Indian banks may be bracing for a slowdown in lending, but that does not appear to be reflected in any way on HDFC Bank, the country's most premium bank in terms of market valuation. It is now passe for the bank as well as for the financial services industry, analysts and investors to settle for consistent profit growth numbers that the bank reports quarter after quarter. This time, HDFC Bank clocked a year-on-year growth of 33.7% in its profit in the quarter to June '11, with profit growth mainly driven by strong loan growth and low provision coverage.
The bank grew its loan book 29% — way ahead of the industry average of 21%. Even on a sequential basis, advances growth was strong at 10.3%. Over the years, HDFC Bank's loan book has undergone a clear shift from being corporate-dominated to a balanced portfolio between retail and corporate loans. The retail book is primarily driven by auto loans. Home loans, which were once a major component of HDFC's loan book portfolio, have been stagnant this quarter. What has actually helped the private bank improve profit margins and disburse loans at a much faster rate than peers is its superior asset quality. At 0.2% of its advances, HDFC Bank's bad loans or net non-performing assets (NPAs) are the lowest in the industry. On top of it, its provision coverage at 83% is in excess of the minimum 70% mandated by the Reserve Bank.
Deposit growth of 13.3% was lower than the industry average but it does not appear to be detrimental to its cost of funds. Current account deposits fell 16.5% sequentially. The bank recently raised . 3,600 crore of Tier-II capital at almost the same interest rate to substitute its low-deposit growth.
There have been concerns relating to the bank's ability to maintain its net interest margin (NIM). But HDFC Bank has surprised again by maintaining its NIM at 4.2% for the fifth consecutive quarter. However, the bank will have to shift its focus again on boosting its low-cost current account and saving account (CASA) deposit, which fell below 50% for the first time during the last four quarters.
At a price-to-earnings (P/E) ratio of 28.4, the HDFC Bank stock looks overpriced compared to its peer Axis Bank, which trades at a P/E of around 15-16. However, given its consistent performance, it is but natural for the bank to command such a high premium.
