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Crisis: Why HDFC Bank will not be hit
Sarath Chelluri in Mumbai | November 24, 2008
The bank's focus on technology and superior margins with support from low-cost deposits will ensure profitable growth in the future.
The merger of retail focused-Centurion Bank of Punjab (CBOP) with HDFC Bank [Get Quote] effective May 23, 2008, will shore up revenues in the medium-term. However, the synergies from the merger with start reflecting over 12-24 months, and boost profitability. Put together, the gains from organic and inorganic initiatives will help the bank sustain growth rates in excess of its historical average of 29-30 per cent, and in a profitable manner.Global meltdown: Complete coverage
The actual benefits will start to filter in the next 12-24 months, with improved productivity in terms of net revenue (net interest income and other income) and CASA (the ratio of low cost deposits to total deposits) growth of CBoP branches on par with HDFC outlets. But before that to happen, HDFC bank will have to shoulder the pressure in the medium-term.
For instance, on the efficiency front, the cost to income ratio has also increased from 50 per cent in March, 2008 to around 55 per cent in Q2 FY09 on the back of higher employee costs and integration costs, post the merger. The integration of the two banks' technology-based platforms is expected to be completed by the end of this fiscal, and will improve the cost efficiencies going forward.
Likewise, the capital adequacy ratio (CAR) dropped to 11.4 per cent in Q2 FY09; this can partially be attributed to the merger blues and also organic growth of loan book. However, it is comfortably above the regulatory requirement of 9 per cent. Notably, CAR will improve and provide capital for future growth, if the promoters exercise their right to convert warrants and infuse Rs 3,500 crore (warrants already issued, conversion price of Rs 1,500 per share, deadline is December 2009).
Of late, HDFC Bank has been going slow on the retail loans and even CBoP's non-issuance of fresh loans (since December 2007) to the two-wheeler and personal loan segments, has ensured comfortable NPA (non-performing assets) levels for the combined entity. Gross NPA and net NPA are up 40 basis points and 20 basis points y-o-y in Q2 FY09 to 1.6 per cent and 0.6 per cent, but are comfortable in comparison to peers. Analysts say that HDFC Bank, after the merger, would provide higher provisions to the combined entity in line with its own superior provision coverage of around 67 per cent (CBOP's at 55 per cent). Although, it will add pressure on the profitability in the near term, it will help avoid slippages in asset quality in the future.
The advances haven't slowed and this is indicated from the credit-deposit ratio rising from 63 per cent (FY08) to around 75 per cent in Q2 FY09. The recent CRR cut has released additional funds of around Rs 4,500 crore that could be used for further loan disbursements and provide support to NIMs (CRR balances with RBI do not yield any returns). The higher yield on advances and investments in conjunction with high interest rates has meant that NIM is still comfortable at 4.2 per cent.
Superior NIMs, a high proportion of low-cost deposits (at 44 per cent) and an extensive branch network (now at over 1,400) will drive growth without appreciable cost pressures. This quality and profitable growth along with low valuations, provides an investment opportunity for long-term investors. At Rs 856.70, the stock trades at around 12.5x (traded at an average 20-25x in the last five years) and P/BV at 2.1x its FY10 earnings, and can deliver 18-20 per cent annually for the next few years.
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