HDFC Bank remains not-out at 54

The private bank has consistently delivered over 30 per cent year-on-year growth in net profit for last 54 quarters

Private sector lender HDFC Bank has set a new benchmark for consistent financial performance. For the past 54 quarters, the bank has consistently delivered a 30 per cent plus year-on-year growth in its quarterly net profit, say analysts.

The March quarter scorecard was no different with the bank reporting 30.1 per cent year-on-year rise in net profit to Rs 1,889.8 crore led by 20.6 per cent growth in net interest income (the difference between interest income and expense) to Rs 4,295.3 crore. It delivered consistent performance on loan growth, profitability as well as asset quality fronts. Focus on the more resilient and profitable retail segment (stronger asset quality and demand versus corporates), strong Casa base and consistent net interest margins (NIMs) were the key highlights of its performance for the quarter.

However, the performance would have been better but for other income. The same grew by just 10.73 per cent driven by moderate fee income growth (subdued activity in corporate segment) of 10.85 per cent over the March 2012 quarter. Lower forex gains (down 38 per cent) also impacted other income growth.

While NIMs remain strong, the increase was partly due to two changes in the bank’s accounting policy this quarter (due to RBI's directive to the industry). Till the December 2012 quarter, HDFC Bank deducted cost of client acquisition from its interest earned, but from this quarter onwards, this item will be a part of operating expenses. Also, recoveries are now a part of other income (the bank used to reduce it from its provisions earlier). Post this change, the bank's net interest margins (NIMs) as well as operating expenses increased marginally. The NIMs stood at 4.5 per cent (4.3 per cent as per earlier classification) while cost-to-income stood unchanged at 51.4 per cent (50.6 per cent as per earlier classification). Post this change, the management expects its NIMs to be between 4.1-4.5 per cent against earlier expectations of 3.9-4.2 per cent and believes, the margins appear to have peaked at current levels. However, these accounting changes will not have any impact on the bank's bottomline.

HDFC Bank's asset quality also remained strong with gross NPAs declining sequentially to 0.97 per cent as against 1.0 per cent in the December 2012 quarter. Its total restructured loans as a proportion of loan book declined to 0.2 per cent versus 0.4 per cent a year back and 0.3 per cent in the December 2012 quarter. "While the asset quality in the commercial vehicle space has stabilised, the same continues to be weak in the construction equipment segment. However, this segment is a very small portion in our total loan portfolio to have any meaningful impact,” Paresh Sukthankar, executive director at HDFC Bank said in a conference call after the results. Analysts, too, remain positive on the bank's asset quality. Vaibhav Agrawal, VP – Research, Banking, Angel Broking, says, "The bank reported healthy performance as its gross and net NPA levels, on an absolute basis came down sequentially, which aided it to report 27 per cent lower provisioning expenses and clock earnings growth of 30 per cent." While HDFC Bank's Current Account Savings Account (Casa) improved 200 basis points sequentially to 47.4 per cent, it was down 100 basis points year-on-year. Management believes this reduction is temporary in nature and expects to maintain Casa between 45 and 47 per cent.

For the fiscal ended March 2013, the bank registered a strong loan growth of 22.7 per cent (above banking industry loan growth of about 17 per cent), driven largely by the retail loan book which now forms 56.9 per cent of its loan book as against 54 per cent in FY12. The retail book grew strong at 26 per cent as against 17 per cent increase in the bank's corporate loan book. While retail growth was driven by segments such as personal loans, auto/home loans, business banking (largely entrepreneurs), muted capex cycle by India Inc led to subdued growth in the corporate segment. Notably, large part of corporate lending was towards meeting the priority sector lending targets (to agriculture, commodities segments) and working capital needs of India Inc.

Notably, the bank believes FY14 will be a better year compared to FY13 as it expects GDP growth and capex to improve. The bank also expects to witness traction in the refinancing done by corporates to benefit from falling interest rates.

While most analysts remain positive on HDFC Bank’s stock given its consistent performance, the valuations appear to factor in near-term positives and indicate limited upside.