HDFC Bank Loses on Slow Earnings Growth - Analyst Blog

HDFC Bank Ltd.'s HDB ADRs fell 2.2% on Tuesday following the bank's fourth-quarter fiscal 2014 (ended Mar 31) net profit of INR23.27 billion ($0.38 billion), up 23.1% from the prior-year quarter. The rise was the lowest that the bank witnessed in a decade and resulted from a weaker Indian economy.

Further, for fiscal 2014, net income grew 26.0% year over year to INR84.78 billion ($1.42 billion).

An increase in both net interest income and fee revenues were positives for the quarter. However, these were partially offset by higher operating expenses. Moreover, deposit and loan balances as well as credit quality continued to show improvement.

Performance Details

HDFC Bank's net revenue for the quarter increased 14.0% year over year to INR69.54 billion ($1.13 billion).

Net interest income rose 15.3% year over year to INR49.53 billion ($0.80 billion). The rise was primarily driven by average asset growth of 20.3%.

Non-interest revenues of INR20.01 billion ($0.32 billion) grew 11.0% from the prior-year quarter. The increase was driven by rise in fees & commissions, foreign exchange & derivatives revenues and miscellaneous income, partially offset by lower gains on revaluation/sale of investments.

Operating expenses totaled INR31.75 billion ($0.51 billion), up 1.2% from the prior-year quarter. The cost-to-income ratio came in at 45.7%, compared with 51.4% as of Mar 31, 2013.

As of Mar 31, 2014, total deposits increased 24.0% year over year to INR3.67 trillion ($0.06 trillion). Likewise, advances rose 26.4% to INR3.03 trillion ($0.05 trillion) year over year.

Additionally, HDFC Bank's total capital adequacy ratio CAR as of Mar 31, 2014 (computed as per Basel III guidelines) was 16.1%, higher than the regulatory minimum of 9.0%. Moreover, Tier-I CAR was 11.8% as of Mar 31, 2014.

Asset Quality

Asset quality continued to show improvement with provisions and contingencies declining 4.8% year over year to INR2.86 billion ($0.05 billion). Further, gross nonperforming assets remained unchanged at 1.0% of gross advances.

Additionally, total restructured loans were 0.2% of gross advances as of Mar 31, 2014, signaling strong balance sheet.

Growth in Network

HDFC Bank has significantly widened its distribution network over the last few of years. During fiscal 2014, the bank added 341 branches, taking the total number of branches to 3,403 as of Mar 31, 2014 in 2,171 cities, against 3,062 branches in 1,845 cities as of Mar 31, 2013. Further, total number of ATMs increased to 11,256 as of Mar 31, 2014 from 10,743 in the previous year.

Our Take

We expect HDFC Bank's initiatives on expanding its branch network to drive higher deposits and loans, thereby boosting growth going forward. However, 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 remain causes of concern.

HDFC Bank currently carries a Zacks Rank #2 (Buy).

Among other foreign banks, Barclays PLC BCS and HSBC Holdings plc (HSBC) are scheduled to report first-quarter 2014 results on May 6 and May 7, respectively.