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HDFC Bank results see sequential improvement

HDFC Bank results see sequential improvement
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First Published: Thu, Oct 15 2009. 01 41 AM IST

Updated: Thu, Oct 15 2009. 01 41 AM IST
Private sector lender HDFC Bank Ltd reported a slowing of year-on-year net interest income (NII) growth to 4.8% in the September quarter from 7.7% in the June quarter. It reported a 36.4% drop in trading profit as well, compared with the June quarter. Still, the company managed to report its trademark 30% growth in net profit, just as it did in the June quarter. This was better than the 25% growth estimated by 10 analysts polled by Reuters.
The company managed to beat street estimates thanks to a 28% increase in other income, including fees, commissions and foreign exchange revenues, but excluding trading profit. Other income had grown by 17% in the June quarter. Moreover, operating expenses were contained near year-ago levels in the September quarter, while they rose 7% in the June quarter. These two factors compensated for the drop in NII growth and trading profit. In fact, excluding trading gains, operating profit rose by 25.6% last quarter, much better than the 14.3% growth reported in the June quarter. Axis Bank Ltd reported a similar improvement in core business profit earlier this week.
Some analysts are also enthused about the sequential improvement in some key ratios. The net interest margin, for instance, improved 10 basis points to 4.2% compared with the June quarter as the company’s cost of funds fell at a slightly faster pace compared to the yields on its assets. This was mainly owing to the increase in CASA (current account/savings account) deposits, from 44% of total deposits in the June quarter to 47% last quarter. Operating expenses fell 140 basis points as a percentage of net revenues. One basis point is one-hundredth of a percentage point.
Graphics:Yogesh Kumar / Mint
The net result of all this is that profit before tax as a percentage of net revenue jumped to 33.7% last quarter, compared with 29.7% in the June quarter. It must be noted here that trading profit had accounted for 29.8% of the overall profit before tax in the June quarter, which has dropped to 16.3% in the September quarter.
Besides, the loan book has grown by 9.5% compared with the June quarter, indicating that things are incrementally getting better. The quality of the bank’s loan portfolio is relatively better than peers and there has been a further improvement in this regard. Gross net performing assets as a percentage of total assets decreased to 1.9% last quarter (adjusted for regulatory changes in reporting) compared with 2.1% in the June quarter.
But all this and more is priced into the bank’s valuations of over four times its current book value. Apart from its parent company, Housing Development Finance Corp. Ltd, all other financial institutions and banks trade at less than three times book value. In fact, HDFC Bank’s shares have underperformed peers in the recent rally precisely because of stretched valuations. While its performance will assure investors, especially in terms of the quality of the loan book and the lower reliance on trading profit, the high valuations will restrict the stock’s gains.
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First Published: Thu, Oct 15 2009. 01 41 AM IST