The country’s second largest private sector lender HDFC Bank Ltd has reported the usual robust growth in net interest income, which the markets have by now taken for granted. On a combined basis, HDFC Bank and Centurion Bank of Punjab, or CBoP, (merged with effect from 1 April) have grown net interest income by 40% on a year-on-year (y-o-y) basis, and 8.3% on a quarter-on-quarter basis. Given the current environment, the growth is impressive, says an analyst.

Other income, comprising fees, commission, foreign exchange/derivatives revenues and profit/loss on investments, rose by 8.4% sequentially. Besides, operating expenses were curtailed marginally, leading to a 9.3% growth in operating profit. Net interest margin rose to 4.2% compared to 4.1% in the last quarter. The quarter-on-quarter growth numbers look impressive.

But on a y-o-y basis, other income was flat, after adding CBoP’s year-ago results for comparison. And as a result, operating profit growth on a y-o-y basis was just 22%, although net interest income (NII) grew by as much as 40%. Ditto in the first quarter, when NII grew by 53%, but operating profit grew by just 18% (partly because of a loss on revaluation of investments).

Some analysts are worried about the 11.5% sequential rise in gross non-performing assets (NPAs) and the fact that the firm has increased provisions for NPAs at a lower rate of 8.5%. This has resulted in a marginal drop in its coverage ratio (provisions for NPAs/gross NPAs). But note that the coverage ratio hasn’t dropped much — from 67% at the end of the June quarter, it has come down to 65.15%. Besides, it was already known that some of CBoP’s retail assets were weak and this would increase the NPAs.

Also See Mixed Picture (Graphic)

At the end of the September quarter, HDFC Bank’s CASA (current accounts and savings accounts) mix stood at 44% of total deposits. Prior to the merger with CBoP it was as high as 55%. According to a recent report by Deutsche Bank AG, what sets the bank apart is that a high proportion of of its CASA deposits (about 17%) come from salary accounts which are sticky in nature and have large idle funds. This, the broker believes, provides HDFC Bank significant competitive advantage in times of tight liquidity. Besides, the high CASA proportion ensures that its cost of deposits are relatively low. And despite the higher than usual rise in NPAs this quarter, investors continue to feel extremely secure about the bank’s asset quality.

But despite this, HDFC Bank shares have underperformed its peers in the current market fall since September. What seems to have worked against it is its high valuations — even after the sharp correction this year, it trades at three times estimated book value for the current year. The high valuation makes upside limited, but at the same time, thanks to the superior quality of the bank, the risk of further underperformance is also low.

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