HDFC Bank:In line performance - Sept 2010 qtr: Alchemy

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In line performance
NII for HDFC Bank for 2QFY11 expanded by 29% YoY and net profit expanded by
33% YoY led by lower provisions. The business growth stood strong at 34% YoY
and we maintain growth for FY11E at 33% and 23% for FY12E. The NIM at 4.2%
is lower by 10bps QoQ, on account of fall in yield on advances. The cost of funds
expanded by 22bps QoQ, partially guarded by 120bps increase in proportion of the
CASA deposits to 50%. We estimate margins at 4.3% (calculated) for FY11E, to
remain stable hereon led by rising yields compared to cost of funds. The fee income
at Rs 8.5bn stood higher at 23% YoY and 15% QoQ partially due to change in
accounting policy. Slippages remained under control and despite lower provisions
(1.1% of advances) the NPA coverage stood stable sequentially at 77%. We
maintain Accumulate with a price target of Rs2,605.
Business growth strong : Margins dip led decline in yields on advance
The business growth stood strong at 34% YoY and 7% QoQ led by advances which
grew by 38% YoY. The loans to the non retail segment have expanded by 56% YoY,
which constitutes 48% of the total loans. The deposits have grown by 30% YoY and the
proportion of the low cost deposits stood firm at 50.6%, up by 140bps QoQ. We
maintain FY11E business growth of 38% for FY11E and 24% for FY12E. The reported
NIM at 4.2% is lower by 10bps QoQ. This dip is on account of 10bps decline in yield on
advances at 9.69% (calculated) for Q2FY11. With hike in its PLR and base rate in late
Q2FY11 we expect the yields to rise hereon, stabilizing margins. We estimate the
calculated margins to be at 4.3% for FY11E.
Fee income spike driven by change in accounting policy
Other income has decreased by 4.6% YoY to Rs9.6bn. This primarily consists of fee
income of Rs8.5bn, which has increased by 16% YoY, partly led by change in accounting
policy. In 2QFY11 the bank has netted off the fees of Rs0.5bn relating to transactions
done by the customers on other bank’s ATMs to its fee income, which was earlier
deducted from fees and commissions under operating expenses. This also partly led to
increase in cost to income ratio by 200 bps to 48.2%.
Stable asset quality
The gross NPA has remained stable sequentially at 1.2% and net NPA has decreased
marginally by 2 bps to 0.3%. The restructured assets have remained stable, QoQ at
0.3% of the gross advances, amongst the lowest in the system. Though the provisions
have declined sharply by 23.5% YoY and 18.1% QoQ to Rs4.5bn, the coverage ratio
was stable sequentially at 78%. We estimate the gross slippages ratio at 1.2% for FY11E
and 1% for FY12E.