Loan repricing not to affect margins

It’s been another “blemishless” quarter for HDFC Bank. Continued traction in its retail business, coupled with lower provisioning, have enabled HDFC Bank to deliver another quarter of strong growth, beating the Street’s expectations.

In the fourth quarter, the bank’s net interest income has grown 19.3 per cent year-on-year (y-o-y) to Rs 3,388 crore, driven by good loan growth of 22.2 per cent. On a sequential basis, though loan growth has remained flat at one per cent, but this is in line with slower systemic growth. Its non-interest income was boosted by a strong growth of 24 per cent y-o-y. Another 32 per cent y-o-y growth in other income boosted the bank’s top line.

The robust loan growth was driven by double-digit growth in all sub-segments of the retail loan book. Thanks to continued traction in the retail segment and lesser corporate demand, retail loan book's pie of the overall loan book grew to 55 per cent. In FY13, the management expects both retail and corporate segments to grow at identical rates. It expects base rates to trend downwards in the next one month or so, which will prop up corporate capex loans. For FY13, the management expects to grow its overall loan book by 20-22 per cent. On expenses, addition of over 500 branches pushed up the bank's operating expenses by 23.5 per cent.
 

INTEREST-ING TIMES
	Q4FY12	% change y-o-y
Net Interest-Income (Rs cr)	3,388	19.3
Other Income (Rs cr)	1,492	19.0
Net Interest margin(%)	4.7	(23) bps

Net Profit (Rs cr)1,45330.4 ROA (%)1.7— Net NPA (%)0.2– Source: Analyst reports 

However, this was more than offset by a 30 per cent fall in provisions and contingencies to Rs 298.3 crore, thereby fuelling bottom line growth of 30 per cent for the bank. Deposits grew 18.3 per cent over the previous year, led by 16.6 per cent growth in savings rate. HDFC Bank’s net interest margins (NIMs) expanded by 10 basis points sequentially to 4.2 per cent, largely driven by higher yield on average advances, which in turn was driven by higher retail contribution to the loan book.

Given that a major chunk of the bank's loans are on fixed interest rates, the bank expects to maintain NIMs in the narrow range of 3.9 to 4.2 per cent even in an easing rate cycle. Interestingly, despite the tough macroeconomic conditions, it managed to improve its asset quality in the March quarter. The bank’s gross non-performing assets (NPAs) fell both sequentially as well as on a y-o-y basis. The net NPA ratio also held firm at the 0.2 per cent level. Total restructured loans also remained unchanged at 0.4 per cent of gross advances.

Analysts believe current levels unsustainable and expect some pressure on the asset quality in FY13. Not surprisingly, the stock was up over one per cent on Wednesday against a flat Sensex.

HDFC Bank, currently, trades at an estimated price/book value of 3.7 times for FY13, higher than the historical range of 3.5 times. Analysts believe these valuations factor in all the positive points.

Vaibhav Agarwal, analyst at AngelBroking, says, “HDFC Bank results were in line with our estimates. Overall operating income growth was quite good. We expect the bank to clock in similar growth rates in FY13 as well. We have an accumulate rating and expect seven to eight per cent upsides from current levels.”