HDFC's pre-provisioning operating profit growth of 27.56% was the best in the last financial year as the bank seemed to focus on cost-cutting. Photo: Bloomberg
HDFC's pre-provisioning operating profit growth of 27.56% was the best in the last financial year as the bank seemed to focus on cost-cutting. It's cost-to-income ratio for the March quarter was 45.7% compared with 51.4% a year ago. The lender was able to clamp down on costs in the previous two quarters as well.
It was also able to reduce the money it has to set aside for bad loans because of improving asset quality. Gross non-performing loans dropped marginally to Rs.2,889.28 crore at the end of March, compared with Rs.3,017.84 crore three months earlier, as recoveries increased. As a proportion of the loan book, gross bad debt continued to hover at around 1%.
Third, net interest margin (NIM)—a measure of the difference between the interest income generated and the amount of interest paid out—improved by 20 basis points from a quarter ago to 4.4%. One basis point is one-hundredth of a percentage point. Not only did HDFC Bank grow overall deposits at 24%, low-cost current and savings account deposits grew faster, helping boost NIM. Deposits accumulated through the one-time special window that RBI opened late last year also helped.
These factors helped compensate for the subdued levels of retail loan growth, which slowed to 10% year-on-year compared with around 14% in the previous quarter as commercial vehicle and gold loan portfolio declined. The wholesale loan book grew around 37% helped by a lower base and demand for working capital. The retail loan book is relatively higher-yielding and is one reason for the bank's superior margins.
"There are equal opportunities to grow both retail and wholesale loan book," deputy managing director Paresh Sukthankar said in a conference call.
However, a slowing economy and high retail inflation are factors to be watched. The other point of concern is the slowdown in fee income growth to around 10%, primarily led by decline in third-party product commissions such as mutual fund and insurance.
Still, the bank was able to show March quarter net profit growth of 23% from a year ago.
The slowdown in growth was also owing to higher tax outgo on the back of a marginal increase in the effective tax rate.
While earnings growth has decelerated, the bank has been able to maintain its edge because of its margin, asset quality and return on assets. It explains why it is still valued at 3.5 times its estimated book value for 2014-15.
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