HDFC Bank net strong; need clarity on CV portfolio: Experts

India's second largest private-sector lender - HDFC Bank - continued to maintain its pace of growth by reporting a 30-percent year-on-year rise in its fourth quarter (January-March) net profit at Rs 1,890 crore, aided by robust growth in interest and other income. Since the last decade, the bank's quarterly net profit has been growing by around 32 percent.

Reacting to the bank's announcement of results on CNBC-TV18, analysts Vaibhav Agrawal of Angel Broking, Ravikant Bhat of SBICAP Sec and Hatim Broachwala of Karvy Stock Broking Ltd term the bank's quarterly performance as extremely positive.
However, Ravikant Bhat of SBICAP Sec adds that some management clarity is needed on the personal loan portfolio and as well as the commercial vehicle and construction equipment (CV/CE) component. Below is the edited transcript of Vaibhav Agrawal’s interview on CNBC-TV18 Q: What would you make of the results? Vaibhav Agrawal: As usual, the bottom-line offers no surprise and is exactly in line with market expectations. Over the last several quarters, HDFC Bank has managed to record a 30-percent growth in earnings on the back of lower provisioning.
What comes as a positive surprise is the growth in net interest income. As compared to the growth of around 22 percent every quarter, net interest income this quarter was almost 27 percent (year-on-year). I think that is a key positive on the operating front as well. Q: The fall in the levels of gross non-performing assets (NPAs) is quite significant and the net NPA level is lower by around Rs 30 crore. How do you read the bank’s asset quality? Vaibhav Agrawal: The bank posted a net interest margin of 4.5 percent as compared to expectations of around 4.2 percent. The increase is very substantial and is a key positive.  On asset quality, the bank continues to defy the macro environment to post strong results. Below is the edited transcript of Ravikant Bhat’s interview on CNBC-TV18 Q: What is your view on the results and what is your recommendation on the stock? Ravikant Bhat: We have a ‘hold’ recommendation with a price target was Rs 700.  The bank’s  net profit of Rs 1,890 crore beat expectations of an estimated net of Rs 1,880. The fall in the gross non-performing assets (NPA) - they’re down sequentially in absolute terms and in proportion - which is postive.
Our main concern was on the personal loan portfolio and as well as the commercial vehicle and construction equipment (CV/CE) component. But the bank’s gold loan portfolio has expanded very strongly and nothing seems to have affected the asset quality. Therefore, we would look forward to the management commentary. As of now the results seem to be pretty decent except that growth in other income does not seem to have had any momentum.
The cost-to-income ratio is slightly higher. Of late the management has guided that going forward the operating leverage would come into play and the cost-to-income ratio would be lower. We look forward to a commentary on this because HDFC Bank has been adding decent number of branches every year and since the size of the branches are going to remain small, it is reasonable to expect that the cost incurred incrementally would not be as high as it used to be in the past. Q: There stress on asset quality in the bank’s CV portfolio is slight. Has that allayed any concerns? Ravikant Bhat: Considering how the economy has been growing over the last few quarters, the concerns remain. Anecdotal evidence indicates a rise in the number of pre-possessed vehicles which needs to be corroborated with the management. There are differentiated models of lending as far as the CV segment goes. Therefore, the stress has is different for each lender.
HDFC Bank’s stringent underwriting standards extent explains the limited impact of the stress on asset quality. However, we look forward to management clarity on the performance of this portfolio. Below is the edited transcript of Hatim Broachwala’s interview on CNBC-TV18 Q: How would you approach HDFC Bank after the announcement of results? Hatim Broachwala: The results are inline with expectations. Profitability of 30 percent, upside in earnings and flattish asset quality are some of the key positives. We don’t foresee a major upside on the valuation front because it is already discounting around 3.9 to 4 times FY14 which looks to be full. Q: What is your view on net interest margins of 4.5 percent? Hatim Broachwala: The net interest margin has beaten expectations. Q: How would rate the results of the four private sector banks that have announced earnings so far? Do you have any recommendation on HDFC Bank? Hatim Broachwala: With the run-up in the stock prices and announcement of most results, we feel that valuations have already run their course. So on most banks, we have a hold recommendation.