HDFC Bank Limited — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2018; comparisons are principally with FY2017. Although the request identifies 2017 Q4, this is an annual report and does not provide a standalone fourth-quarter income statement. Financial statements are consolidated and prepared under U.S. GAAP; Indian statutory results use Indian GAAP.
Business context
HDFC Bank is an Indian commercial bank operating in retail banking, wholesale banking and treasury, with NBFC subsidiary HDB Financial Services and brokerage subsidiary HDFC Securities. At year-end it had 4,787 branches, 12,635 ATMs and 43.6 million customers. Retail banking generated 81.6% of FY2018 net revenue, wholesale banking 15.3% and treasury 3.1%.
Key financial metrics
| Metric | FY2018 / March 31, 2018 | FY2017 / March 31, 2017 | Change |
|---|---|---|---|
| Net revenue | Rs. 508.4 billion | Rs. 424.2 billion | +19.8% |
| Net interest revenue | Rs. 423.2 billion | Rs. 351.8 billion | +20.3% |
| Net income attributable to HDFC Bank | Rs. 178.5 billion | Rs. 140.5 billion | +27.0% |
| Income before tax | Rs. 277.1 billion | Rs. 220.0 billion | +26.0% |
| Credit-loss provision expense | Rs. 59.4 billion | Rs. 38.0 billion | +56.5% |
| Net interest margin | 4.7% | 4.6% | +0.1 percentage point |
| Non-interest expense / net revenue | 45.5% | 48.1% | Improved |
| Return on average equity | 16.5% | 14.9% | +1.6 percentage points |
| Total assets | Rs. 11,367.3 billion | Rs. 9,067.0 billion | +25.4% |
| Net loans | Rs. 7,263.7 billion | Rs. 5,910.4 billion | +22.9% |
| Total deposits | Rs. 7,883.8 billion | Rs. 6,431.3 billion | +22.6% |
| Short-term borrowings | Rs. 779.2 billion | Rs. 322.3 billion | +141.8% |
| Long-term debt | Rs. 932.9 billion | Rs. 730.9 billion | +27.6% |
| Total capital adequacy ratio | 14.82% | 14.55% | +0.27 percentage point |
| Common Equity Tier 1 ratio | 12.25% | 12.79% | -0.54 percentage point |
Asset quality: Gross non-performing customer assets were 1.41% of gross customer assets and net non-performing customer assets were 0.61% of net customer assets. On the loan-only measure, gross NPLs were 1.5% of gross loans, versus 1.4% a year earlier. Total credit-loss allowances rose to Rs. 112.5 billion from Rs. 78.5 billion; allowance coverage of gross non-performing credit assets was 103.5%, versus 94.6%.
Cash flow and liquidity: Net cash provided by operating activities was Rs. 94.3 billion, down from Rs. 379.3 billion; investing activities used Rs. 2,048.3 billion and financing activities provided Rs. 2,097.0 billion. Cash and cash equivalents ended at Rs. 574.2 billion. The filing reports a 90% minimum Liquidity Coverage Ratio requirement from January 2018, rising to 100% in January 2019, but the supplied text does not state the Bank’s actual LCR. It reports 42.2% of deposits maturing within one year, compared with 37.1% of loans.
Material changes versus FY2017
- Net income grew faster than net revenue, supported by higher net interest and fee income, improved expense efficiency and a favorable shift in derivative results.
- Credit-loss provisions increased substantially, primarily from higher retail provisions and unallocated allowances. Retail loans grew 28.8%, compared with 11.5% growth in gross wholesale loans.
- Funding expanded, but the funding mix also shifted: total deposits rose 22.6%, while period-end short-term borrowings increased sharply to Rs. 779.2 billion. Low-cost current and savings deposits were 43.5% of deposits at year-end.
- Capital adequacy edged up, while CET1 declined. The Bank was designated a domestic systemically important bank, with additional CET1 requirements phased in from April 2018.
- Unrealized losses on available-for-sale securities contributed to a Rs. 29.8 billion loss in other comprehensive income; accumulated other comprehensive income moved from positive Rs. 26.0 billion to negative Rs. 3.8 billion.
Outlook, risks and unusual items
- Management described India’s recovery as gradual, with private investment expected to improve unevenly. The filing provides no specific earnings or revenue guidance. It budgeted approximately Rs. 20.2 billion of FY2019 capital expenditure, mainly for branches, ATMs and technology.
- Key risks include interest-rate and bond-yield volatility, loan growth and asset-quality deterioration, unsecured retail lending, deposit rollover and funding mismatches, sector and borrower concentrations, regulatory changes, competition, cyber threats and operational or fraud events. Management also cited higher oil prices, rupee weakness and emerging-market volatility.
- Credit concentration merits attention: the ten largest borrower exposures totaled Rs. 651.4 billion, or 69.9% of capital funds under RBI guidelines; none was classified as non-performing at year-end. Consumer loans represented 22.4% of exposures.
- The Bank reported an RBI supervisory review that identified asset-classification modifications for three accounts; one was subsequently upgraded to standard. The report also discusses a past leak of unpublished financial information through WhatsApp and a SEBI order; the Bank filed reports with SEBI in May 2018, and further action remained possible.
- Off-balance-sheet exposures included Rs. 847.0 billion of guarantees and documentary credits, Rs. 452.0 billion of undrawn loan commitments and Rs. 2,738.5 billion of unconditional cancellable commitments. Derivative notional amounts totaled Rs. 7,827.4 billion; notional value is not equivalent to expected loss.
- Subsequent to year-end, the Bank allotted shares to HDFC Limited on July 17, 2018, raising Rs. 85.0 billion. The filing says a broader fund-raising authorization was up to Rs. 240.0 billion. The board-recommended Rs. 13-per-share dividend was approved by shareholders in June 2018.
- The Bank reported an unqualified audit opinion on its U.S. GAAP consolidated financial statements and an unqualified opinion on internal control over financial reporting. Adoption of U.S. GAAP CECL in FY2021 was expected to increase credit-loss allowances and could have a material impact.
Important facts for investors to verify
- Reconcile the reported deterioration in NPL ratios and the sharp increase in provisions with loan growth, write-offs, recoveries and allowance coverage.
- Verify actual liquidity metrics, including the Bank’s LCR, and assess the sharp rise in short-term borrowings alongside deposit maturities and loan maturities.
- Review the sensitivity of capital and earnings to rising interest rates, available-for-sale portfolio losses and the CET1 decline, including new D-SIB capital requirements.
- Confirm the status and financial implications of the SEBI inquiry concerning the information leak, the RBI account-classification findings and other regulatory or legal matters.
- Reconcile the priority-sector disclosure: the filing reports small and marginal farmer lending of 7.3% against an 8.0% requirement, but gives inconsistent shortfall amounts in different sections (Rs. 32.7 billion and Rs. 96 billion).
- Assess the July 2018 Rs. 85.0 billion share issuance to HDFC Limited, the remaining fund-raising authorization, and resulting dilution and related-party governance considerations.
- Compare U.S. GAAP figures with Indian GAAP disclosures before drawing conclusions; the filing notes material differences in credit-loss, investment and other accounting treatments.