HDFC Q3FY10 Performance

Interest income remains flat in 9mFY10 on YoY basis despite 21% YoY growth in advances. Stagnancy in income stems from downward re-pricing of assets.  NIMs improve marginally due to maturity of high cost term deposits; CASA level higher at 49% in 9mFY10. Operating expenses lowered in 3QFY10, cost to income ratio at 47% as against 53% in 9mFY09. Net NPA to advances come down from 0.6% in FY09 to 0.5% in 9mFY10. Provision coverage ratio at 72% in 3QFY10. Capital adequacy ratio (CAR) comfortable at 18.3%, Tier I CAR at 13.8% in 9mFY10.

Notwithstanding the slower growth in the erstwhile CBoP assets, which was well anticipated, HDFC Bank managed to marginally outperform the banking sector in the first nine months of this fiscal. The growth of 21% YoY in advances during the April 2009 to December 2009 period was way ahead of the sector growth of 12% YoY. It may also be noted that the bank had 1,725 branches at the end of 9mFY10 as against 1,412 branches in 9mFY09. Clearly focusing on garnering low cost deposits (current and savings accounts) through its own as well as the branches of the erstwhile Centurion Bank of Punjab (CBoP), helped HDFC Bank post a decent growth in profitability during the period under consideration. The stagnancy in interest income, however, stems from downward re-pricing of the bank’s assets, despite higher asset growth.


The proportion of low cost deposits (CASA) in HDFC Bank’s books improved to 49% in 9mFY10 after having fallen to a 6-year low in FY09. The NIMs which improved by 0.1% to 4.3% are within our estimates for FY10. The bank has been under pressure for sometime to improve the CASA ratio in order to maintain its edge over other private sector and PSU banks. However, we believe that the NIMs may not be sustainable at the current levels once the cost of deposits starts rising.
 
HDFC Bank has been able to grow its fee income base by 12% YoY in 3QFY10. As a result, the proportion of fee to total income improved to 23% as against 21% in 3QFY10. However, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments, the absence of which would have otherwise aided the bank’s other income.


Due to the merger with CBoP, the quality of HDFC Bank’s asset book was impacted in FY09. The bank has, however, managed to contain the slippages over the past three quarters. HDFC Bank’s gross NPAs dropped from 1.9% of advances in 9mFY09 to 1.6% in 9mFY10. As per the bank, the erstwhile CBoP portfolio accounted for approximately 42% of the bank’s gross NPAs at the end of March 2009. Net NPAs were 0.5% of advances while the NPA coverage ratio was 72% in 9mFY10.


At the end of 9mFY10, the total restructured assets in HDFC Bank’s books were 0.4% of the bank’s gross advances and are therefore not really a concern.

At the current price of Rs 1,690, the stock is valued at 2.9 times our estimated FY12 adjusted book value. The bank’s overall performance continues to remain largely in line with our estimates. While a higher CAR (capital adequacy) is a matter of comfort, we do envisage lower asset growth and pressure on margins in the medium term.