On Tuesday, India’s HDFC Bank (HDB) reported fisccal second quarter 2011 (ended September 30, 2010) net earnings of INR57.70 billion (US$1.24 billion),up 14.3% from the prior-year quarter. Results improved primarily due to strong growth in net revenues and decline in provisions and contingencies (primarily comprising loan loss provisions), which was partially offset by an increase in operating expenses.
HDFC Bank’s net interest income for the quarter shot up 29.2% year over year to INR25,263 million (US$543.91 million), driven by growth in average assets and net interest margin (NIM). NIM for the quarter was 4.2%, flat on a year-over-year basis.
Non-interest revenues summed up to INR9,607 million (US$206.84 million), down 8.8% from the prior-year quarter. While fees and commissions and foreign exchange/derivative revenues rose from the prior-year quarter, the company experienced a year-over-year decline in profit on revaluation/sale of investments in the quarter. The largest component of non-interest revenues was fees and commissions of INR8,570 million (US$184.51 million), up 16.0% over the year-ago quarter.
HDFC Bank’s operating expenses for the quarter totaled INR16,799 million (US$361.68 million), up 18.6% from the year-ago quarter. However, operating expenses improved to 47.5% of net revenues as against 49.8% in the prior-year quarter. Provisions and contingencies for the quarter were INR4,545 million (US$97.85 million), down 23.5% from INR5,941 million (US$122.98 million)in the prior-year quarter.
HDFC Bank’s total deposits spiked up 30.4% from the prior-year quarter to INR1,953.21 billion (US$42.05 billion). Additionally, substantial growth was witnessed in retail loans, which climbed 30.8% year over year to INR819.50 billion (US$17.64 billion).
Asset quality improved with gross non-performing assets (NPAs) to gross advances coming at 1.16%, down 60 basis points (bps) year over year. Net NPAs also remained healthy at 0.30% of net advances, down 20 bps from year-ago quarter.
HDFC Bank’s total capital adequacy ratio (CAR) as of September 30, 2010 (computed as per Basel 2 guidelines) remained strong at 17.0%, higher than both the regulatory minimum of 9% and 15.7% recorded at September 30, 2009. Tier-I CAR was 12.7% as of September 30, 2010, compared with 10.9% at September 30, 2009.
During the reported quarter, HDFC Bank allotted 29,14,147 shares, pursuant to the exercise of stock options by certain employees.
HDFC Bank has broadened its network and as of September 30, 2010, the company’s distribution network stood at 1,765 branches and 4,721 ATMs in 819 cities. As of September 30, 2009, the company had 1,506 branches and 3,573 ATMs in 635 cities.
We expect the company to face increasing competition in the retail space with competitors’ re-entry after two years. We are also concerned about HDFC Bank’s highly competitive operating environment. Nevertheless, we expect continued synergies from the company’s exposure to the fast growing Indian retail credit sector. The continuation of branch expansion is also expected to drive growth in savings deposits in the upcoming years.
HDFC Bank currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.
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