HDFC Bank: Superior show continues

Uptick in fee income growth added to the strong show in Q4 FY15

Healthy loan growth, revival in fee income growth and stable asset quality outlined HDFC Bank’s results in the March 2015 quarter, wherein net profit at Rs 2,807 crore (up 20.6 per cent year-on-year) came largely in line with the expectations.

While the bank’s net interest income (NII) grew at a healthy rate of 21.4 per cent to Rs 6,013 crore led by loan growth of 20.6 per cent, fee income also grew fast. It was up 20.6 per cent versus 10-13 per cent in the past two-three quarters.

The management indicated that this uptick had an element of seasonality and one-offs. Also, bounce back in the third party distribution, especially in the equity mutual funds business, fuelled fee income. While the trend is positive, the Street will keenly watch if it is sustained going forward as well.

Lower tax rate (down 111 basis points to 32.3 per cent) and higher gains on revaluation/sale of investments (up 5.8 times to Rs 196 crore) further aided net profit in the quarter.

Notably, loan growth was broad-based with retail book growing at 21.8 per cent and wholesale book growing at 17.6 per cent, which is impressive given the weak economic environment. Continued traction in auto loans, home loans and personal loans, which grew at 20-25 per cent each fuelled retail loan growth.

Healthy 31 per cent growth in credit cards and 52 per cent in retail agri-loans were other positives. While SME book grew 17 per cent, wholesale loan growth was driven by marginal uptick in working capital loans, brownfield Capex and refinancing.

While provisions doubled to Rs 577 crore y-o-y, the management clarified that large part of the increase has come from general provisioning (due to higher loan).

It does not see any stress on the asset quality and has seen some relief in the CV and commercial equipment segments both in terms of loan growth and asset quality. Gross and net non-performing asset (NPA) ratios remained flattish at 0.93% and 0.20%, respectively.

Net interest margins (NIMs) remained stable at 4.4% on the back of cost efficiencies and lower borrowing costs. The bank's cost/income ratio at 44.9% contracted 80 basis points year-on-year, indicating better efficiencies.

Though sequentially it increased 290 basis points, it was due to front-loading of expenses towards addition of 355 branches in the quarter. Going forward, management is confident of future growth and expects NIMs to remain between 4.2-4.4% in FY16.

"We believe demand for term loans, project loans could pick up if the economic growth picks up by even 1%. If economy picks up, I believe banking industry loan growth will be about 13-14% in FY16. HDFC Bank should grow 4-5% faster than the system", said Paresh Sukhtankar, Deputy Managing Director of HDFC Bank.

The stock, which was volatile in Thursday's trade, closed flat. It trades at a reasonable 3.5 times FY16 estimated book, its historical average one-year forward price/book ratio.