HDFC Bank Ltd.’s (HDB) ADRs gained 1.8% following the bank’s first-quarter fiscal 2015 results, before the opening bell on Monday. The bank recorded a net profit of INR22.33 billion ($0.37 billion), up 21.1% year over year.
The results benefited from a rise in net interest income. Moreover, deposit and loan balances continued to show improvement. However, higher operating expenses and fall in non-interest revenues were causes of concerns. Again, credit quality was a mixed bag.
HDFC Bank’s core net revenue, excluding the effects of bond gains for the quarter, increased 13.9% year over year to INR69.97 billion ($1.17 billion).
Net interest income rose 17.0% year over year to INR51.72 billion ($0.03 billion), primarily driven by asset growth of 18.0%. However, net interest margin (NIM) was 4.4%, down from 4.6% in the year-ago quarter.
Non-interest revenues came in at INR18.51 billion ($0.31 billion), declining 3.9% from the prior-year quarter. The decrease was due to a fall in foreign exchange & derivatives revenues and lower gains on revaluation/sale of investments, partially offset by rise in fees and commissions, and miscellaneous income.
Operating expenses totaled INR31.78 billion ($0.53 billion), up 4.6% from the prior-year quarter. The cost-to-income ratio came in at 45.3%, compared with 47.9% as of Jun 30, 2013.
As of Jun 30, 2014, total deposits increased 22.7% year over year to INR3.72 trillion ($0.06 trillion). Likewise, advances grew 20.7% to INR3.12 trillion ($0.05 trillion) year over year.
Additionally, HDFC Bank’s total capital adequacy ratio (CAR) as of Jun 30, 2014 (computed as per Basel III guidelines) was 15.1%, higher than the regulatory minimum of 9.0%. Moreover, Tier-I CAR was 11.1% as of Jun 30, 2014, versus 10.5% as of Jun 30, 2013.
Asset quality represented a mixed bag with provisions and contingencies declining 8.4% year over year to INR4.83 billion ($0.08 billion). However, gross nonperforming assets of gross advances were 1.07% as against 1.04% as of Jun 30, 2013.
Total restructured loans to gross advances remained unchanged year over year at 0.2%, indicating a strong balance sheet.
Growth in Network
HDFC Bank has been able to expand its distribution network. During the quarter, the bank added 369 branches, increasing the total number of branches to 3,488 in 2,231 cities against 3,119 branches in 1,891 cities as of Jun 30, 2013. Further, total number of ATMs rose to 11,426 as of Jun 30, 2014 from 11,088 as of Jun 30, 2013.
We expect HDFC Bank’s initiatives to expand its branch network will 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 might be potential headwinds.
HDFC Bank currently carries a Zacks Rank #4 (Sell).
Among other foreign banks, Barclays PLC (BCS) and HSBC Holdings plc (HSBC) are scheduled to report second quarter results on Jul 30 and Aug 4, respectively.