A preference for asset quality over aggressive volume growth and ability to sustain margins augur well for HDFC Bank
An economic slowdown may not be new for HDFC Bank that grew consistently at 30 per cent during various cycles in the last ten years. To weather the present slowdown, the bank has sought to adopt a conservative approach, resulting in a subdued growth in its core business of lending– its credit growth has remained flat in the last few quarters. In these trying times, seeking to maintain asset quality and stable margins could mean a loss on volumes, but it has also helped in maintaining profitable growth. The merger of Centurion Bank of Punjab (CBOP) with HDFC Bank last year extended its branch network in the near-term, however the real operational synergies from the merger are expected to flow in 12-18 months.
Unexciting loan growth
HDFC Bank’s loan book grew by just 7.2 per cent y-o-y in June 2009 quarter, which reflects the weak demand environment and the bank’s conservative appetite for growth. In the last fiscal, too, the trend in absolute advances (sequentially) from the September 2008 to March 2009 quarter was largely flat. For June 2009 quarter, its net interest income and fee income grew at a slower pace of 8 per cent and 27 per cent year-on-year (y-o-y), respectively from around 30-40 per cent levels in 2008-09. The lower growth is also due to the base effect–due to the merger of CBOP with HDFC Bank in May last year.
On the whole, HDFC Bank observed a modest loan growth due to a moderation in both retail and corporate books. Retail loans may have grown year-on-year, but sequentially it has not. With concerns over the retail segment, the bank is persisting with a cautious approach, especially in the unsecured space (personal loans, credit cards) where the bank has introduced stricter underwriting standards.
A demand slowdown and a cut-back of new investments in the corporate advances during 2008-09 was evident in the slowdown of credit to this sector, however things seem to be stabilising, which is a positive. Regarding the credit growth for 2009-10, Paresh Sukthankar, executive director, HDFC Bank, says “If we project a systematic growth of around 17-19 per cent for the year, we would hope to grow faster than the system as we have done it in the past.”
| CREDIBLE RECORD | |||
| in Rs crore | FY09 | FY10E | FY11E |
| Net interest income | 7,421 | 8,997 | 10,931 |
| Other income | 3,318 | 3,973 | 4,595 |
| Total income | 10,739 | 12,969 | 15,526 |
| Operating profit | 5,207 | 6,688 | 8,248 |
| Net profit | 2,244 | 2,812 | 3,398 |
| P/E (x) | 26.2 | 20.9 | 17.3 |
| P/BV (x) | 4.2 | 3.4 | 3.0 |
| E: Analysts' estimates | |||
Profitability intact
It is a foregone conclusion that HDFC Bank’s net profit would grow at about 30 per cent, which is what the bank delivered in the June quarter also. However, there has been a change in the profit contributors. As the growth in core income slipped, trading profits grew at robust rates thereby boosting profitability in the recent quarters. Unlike during 2007-08 and the first two quarters of 2008-09, the share of trading profits in net profit has averaged at around 40 per cent in the last three quarters. Going ahead, with yields expected to harden (from second half of 2009-10) the gains in treasury (trading) income may not be sustainable feel experts.
The pressure from a slowdown in the credit growth might have got accentuated on the earnings, had it not been for the best -in-the industry net interest margins (NIM) of over 4 per cent that the bank enjoys. What is remarkable is that the bank has maintained these margins in the last 17 quarters. With over 1,400 branches and an expected increase of 200-250 branches in 2009-10, low-cost deposits would boost margins in the future also. In the second half of the current year, some high-cost deposits would also get re-priced and would further cushion the margins. The management expects NIMs to average between 3.9 per cent and 4.2 per cent.
Asset quality holds up
During any downturn, non-performing assets (NPA) are bound to rise. Nevertheless, HDFC Bank has been doing a good job of holding on to asset quality without major slippages in the recent quarters even as CBOP books have deteriorated faster than its standalone book in the present downturn. Of the total NPAs, around 40-42 per cent is estimated to have originated from CBOP is the extent of let-up in the tough macro conditions, given that CBOP’s share in total loan book is pegged at less than 20 per cent.
While there has been increase in the quantum of restructured assets in case of several banks, HDFC Bank’s restructured assets are among the lowest in the industry. Restructured loans account just 0.55 per cent of its loan book, around a fourth of the gross NPA of 2.05 per cent, which seems to be manageable, going ahead. With most of the restructured loans given for working capital requirements to corporates, analysts say that these should remain under check.
Outlook
Higher treasury gains over the last few quarters have been used to provide for bad loans. Consequently, the provision coverage rose by 130 bps to around 70 per cent in the June quarter. Absence of gains from the treasury in the future could put pressure on earnings or ability to maintain high provision covers. Analysts estimate HDFC Bank’s net profit to grow at an average of 25 per cent in the next two years. Thus, the banks’ ability to extract synergies from the CBOP merger assumes importance for future growth. Superior NIMs, a high proportion of low-cost deposits driven by extensive branch network and robust risk management systems will help drive profitable growth and maintain asset quality.
HDFC Bank is adequately capitalised and would be able to sustain the lending momentum as and when the credit cycle picks up. Even though HDFC Bank trades at a premium vis-a-vis its peers–at Rs 1,384 the stock is trading at 3.5 times its 2010-11 adjusted book value and looks fully valued–it could considered on dips with a long-term perspective.
