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HDFC Bank Ltd. (HDB - Analyst Report) reported its fiscal third-quarter 2013 (ended Dec 31, 2012) net profit of INR18.59 billion ($0.34 billion), exhibiting an improvement of 30.0% from the prior-year quarter. Total revenue growth remains the driving force behind the impressive earnings.

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 significant hikes in deposits and loans.

Performance Details

HDFC Bank’s net revenue for the quarter soared 23.4% year over year to INR55.98 billion ($1.04 billion).

Net interest income improved 21.9% year over year to INR37.99 billion ($0.70 billion). The increase was primarily driven by strong loan growth of 24.3% and a stable net interest margin of 4.1% in the reported quarter.

Non-interest revenues of INR17.99 billion ($0.33 billion) grew 26.7% from the prior-year quarter. This was primarily led by a 23.4% jump in fees and commissions and substantial gain on revaluation of investments, partially offset by a 29.4% dip in foreign exchange & derivative revenues.

HDFC Bank’s operating expenses totaled INR25.74 billion ($0.48 billion), growing 19.3% from the prior-year quarter. The core cost-to-income ratio in the reported quarter came in at 47.1% compared with 49.4% as of Sep 30, 2012.

Balance Sheet

HDFC Bank’s total deposits grew 22.2% from the prior-year quarter to INR2.84 trillion ($0.05 trillion). Likewise, total net advances escalated 24.3% year over year to INR2.42 trillion ($0.04 trillion).

Asset Quality

Asset quality continued to remain strong with gross nonperforming assets (NPAs) at 1.00% of gross advances, down 3 basis points (bps) year over year. Further, net NPAs remained healthy at 0.20% of net advances, unchanged from the year-ago period.

Moreover, provisions and contingencies dipped 6.7% year over year to INR3.07 billion ($0.06 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of Dec 31, 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 10.9% as of Dec 31, 2012 compared with 11.4% as of Sep 30, 2012.

Branch Network

HDFC Bank has extensively enhanced its distribution network over the last couple of years. As of Dec 31, 2012, the company had 2,776 branches and 10,490 ATMs in 1,568 cities compared with 2,201 branches and 7,110 ATMs in 1,174 cities as of Dec 31, 2011.

Our Take

We expect HDFC Bank’s exposure to the fast-growing Indian retail credit sector to boost its overall growth prospects. Also, the company’s efforts to expand its branch network will result in higher deposits and loans. Nevertheless, continuously rising operating expenses have the potential to thwart its growth prospects going forward. Mounting 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 Rank #5 (Strong Sell). However, other foreign banks namely Banco Macro S.A. (BMA - Snapshot Report) and UBS AG (UBS - Analyst Report) retain a Zacks Rank #1 (Strong Buy) and are highly recommended for investment.

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