The performance of HDFC Bank Ltd’s stock is increasingly like that of a high-growth utility’s. Quarter after quarter, come rain or shine, the bank continues to grow its profit at above 30%. That has been the trend for almost seven years now and the June quarter is no exception, with net profit growing by one-third over a year ago.
Little wonder then, investors are willing to pay a high premium for holding this stock. It is currently trading at four times its estimated book value for fiscal 2012, the highest among all private sector banks, barring Kotak Mahindra Bank Ltd. That metric is almost twice that of similar-sized banks such as ICICI Bank Ltd and Axis Bank Ltd.
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If one has to necessarily quibble about anything, then it would be the decline in net interest margin, which slipped 20 basis points from the end of March. But that was not entirely unexpected. Rates have been creeping up and cost of funds has been increasing. Despite this, net interest margin came in at 4.2%. One basis point is one-hundredth of a percentage point.
HDFC Bank has been able to maintain its margins at around the 4% mark for some years now, mainly due to a strong current and savings account deposit ratio of 49%. The fact that four-tenths of its loan book is made up of working capital advances that can be repriced quickly, also helped.
Another slight negative for the bank is the relatively slower rate of deposit growth at 15.3% for the June quarter compared with a year ago. In a conference call, the bank’s management pointed out that it had raised some Rs3,500 crore as tier-II capital, which allowed it to go slow on raising deposits. Even if this had come by way of deposits, growth would have come at 17.3%, still a tad lower than the system’s. The bank mainly relies on retail deposits; the 125 new branches opened in the last quarter should help.
All other parameters are healthy. Net interest income rose by nearly one-fifth from a year ago, fee and commission income by 15%, and asset quality improved. More importantly, advances gained by one-fifth from a year ago (and 29% adjusting for one-off short-term loans on account of the telecom spectrum auctions last June).
The bank’s management indicated that loan growth will continue at a few percentage points more than the system’s—which is expected at around 18%—despite the morose macroeconomic environment. Given HDFC Bank’s track record, there’s no reason to believe it won’t do so.
Graphic by Yogesh Kumar/Mint
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