HDFC Bank Limited — FY2011 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2011, with comparisons to the year ended March 31, 2010. Although the request identifies “2010 Q4,” this is an annual report, not a stand-alone quarterly filing. Consolidated financial statements are prepared under U.S. GAAP; certain regulatory ratios and asset-quality measures are reported under Indian GAAP. Amounts below are in Indian rupees (Rs.) unless stated otherwise.
Financial and operating performance
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Net revenue | Rs. 145.6 billion | Rs. 105.6 billion | Up 37.8% |
| Net interest revenue | Rs. 108.4 billion | Rs. 80.9 billion | Up 33.9% |
| Net interest revenue after credit-loss provisions | Rs. 98.8 billion | Rs. 62.7 billion | Up 57.5% |
| Net interest margin | 4.8% | 4.6% | Improved 0.2 percentage points |
| Non-interest revenue | Rs. 46.8 billion | Rs. 42.9 billion | Up 9.1% |
| Non-interest expense | Rs. 82.4 billion | Rs. 68.4 billion | Up 20.4%; expense-to-net-revenue ratio improved to 56.6% from 64.8% |
| Net income attributable to HDFC Bank | Rs. 41.2 billion | Rs. 24.6 billion | Up 67.7%; basic EPS Rs. 17.84 versus Rs. 11.26 |
| Operating cash flow | Rs. 50.1 billion | Rs. 109.1 billion | Down; management cites higher operating cash flow in FY2010 from changes in bills payable |
| Cash and cash equivalents, period-end | Rs. 288.9 billion | Rs. 297.6 billion | Down 2.9% |
- Balance sheet and lending: Total assets were Rs. 2,920.2 billion, up 20.8%. Net loans were Rs. 1,622.9 billion, up 25.1%; gross loans were Rs. 1,648.8 billion, with retail loans of Rs. 980.1 billion and wholesale loans of Rs. 668.6 billion.
- Funding and liquidity: Deposits reached Rs. 2,082.1 billion, up 24.5%; retail deposits were approximately 67% of total deposits. Savings and current accounts represented 52.7% of deposits at year-end. Cash and cash equivalents plus term placements totaled Rs. 391.0 billion; the filing does not provide a single conventional liquidity-ratio value in the supplied text.
- Debt and capital: Year-end short-term borrowings were Rs. 76.7 billion, long-term debt Rs. 93.3 billion, and securities sold under repurchase agreements Rs. 60.0 billion. Under Indian GAAP/Basel II, total capital adequacy was 16.22% and Tier 1 was 12.23%, compared with 17.44% and 13.26% respectively in FY2010. The RBI minimum total ratio was 9% and Tier 1 minimum 6% under Basel II.
- Margins and funding costs: Average cost of deposits declined to 4.3% from 4.7%, while the average cost of savings deposits rose to 3.5% from 2.8%. Average loan yield declined to 10.2% from 10.7%; the bank’s reported spread increased to 4.5% from 4.2%.
- Credit quality: Under U.S. GAAP, gross non-performing loans were 1.3% of gross loans, net non-performing loans were 0.3% of net loans, and total allowance coverage was 125.3% of gross non-performing loans. Under Indian GAAP, gross non-performing customer assets were reported at 1.0% of gross customer assets and net at 0.2%; these measures use different bases.
Material changes versus FY2010
- Loan growth drove higher interest revenue: average loan volume increased 36.3%, while loan yields fell. Retail gross loans grew 33.7% and wholesale gross loans 13.7%.
- Credit-loss provisions fell 47.1% to Rs. 9.6 billion, mainly reflecting lower retail delinquencies and improved asset quality. Wholesale provisions rose 151.1% to Rs. 4.0 billion, principally because of microfinance-sector stress.
- Fee and commission income increased 27.1%; foreign-exchange transaction income rose 141.2%. These gains were partly offset by net derivative losses of Rs. 3.9 billion, compared with gains of Rs. 2.9 billion in FY2010, and a net trading-securities loss of Rs. 0.6 billion.
- Available-for-sale investments increased to Rs. 628.7 billion. Accumulated other comprehensive loss widened to Rs. 5.7 billion, principally reflecting unrealized losses on available-for-sale securities.
- Investing cash outflow increased to Rs. 466.7 billion, driven by loan growth and purchases of investments. Financing cash inflow was Rs. 407.9 billion, principally reflecting deposit growth.
- Non-interest expenses rose with network expansion: branches increased to 1,986 from 1,725 and ATMs to 5,471 from 4,232. A revised useful-life estimate for certain point-of-sale equipment and IT servers reduced FY2011 pre-tax income by Rs. 390.5 million.
Outlook, risks, contingencies and unusual items
- Management’s strategy emphasizes continued market-share and branch growth, disciplined credit risk management, low-cost deposits and steady earnings growth. No specific earnings or margin guidance is provided.
- Management budgeted approximately Rs. 15.1 billion of FY2012 capital expenditure, including Rs. 9.7 billion for technology and systems, Rs. 3.8 billion for branches and back offices, and Rs. 1.0 billion for ATMs; actual spending may differ.
- The filing cites rising Indian interest rates and inflation as risks to net interest margins, investment valuations, loan demand and borrower repayment. Management notes that rates had been rising since FY2011’s third quarter. The RBI’s stated estimate for Indian GDP growth in FY2012 was 8.0%.
- Microfinance institutions were under strain following restrictions imposed by a state government; the bank expects portfolio-quality pressure in the affected market to continue pending central regulation. Textiles and certain wholesale sectors also showed elevated impairment rates.
- Key risks include rapid growth and integration of Centurion Bank of Punjab (CBoP), unsecured retail lending, deposit rollover and maturity mismatches, concentration among large borrowers, regulatory changes, competition, operational or technology disruption, and foreign-exchange and market risks.
- The CBoP acquisition generated Rs. 74.9 billion of goodwill, unchanged at year-end; management reported no impairment indication in its annual test. The bank reported Rs. 1.54 billion of claims not acknowledged as debts, largely in the ordinary course, and stated it did not expect a material adverse effect. Guarantees and documentary credits totaled Rs. 271.4 billion; outstanding loan sanction letters were Rs. 518.5 billion, but the bank stated it was not obligated to lend under them.
- The independent auditor issued unqualified opinions on the consolidated U.S. GAAP financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2011.
Most important facts for investors to verify
- Reconcile reported credit-quality measures across U.S. GAAP and Indian GAAP, and track MFI-related delinquencies, provisions and restructured exposures.
- Assess the sensitivity of net interest income and available-for-sale securities to further rate increases; verify the scale and duration of unrealized investment losses.
- Review the decline in operating cash flow alongside rapid loan and investment growth and the bank’s continued reliance on deposit funding.
- Check borrower and sector concentration, collateral recovery assumptions, and the potential exposure represented by guarantees, derivatives and other commitments.
- Monitor capital adequacy after its year-over-year decline, planned FY2012 capital spending, and the carrying value and future impairment risk of CBoP goodwill.
- Consider the effect of rupee movements on U.S.-dollar ADS returns. The filing’s U.S.-dollar translations are for convenience and do not represent guaranteed conversion values.