)
HDFC Bank has done it again. It has posted net profit growth of 30 per cent year-on-year for the quarter ended June 30. However, while overall results — loan growth, net interest margins (NIMs) and net interest income—were broadly in line with Street estimates, the bank witnessed minor stress on asset quality. Also, some of the details suggest the earnings quality for the quarter wasn’t up to the mark, with part of the profit growth driven by a sharp jump in treasury income and lower provisions. The scrip fell 2.36 per cent to Rs 662.65 on Wednesday, in sync with the S&P BSE Bankex.
Though comfortable and still the best in the industry, HDFC Bank’s net non-performing assets (NPA) ratio inched up 10 basis points to 0.3 per cent, compared with the June 2012 quarter. Rikesh Parikh, vice-president-equities, Motilal Oswal Securities, says: “The asset quality deterioration is a disappointment and will remain a key monitorable.”
A large part of this stress came from the retail book (mainly commercial vehicle and construction equipment segments), while the corporate portfolio’s asset quality held up well. Paresh Sukthankar, executive director, HDFC Bank, said in a post-results call: “The retail sector formed 55 per cent of incremental gross NPA formation in the quarter.” He added a couple of accounts in the bank’s corporate loan books were under pressure, while the overall asset quality remained unchanged in this segment.
The retail segment credit growth (25.5 per cent year-on-year) has been higher than that of the corporate segment (up 16.5 per cent) due to a slowdown in fresh capital expenditure (capex) by India Inc, and driven the bank’s interest income in the quarter. The management expects retail loan growth to be higher, unless there is a significant pick-up the in capex cycle.
Lower provisions fuel profit growth
The bank’s net interest income grew 21 per cent year-on-year, driven by similar growth in the loan book. Although other income grew 16.7 per cent to Rs 1,926 crore, it was boosted by a three-fold rise in gains on sale/revaluation of investments to Rs 310 crore—a trend difficult to sustain.
Deposit growth of 17.8 per cent was the lowest since the September 2011 quarter. Its credit account, savings account (Casa) ratio, too, fell to 44.7 per cent—lowest in the past eight quarters. This metric stood at 49.1 per cent in the June 2012 quarter, and 47.4 per cent in the March 2013 quarter. However, analysts are unperturbed by the drop in Casa. Parikh of Motilal Oswal Securities says: “Casa has been falling due to higher interest rate offered by other banks. They have been able to maintain NIMs. Till the time NIMs are maintained, the Casa deterioration not a concern.”
The bank’s net interest margin remained unchanged at 4.6 per cent, aided by strong growth in the high-margin retail portfolio and its ability to manage costs well.
Fairly priced
Considering the bank’s record and the better-than-industry metric, most analysts believe it will outperform the industry. So should the stock. Vaibhav Agrawal, vice-president-research, banking, Angel Broking, says: “Given the challenging macroeconomic developments, we believe within the banking sector, defensive stocks like HDFC Bank are likely to outperform the rest of the sector.” He has an ‘Accumulate’ rating on the scrip with a one-year target price of Rs 752.
However, some analysts believe current valuations adequately factor in the positives — leaving little room for any error. “While we appreciate its relative superiority to its peers on consistency and predictability parameters, we opine that valuations at four times our estimated adjusted book value per share have peaked. With the emergence of credible challengers such as Kotak Mahindra Bank and IndusInd Bank, we believe the valuation gap (scarcity premium) that HDFC Bank currently enjoys will narrow over the next few years”, says Krishnan A S V, Banking analyst at Ambit Capital.
How the stock performs will ultimately depend on the bank’s ability to sustain earnings, as well as keep its NPAs under check.
