Wednesday, July 22, 2009



HDFC Bank (‘HDFCB’) delivered strong net profit growth of ~31% yoy to Rs6.1bn in Q1FY10, ahead of our estimates. The earnings outperformance was driven by strong treasury gains and lower expenses, while credit growth at ~7% yoy was lower than consensus and our expectations.

• Margins stable; NII growth muted due to lower credit growth: HDFCB’s margins were resilient at 4.1% (flat on a yoy basis, while declining by 10bp qoq) owing to (i) traction in CASA deposits – contributing 74% to the incremental deposits sequentially, and (ii) improvement of ~200bps qoq in CD ratio to 71.2%. NII growth was muted at ~8% yoy (Rs18.6bn, as against our estimate of Rs20.1bn), owing to lower asset growth. (See Exhibit 1 in report)

• Treasury gains used to hike provisions: Provisions of Rs6.6bn (up by ~90% yoy) were higher than expected as the bank utilized strong treasury gains booked during the quarter. Loan loss provisions stood at ~Rs6.5bn, resulting in ~120bp qoq improvement in coverage to 69.7%. Part of the rise in provisions is indicated to be due to continued delinquencies on the credit cards and personal loan portfolio. (Exhibit 6)

• Asset quality holds up, restructurings negligible: Gross NPAs inched up marginally 7bp qoq to 2.05%, primarily due to the unsecured retail loans. The bank’s restructured assets (including pending applications) stands at Rs5.8bn (0.55% of gross advances), up by ~Rs2bn over Q4FY09 (0.2% of net advances as of June ’09). (See Exhibit 5 in report)

• Stellar treasury gains, fee income momentum sustained: Other income grew by a stupendous 76% qoq to Rs10.4bn on the back of strong treasury gains of Rs2.6bn (17% of operating profit). Bulk of these treasury gains are indicated to be from money markets. Core fee income (CEB) gained ground, up by ~27% yoy, primarily buoyed by retail transaction fees, credit card charges and trade credit from the whole-sale segment. Retail segment continues to contribute 75% of total fee income. (See Exhibit 3 in report)

• QoQ uptick in CASA; comprises 74% of incremental deposits: CASA ratio improved by ~60bp qoq to 45% as savings deposits witnessed traction with a 10% qoq growth (21% yoy). Notably, CASA deposits contributed 74% to the incremental deposits in Q1FY10. Recovery in savings balances for HDFCB is a function of (i) structurally lower term deposit rates at the industry-level, and (ii) improving contribution from CBoP branches.

To see full report: HDFC BANK