 billion ($0.25 billion) grew 11.0% from the prior-year quarter. This was primarily led by a 22.4% jump in fees and commissions and 8.2% hike in foreign exchange & derivative revenues, partially offset by substantial loss on revaluation of investments.

HDFC Bank’s operating expenses totaled INR25.06 billion ($0.45 billion), growing 23.4% from the prior-year quarter. The core cost-to-income ratio in the reported quarter came in at 49.4% compared with 49.2% as of June 30, 2012.

Balance Sheet

HDFC Bank’s total deposits grew 18.8% from the prior-year quarter to INR2.74 trillion ($0.05 trillion). Likewise, total net advances escalated 22.9% year over year to INR2.32 trillion ($0.04 trillion).

Asset Quality

Asset quality continued to remain strong with gross nonperforming assets (NPAs) at 0.90% of gross advances, down 10 basis points (bps) year over year. Further, net NPAs remained healthy at 0.20% of net advances, at par with the year-ago quarter.

Moreover, provisions and contingencies plummeted 20.0% year over year to INR2.93 billion ($0.09 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of September 30, 2012 (computed as per Basel II guidelines) remained strong at 17.0%, higher than the regulatory minimum of 9.0%. Additionally, Tier-I CAR was 11.4% as of September 30, 2012 compared with 10.9% as of June 30, 2012.

Branch Network

HDFC Bank has a wide-spread reach with a distribution network of 2,620 branches and 10,316 ATMs in 1,454 cities as of September 30, 2012. However, as of September 30, 2011, the company had 2,150 branches and 6,520 ATMs in 1,141 cities.

Our Take

We expect continued synergies from HDFC Bank’s exposure to the fast-growing Indian retail credit sector. Also, the company’s efforts to expand its branch network will result in higher deposits and loans. Nevertheless, we are concerned about the continuous rise in its operating expenses. 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 concern.

HDFC Bank currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals we maintain a long-term ‘Neutral’ recommendation on the stock.

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