HDFC Bank: The pace comes off

The bank appears to be playing it rather safe in a difficult environment.

Loans given by HDFC Bank grew by just over 7 per cent year-on-year in the June 2009 quarter. That may sound disappointing but since the bank has enough capital and liquidity, it’s obviously a conscious decision to hold back in a challenging environment where there aren’t enough good lending opportunities, especially in the retail space.

Sequentially, advances are up about 5 per cent which is probably better than the performance for the banking system. The slower pace of growth has left the bank with a net interest income of just Rs 1,856 crore for the quarter, up just 7.7 per cent year-on-year and flat sequentially. That’s been possible because the net interest margin (nim) has been maintained at 4.1 per cent — the higher share of cheaper current and savings accounts at 45 per cent, would have brought down the cost of funds.

If the bottom-line has grown by a far healthier 31 per cent to Rs 606 crore, it’s because of the higher other income, the biggest chunk of which was fees, up 27 per cent year-on-year. Also, costs have been reined in —the core costs to income ratio was lower at 52.2 per cent down 160 basis points year-on-year.

While not a serious concern, HDFC Bank’s gross non-performing assets have edged up to 2.1 per cent from 1.98 per cent at the end of the March 2009 quarter. Provisions at Rs 659 crore are more or less flat sequentially and will probably be at these levels for another quarter — much of this is believed to be on account of the Centurion Bank of Punjab loan portfolio.

However, HDFC Bank is well covered for bad loans with a coverage ratio of 100 per cent. Moreover, restructured assets, including applications to be looked at, are at just 0.55 per cent of gross customer advances. With adequate provisioning, a clean book and enough capital, HDFC Bank is well-positioned to grow as and when the economy turns. At Rs 1,357, the stock trades at around three times price to estimated 2009-10 book value but a less expensive 2.6 times 2010-11 estimated book value.