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HDFC Bank Ltd. (HDB - Analyst Report) reported its fiscal fourth-quarter 2013 (ended Mar 31) net profit of INR18.90 billion ($0.35 billion), an improvement of 30.1% from the prior-year quarter. Similarly, for fiscal 2013, net profit was INR67.26 billion ($1.23 billion), surging 30.2% year over year.

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

Performance Details

HDFC Bank’s net revenue for the quarter soared 17.5% year over year to INR61.00 billion ($1.12 billion). For fiscal 2013, net revenues stood at INR226.64 billion ($4.15 billion), up 21.4% year-over-year.

Net interest income improved 20.6% year over year to INR42.95 billion ($0.79 billion). The rise was primarily driven by a strong loan growth of 22.7% and a stable net interest margin of 4.5% in the reported quarter.

Non-interest revenues of INR18.04 billion ($0.33 billion) grew 10.7% from the prior-year quarter. This was due to an increase in all the components of non-interest income.

HDFC Bank’s operating expenses totaled INR31.36 billion ($0.58 billion), growing 17.7% from the prior-year quarter. The core cost-to-income ratio in the reported quarter came in at 51.4% compared with 51.3% as of Mar 31, 2012.

Balance Sheet

As of Mar 31, 2013, HDFC Bank’s total deposits increased 20.1% year over year to INR2.96 trillion ($0.05 trillion). Likewise, net advances escalated 22.7% from the prior-year quarter to INR2.40 trillion ($0.04 trillion).

Asset Quality

Asset quality continued to be strong with gross nonperforming assets (NPAs) at 0.97% of gross advances, down 5 basis points year over year. Further, net NPAs remained healthy at 0.2% of net advances.

Moreover, total floating provisions dipped 27.9% year over year to INR18.35 billion ($0.34 billion).

Capital Ratios

HDFC Bank’s total capital adequacy ratio (CAR) as of Mar 31, 2013 (computed as per Basel II guidelines) improved to 16.8% from 16.5% as of Mar 31, 2012 and higher than the regulatory minimum of 9.0%. Additionally, Tier-I CAR was 11.1% as of Mar 31, 2013 compared with 11.6% as of Mar 31, 2012.

Branch Network

HDFC Bank has extensively enhanced its distribution network over the last couple of years. As of Mar 31, 2013, the company had 3,062 branches and 10,743 ATMs in 1,845 cities compared with 2,544 branches and 8,913 ATMs in 1,399 cities as of Mar 31, 2012.

Our Take

We expect HDFC Bank’s exposure to the fast-growing Indian retail credit sector to boost its overall growth prospects. Additionally, the company’s efforts to expand its branch network will result in higher deposits and loans.

However, steadily 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 carries a Zacks Rank #4 (Sell). However, other foreign banks namely Banco Macro S.A. (BMA - Snapshot Report) and Deutsche Bank AG (DB - Analyst Report) carry a Zacks Rank #1 (Strong Buy) and are highly recommended for investment.

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