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HDFC Bank: Rebound, asset quality to boost profit growth

20 Jul 10 10:00 AM
ET
India’s second largest private lender HDFC Bank reported the highest profit growth in the past five quarters in the June 2010 quarter.

That should comfort investors, as the stock is trading at 30 times its trailing earnings and is one of most expensive stocks in the banking sector. Such a stratospheric valuation leaves investors anxious because any slippage in earnings could lead to a sharp correction in its stock price. Fortunately, this is not the case with HDFC Bank, as it has not only maintained its by now consistent 30% year-on-year growth, but has also bettered it.

Tight conditions in the bond market crimped the ability of the bank to book treasury gains. HDFC Bank’s treasury income fell by nearly 90% in the June 2010 quarter from a year ago. If not for this, profit growth would have been far higher.

Profit growth during the quarter was primarily driven by a strong pick-up in advances or loans. The bank grew its advances by 40% in the last quarter, which is almost double the rate at which the banking industry’s loan book grew. The quarter to June also saw an increase in short-term corporate loans of the bank, which was reflected in the 10% growth in its overall loan growth.

If this one-time factor is excluded, loan growth will be close to 30%. Even at this rate, the growth appears to be quite high, considering that HDFC Bank grew its loan book by a mere 8% just three quarters ago. The management has indicated that the demand for funds will remain high, given the rebound in growth. This should keep the momentum going.

What has actually helped the bank in extending credit at a much faster rate than its peers is the quality of its assets. At 0.3% of its advances, its bad loans or net non-performing assets (NPAs) are the lowest in the industry. On top of it, its provision coverage at 77% is in excess of the minimum 70% mandated by the Reserve Bank of India (RBI).

The bank is consciously enhancing the base of low-cost current account and savings account (CASA) deposits at a faster rate than its total deposits. For instance, its CASA deposits grew 37% compared to the growth of 26% in total deposits in the June 2010 quarter. This led to a marginal improvement in its net interest margin (NIM) by 10 basis points compared to a year ago.

High CASA deposits and a low bad-loans ratio provide stability to the bank’s business. HDFC should be able to take advantage of the rebound in growth and to maintain its bottomline growth, going forward as well.