HDFC Bank announced its Q2 FY10 results on Wednesday, reporting a net profit growth of 30% y-o-y to Rs688 cr, in line with our estimates. While core balance sheet growth was low on a y-o-y basis, reflective of sectoral trends, there were initial signs of improving growth on a sequential basis. Advances increased 10% sequentially to Rs1,13,672 cr.
On a YTD basis, the Bank’s Advances grew 14.8% in 1HFY2010, as against a growth of 3.7% for the banking system as a whole. Deposits reached Rs1,49,805 cr in 2QFY2009, up 12% y-o-y. Notably, total CASA deposits registered a strong growth of 28% y-o-y and 15% sequentially, leading to a sequential improvement in the CASA ratio to 50% (45%).
On account of this, as well as an increase in the CD ratio to 76%, NIMs improved to 4.2% in 2QFY2010, as against 4.1% in 1QFY2010, driving a moderate 5% sequential growth in Net Interest Income.
The Bank’s Fee income grew at a reasonably strong 18% y-o-y to Rs692 cr. The Bank also booked large treasury gains of Rs163 cr, and Forex and Derivative linked income of Rs151 cr. The Asset quality of the bank improved sequentially, with Gross NPAs at 1.8% (2.1% in 1QFY2010) and net NPAs at 0.5% (0.6% in 1QFY2010). The NPA coverage ratio based on specific provisions was at 70% in 2QFY2010 as compared to 65% as of 2QFY2009. The Bank also continued its focus on cost control, with operating expenses remaining flat sequentially, even though the Bank opened 90 branches and 191 ATMs during the quarter.
We believe that HDFC Bank is among the most competitive banks in the sector and is poised to maintain its profitable growth over the long term. With its strong capital adequacy and substantial branch expansion, the Bank is well-placed to take advantage of the imminent revival in GDP growth. We believe that the bank’s competitive advantages are set to drive further gains in CASA market share and traction in multiple fee revenue streams, going forward, as the economic environment continues to improve. However, at current valuations, a large part of this growth already appears priced in. At the CMP, the stock is trading at 20.9x its FY2011E EPS of Rs81.4 and at 3.4x its FY2011E ABV of Rs505.8. We maintain an Accumulate on the stock, with a 12-month Target Price of Rs1,770, implying an upside of 4%.