HDFC Bank Ltd. (HDB) reported second-quarter fiscal 2015 results, before the opening bell on Tuesday. The bank recorded net profit of INR23.81 billion ($0.39 billion), up 20.1% year over year.
HDFC Bank’s quarterly results reflected an impressive performance on the back of improvement in top line with both net interest income and non-interest revenues recording an increase. Moreover, growth in deposit and loan continued to be strong. However, higher operating expenses and struggling asset quality remained on the downside, shaking investors’ confidence in the stock.
Performance Details
HDFC Bank’s net revenue increased 19.6% year over year to INR75.58 billion ($1.24 billion). The rise was triggered by higher interest income, partly mitigated by elevated interest expense.
Net interest income rose 23.1% year over year to INR55.11 billion ($0.09 billion). Moreover, net interest margin (NIM) stood at 4.5%, up from 4.3% in the year-ago quarter.
Non-interest revenues amounted to INR20.47 billion ($0.33 billion), rising 11.0% from the prior-year quarter. The increase was due to higher fees and commissions, profit on revaluation/sale of investments and rise in miscellaneous income, partly offset by a reduction in foreign exchange & derivatives revenues.
Operating expenses totaled INR34.98 billion ($0.57 billion), up 19.2% from the prior-year quarter. The cost-to-income ratio came in at 46.3%, compared with 46.4% as of Sep 30, 2013.
As of Sep 30, 2014, total deposits increased 24.8% year over year to INR3.91 trillion ($0.06 trillion). Likewise, advances grew 21.8% year over year to INR3.27 trillion ($0.05 trillion), driven by growth in domestic retail loans and wholesale loans.
Additionally, HDFC Bank’s total capital adequacy ratio (CAR) as of Sep 30, 2014 (computed as per Basel III guidelines) came in at 15.7%, higher than the regulatory minimum of 9.0%. Moreover, Tier-I CAR stood at 11.8% as of Sep 30, 2014.
Asset Quality
Asset quality represented a mixed bag with provisions and contingencies rising 18.1% year over year to INR4.56 billion ($0.07 billion). However, gross nonperforming assets of gross advances stood at 1.02% as against 1.09% as of Sep 30, 2013.
Total restructured loans to gross advances came in at 0.1% versus 0.2% as of Sep 30, 2013.
Growth in Network
HDFC Bank has been able to expand its distribution network. During the quarter, the bank added 349 branches, increasing the total number of branches to 3,600 in 2,272 cities against 3,251 branches in 2,022 cities as of Sep 30, 2013. Further, total number of ATMs rose to 11,515 as of Sep 30, 2014 from 11,177 as of Sep 30, 2013.
Our Take
HDFC Bank faces several challenges in the form of persistently rising operating expenses, slowdown in the Indian economy and intense competition in the retail space from local peers like ICICI Bank Ltd. (IBN), UTI Bank, IDBI Bank and IndusInd Bank. Further, weakening asset quality continues to remain a drag on the bank’s financials.
Nonetheless, the bank’s initiatives to expand its branch network are expected to result in appreciable growth in loans and deposits, which in turn will propel profitability going forward.
HDFC Bank currently carries a Zacks Rank #5 (Strong Sell).
Among other foreign banks, Barclays PLC (BCS) and HSBC Holdings plc (HSBC) are scheduled to report third-quarter results on Oct 30 and Nov 3, respectively.
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