HDFC Bank: Slow and steady

The momentum may be slowing but that’s the right approach in a challenging credit environment.

Given that the credit environment is challenging it’s not surprising that the pace of growth at HDFC Bank is slowing down — advances for the March 2009 quarter are more or less at similar levels as they were in the December 2008 quarter. That appears to be a conscious decision and not a bad one since the bank is holding excess government securities and can step up the acquisition of assets as and when the environment is more conducive to lending.

Moreover, the bank has sustained the net interest margin (NIM) at 4.2 per cent, which was lower by about 10 basis points sequentially, helped by a larger proportion of current and savings accounts which was up at 44 per cent. In fact the nim has ranged between 3.8 and 4.3 per cent over the last 16 quarters. The growth in the bank’s fee income continues to be remarkably strong, reflecting the tremendous strength of the bank’s corporate clientele. Net profits for the quarter have also been driven by bond gains and some savings in staff costs.

While the increase in provisions sequentially at 23 per cent, has been somewhat sharp, some of it could be accelerated provisioning for bond profits. Nevertheless, delinquencies have been higher in a weak credit market. The bank has, however, stepped up provisions to cover a fairly large portion of the restructured assets and as such the incremental impact of any defaults on this front will be minimal.

The ratio of net non-performing loans(NPLs) to net advances stayed at 0.6 per cent in the March 2009 quarter similar to the levels at the end of December 2008. Going by current indications, loan growth in the current year could be around 18-20 per cent. While a changing portfolio mix in favour of corporate loans might bring down yields in the current year, it would also ensure that delinquencies are lower thereby protecting the bottom line.At Rs 1093, the stock trades at just under three times price to estimated 2009-10 book value.