HDFC Bank: Robust other income

The bank may not be able to reap higher trading gains in the coming quarters as yields have started firming up.

HDFC Bank’s net profit jumped 30 per cent year-on-year (y-o-y) for the quarter ended September 2009 (Q2), partly due to higher treasury income and cost control as well as a healthy 18 per cent rise in fee-based income to roughly Rs 692 crore.

Although the bank has lent more in Q2 compared to the relatively stagnant advances reported since the September 2008 quarter to June 2009 quarter, the Street was expecting a higher growth in advances. Because of this as well as a declining interest rate environment, the bank’s net interest income (interest income earned minus expended) grew just 5 per cent y-o-y, which was below expectations. While treasury gains were partly responsible for jump in the other income, the bank may not be able to get the cushion of higher trading gains in the coming quarters as yields have started firming up.

Besides trading gains, better productivity from its branches was also impressive. A tab on operating costs helped the bank reduce its cost-to-income ratio to 50 per cent compared to 55 per cent in second-quarter of last year; however, it was a tad higher than 47.5 per cent in the June 2009 quarter, which to some extent is on account of the 90-odd new branches it added during the quarter.

While the bank is still conservative in terms of lending to the retail segment, a higher traction in asset-backed products like auto and home loans helped retail loans grow 7 per cent y-o-y. The bank, however, has seen its lending to companies rise a robust 20 per cent y-o-y. The cautious approach to high-yielding retail segment and preference to the corporate sector meant that net interest margins slipped 20 basis points (bps) to 4.4 per cent. This was despite the 200-300 bps rise in the low-cost CASA (current and savings account) deposit ratio, y-o-y as well as sequentially, to 47 per cent. The asset quality remained healthy with gross non-performing assets down 30 bps to 1.8 per cent of gross advances; the bank also increased its provision coverage from 65 per cent to 70 per cent on a y-o-y basis. The stock is up 14 per cent in the last one month. At Rs 1,702, it trades at 3.7 times its 2010-11 estimated book value of Rs 470, leaving limited upside.