Stock Review: HDFC BANK

HDFC Bank, which has been reporting a net profit growth of around 30% Y-o-Y for the past several quarters, finished yet another quarter on similar lines. Its net profit for the March 2011 quarter rose by 33.2% Y-o-Y. The continuous improvement in asset quality and the increasing CASA mix seem very positive for the bank's long-term growth. The company managed to beat street estimates due to a 32% increase in other income, including fees, commissions and foreign exchange revenues and trading profit.

In the quarter, the bank increased its ATM networks by 30% to 5471. It grew its loan book by 27% compared with 21% growth at the industry level. However, on a sequential basis, it has seen a fall in advances. This though seems a strategic call by the bank to pull down its credit-to-deposit ratio to 76% this quarter compared with 82% Y-o-Y. Retail lending accounts for almost 50% of the loan book. This is a clear shift for the bank, which was earlier cautious on retail lending to maintain its asset quality.

The bank has been proactive not just on the asset side of the retail business, but also on the liability side. It improved the share of low-cost current account and savings account (CASA) deposits to 51% in the March 2011 quarter. This is highest among its peer group. This helped the bank maintain its net interest margin (NIM) on a quarter-on-quarter basis at 4.2%. However, this trend may not continue as 50-60% of the banks fixed deposit (FDs) are expected to mature next year. This will lead to re-pricing of the cost of funds in the coming year.

The surge in the loan book has not come at the cost of its asset quality. In fact, the asset quality has improved substantially. Net non-performing assets (NPA) came down to 0.2% in the March quarter compared with its yearago levels of 0.3%. Not surprisingly, the provisions and contingencies, which mainly comprise loan-loss provisions, have come down by about 2%.

HDFC Bank also announced subdivision of one equity share into five shares. This is positive for investors as it will improve the liquidity of the scrip.

Given the good performance and the management quality, the bank seems fairly valued at a price-toearning ratio of 27.4 times.