HDFC Bank Limited — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2017; this is an annual report, not a standalone 2016 fourth-quarter filing. Financial statements are consolidated and prepared under U.S. GAAP; certain regulatory and capital measures are reported under Indian GAAP or RBI rules. Amounts below are in Indian rupees (Rs.) unless stated otherwise.
Business context and key financial metrics
HDFC Bank is an Indian private-sector bank focused on retail banking, wholesale banking and treasury. At year-end it had 4,715 branches, 12,260 ATMs and more than 40.5 million customers. Management attributed stronger current- and savings-account deposits and increased point-of-sale activity during the year partly to India’s November 2016 demonetization.
| Metric | FY2017 / March 31, 2017 | FY2016 / prior year-end | Change |
|---|---|---|---|
| Net revenue | Rs. 424.2bn | Rs. 367.7bn | +15.4% |
| Net income attributable to HDFC Bank | Rs. 140.5bn | Rs. 117.9bn | +19.2% |
| Net interest revenue | Rs. 351.8bn | Rs. 292.4bn | +20.3% |
| Net interest revenue after credit-loss provisions | Rs. 313.8bn | Rs. 270.8bn | +15.9% |
| Net interest margin | 4.6% | 4.6% | Stable |
| Non-interest expense | Rs. 204.2bn | Rs. 182.1bn | +12.2% |
| Net loans | Rs. 5,910.4bn | Rs. 4,935.5bn | +19.8% |
| Total assets | Rs. 9,067.0bn | Rs. 7,736.7bn | +17.2% |
| Total deposits | Rs. 6,431.3bn | Rs. 5,457.9bn | +17.8% |
| Cash and cash equivalents | Rs. 430.7bn | Rs. 377.7bn | +14.0% |
| Net cash from operating activities | Rs. 379.3bn | Rs. 170.1bn | Higher |
| Capital adequacy ratio (Basel III, RBI/Indian GAAP) | 14.55% | 15.53% | Lower |
Basic earnings per equity share were Rs. 55.23, versus Rs. 46.84; the dividend declared for FY2017 was Rs. 11.00 per share, versus Rs. 9.50. FY2017 net income was 1.7% of average assets and 14.9% of average shareholders’ equity. The cost-to-net-revenue ratio improved to 48.1% from 49.5%.
Retail banking generated 82.8% of net revenue, wholesale banking 14.9%, and treasury 2.3%. Retail loans were approximately 67.6% of gross loans. Average funding cost including equity was 4.6%, compared with 4.9% in FY2016.
Material changes versus FY2016
- Credit-loss provisions rose 76.3% to Rs. 38.0bn. Gross non-performing loans increased to Rs. 83.0bn from Rs. 53.0bn, and gross NPLs as a share of gross loans rose to 1.4% from 1.1%. Net NPLs as a share of net loans rose to 0.6% from 0.4%; total allowance coverage of gross NPLs fell to 94.6% from 108.3%.
- Loan growth was broad-based: gross retail loans increased 17.1% and gross wholesale loans 26.4%. Deposits grew 17.8%, with savings deposits up 30.9% and non-interest-bearing deposits up 30.7%; management linked part of the increase to demonetization.
- Non-interest revenue rose 13.9%, led by fees and commissions (+12.4%) and foreign-exchange income recovering from a loss to a gain. Derivatives moved from a Rs. 15.1bn gain in FY2016 to a Rs. 5.7bn loss in FY2017, partly offsetting the foreign-exchange improvement.
- Funding costs eased overall, but expense on short-term borrowings rose 32.8% and expense on long-term debt rose 33.4%, reflecting higher average balances and, for short-term borrowing, a higher average rate.
- Net cash from operations rose sharply, partly reflecting changes in bills payable, remittances in transit and other working-capital balances. Investing activities used Rs. 1,578.2bn, primarily for loan growth, securities and other investments; financing activities provided Rs. 1,254.0bn.
Outlook, risks, contingencies and unusual items
- Outlook: Management cited external forecasts for Indian GDP growth of 7.5% and average inflation of 3.1% in FY2018, while noting near-term disruption from demonetization and subdued private-sector investment. These are economic expectations, not bank-specific earnings guidance. The bank budgeted about Rs. 16.1bn of FY2018 capital expenditure, including Rs. 2.9bn for branches and ATMs and Rs. 7.0bn for technology and systems.
- Asset quality and credit risk: Management said it had not seen significant deterioration in overall asset quality, but reported higher NPLs and provisioning. Retail unsecured lending, collateral recovery and exposure to stressed sectors remain risks. A state-government food-procurement loan was classified as non-performing; the bank reported that it was being serviced under a 20-year repayment arrangement with credit enhancements, including a Government of India letter of comfort.
- Concentration and directed lending: The ten largest customer exposures totaled Rs. 568.0bn, or 69.0% of capital funds under RBI measures; none was classified as non-performing. FY2017 met the overall priority-sector lending target, but missed sub-targets for small and marginal farmers and weaker sections. The bank may be required to make deposits with development institutions for shortfalls.
- Liquidity, rates and capital: Deposits are primarily short- and medium-term, while some assets are longer-dated; 36% of deposits and 38% of loans were expected to mature within one year. Management identified deposit rollover and interest-rate movements as risks. Capital adequacy remained above the stated 10.25% RBI minimum applicable at March 31, 2017, but declined year over year; Basel III requirements were still being phased in.
- Foreign ownership: Foreign investment reached 74.25% of paid-up capital, above the stated 74% cap. The RBI reinstated restrictions on foreign purchases in February 2017; the filing says this could affect share trading and future capital raising.
- Commitments and legal matters: Guarantees and documentary credits totaled Rs. 729.0bn; undrawn loan commitments were Rs. 419.0bn, in addition to Rs. 2,159.0bn of unconditional cancellable commitments. Claims against the bank not acknowledged as debt, mainly indirect taxes and other claims, totaled Rs. 7.76bn; management did not expect a material adverse outcome. The report also describes prior RBI penalties, including Rs. 20m paid in 2016 for import-remittance and KYC/AML lapses. A separate Rs. 2.6m FIU penalty was dismissed on appeal in June 2017.
- Reporting and assurance: Management and KPMG reported effective internal control over financial reporting as of March 31, 2017; KPMG issued unqualified opinions on the consolidated financial statements and internal controls. The forthcoming transition to Indian Accounting Standards and possible changes to U.S. GAAP credit-loss rules are potential reporting changes; management expected CECL adoption to increase allowances, with potentially material impact.
Most important facts for investors to verify
- Whether FY2017’s higher provisions and NPL ratios continued to rise after year-end, and how much reflects retail versus wholesale exposures.
- Whether deposit growth associated with demonetization persisted, and how funding costs and loan-deposit maturity mismatches evolved.
- The drivers and sustainability of the sharp year-over-year change in operating cash flow and the FY2017 derivatives loss.
- Capital headroom under applicable RBI/Basel III requirements, including the effect of continued asset growth and the foreign-ownership restriction.
- Progress on priority-sector sub-target shortfalls, related deposits or other regulatory consequences, and the status of material legal and tax claims.
- Whether the bank’s FY2018 capital-expenditure budget and stated economic assumptions translated into actual spending and operating performance.