HDFC Bank: Consistency pays

High Casa ratio and lowest risk in corporate loan book make it a good defensive play.

HDFC Bank has managed to do what technology bellweather Infosys could not — repeat its stellar quarterly performance. The private sector bank, much favoured by domestic and foreign institutions, ended the financial year with a net profit of Rs 3,926.4 crore, up 32.2 per cent. The bank’s balance sheet size increased by 24.7 per cent from Rs 222,459 crore last year to Rs 277,353 crore in March 2011.

Analysts say the bank has positively surprised the Street on all profitability parameters. For the March quarter, NII (interest earned less interest expended) stood at Rs 2,839.5 crore as against Rs 2,351.4 crore in the corresponding period last year. The bank says this was driven by loan growth of 27.1 per cent and a core net interest margin (NIM) of 4.2 per cent. Even as NIM stayed flat, analysts are happy it has not dipped as was expected due to rising deposit costs. Investors love this bank not only because it delivers 30 per cent growth year-on-year, but it has been maintaining the profitability at these levels in good times and bad. HDFC Bank is the only bank with a consistent track record of 30 per cent year-on-year earnings growth, every quarter, over the past 25 quarters.

The bank’s loan book is not only strong but also healthy. The corporate loan book is skewed towards shorter tenure working capital loans, which are less risky than term loans. Over time, the bank is increasing the proportion of securitised loans in its retail portfolio. The bank’s exposure to vulnerable sectors is also much lower than industry averages.

At 51 per cent, the bank has one of the highest current account savings account (Casa) ratio in the industry. Thanks to its stringent processes and risk management systems, the bank has low gross non performing loans of 1.1 per cent of loans. HDFC Bank has the lowest proportion of restructured loans at 0.3 per cent and among the lowest net NPLs of 0.2 per cent.

Analysts say the bank’s high provisioning cover of close to 100 per cent, including general provisions, and high earnings compounded annual growth rate of 36 per cent over FY08-10 make HDFC Bank the best in class among Indian financials. And it is for this reason that the market is willing to pay a higher valuation to the bank, too. Standard Chartered Equity Research says: “We believe HDFC Bank’s premium valuation of 3.8x FY12E P/BV already reflects these strong fundamentals.”