In the third quarter of FY10, HDFC Bank Ltd reported a profit after tax of Rs820 crore, up 32% year-on-year (y-o-y) and 19% quarter-on-quarter (q-o-q), in line with our expectations. Margins improved by 10 basis points (bps) q-o-q to 4.3%, driven by a robust 200 bps q-o-q improvement in the core current and saving accounts (CASA) at 49%. Margins are likely to have an upward bias after capital infusion.
Fee income grew by 4.5% sequentially, but overall growth was marred by treasury losses of Rs3 lakh during the quarter. Operational expenditure grew 6% q-o-q as the bank opened 219 branches during the quarter. Improvement in asset quality and lower incremental delinquencies (gross non-performing assets, or GNPAs, and provisions down q-o-q) boosted profits. Advances grew 21.1% y-o-y and 5.2% q-o-q, driven primarily by wholesale advances up 37.1% y-o-y and 5.1% q-o-q with an incremental credit deposit ratio of 119% during the quarter as additional capital helped the bank increase advances. Yield on advances declined by about 65 bps q-o-q as the bank mobilized low-yielding wholesale advances.
Graphics by Yogesh Kumar / Mint
Core performance, excluding treasury, improved sequentially with the core cost to income ratio down by 210 bps, sequentially. Asset quality improved with a 2.6% q-o-q decline in the gross NPAs and 24.3% q-o-q decline in the accounts restructured (cumulative Rs480 crore or 0.4% of gross advances). Capital adequacy ratio improved to 18.3% (Tier-I ratio of 13.8%) from 15.7% (Tier-I ratio of 10.9%) in the second quarter of FY10 after capital infusion.
Net interest income grew by 12.4% y-o-y and 13.7% q-o-q. The bank’s total assets grew 11.7% y-o-y and 5.5% q-o-q, driven by advances and investment growth of 5.2% and 12.1% q-o-q, respectively. Significant CASA improvement along with sequentially stable term deposits and availability of additional capital helped the bank cut funding costs by 65 bps q-o-q, while yield on funds declined 51 bps q-o-q leading, to a 10 bps improvement in margins.
All key core operating parameters showed sequential improvement. The bank continues to report steady growth with no major corporate debt restructuring risks, which deserves a premium. Its current valuations reflect the same. Margins are likely to have an upward bias. At the current market price, the stock is quoting at 19.9x estimated FY11 earnings per share, 3.2x estimated FY11 book value and 3.4x estimated FY11 average book value. We maintain our accumulate rating, with a revised price target of Rs1,800.