HDFC Bank Limited — Form 20-F Summary
Business context and reporting period
This is an annual report for the fiscal year ended March 31, 2010, not a standalone 2009 fourth-quarter filing. The financial statements are consolidated and prepared under U.S. GAAP, with amounts primarily in Indian rupees (Rs.). Fiscal 2009 results include the acquired Centurion Bank of Punjab (CBoP) only from May 23, 2008 and cover 313 days of combined operations, limiting year-over-year comparability.
HDFC Bank conducts retail banking, wholesale banking and treasury operations. It reported 1,725 branches, 4,232 ATMs and about 19 million customers at fiscal year-end. Retail banking contributed 80.1% of fiscal 2010 net revenue.
Key financial metrics
Unless stated otherwise, amounts below are Rs. billions. U.S. dollar translations in the filing use Rs. 44.95 per US$1.00.
| Metric | Fiscal 2010 | Fiscal 2009 | Change or context |
|---|---|---|---|
| Net revenue | 105.6 | 86.1 | Up 22.7%; comparison affected by CBoP reporting period |
| Net interest revenue | 80.9 | 72.9 | Up 11.0% |
| Net interest revenue after credit-loss provisions | 62.7 | 52.5 | Up 19.5% |
| Net income attributable to HDFC Bank | 24.6 | 15.1 | Up 62.7% |
| Net interest margin | 4.6% | 4.6% | Stable |
| Cost-to-net-revenue ratio | 64.8% | 73.4% | Improved |
| Return on average equity | 9.1% | 6.8% | Improved |
- Balance sheet: Total assets rose 19.6% to Rs. 2,416.5 billion. Net loans increased 31.5% to Rs. 1,297.2 billion; gross loans were Rs. 1,320.9 billion.
- Funding and liquidity: Deposits grew 17.3% to Rs. 1,672.4 billion. Cash and cash equivalents were Rs. 297.6 billion, up 73.8%. The bank reported a positive cumulative asset-liability gap of Rs. 195.5 billion across all maturity buckets, although individual buckets beyond one year showed negative gaps.
- Debt and capital: Short-term borrowings were Rs. 98.2 billion at year-end, compared with Rs. 27.2 billion a year earlier; long-term debt was Rs. 75.9 billion. Basel II total capital adequacy was 17.44% and Tier 1 was 13.26%, above RBI minimums of 9% and 6%, respectively.
- Asset quality: Under U.S. GAAP, gross non-performing loans were 1.5% of gross loans, versus 1.9% in 2009; total credit-loss allowance was Rs. 23.8 billion, or 123.3% of gross NPLs. Management separately reported Indian GAAP net non-performing customer assets at 0.3% of net customer assets. Restructured loans were Rs. 1.81 billion.
- Cash flow: Operating activities provided Rs. 109.1 billion, investing activities used Rs. 343.9 billion and financing activities provided Rs. 363.0 billion. Cash and cash equivalents increased Rs. 126.3 billion to Rs. 297.6 billion.
- Dividends: Fiscal 2010 dividend was Rs. 12 per equity share; the total declared was Rs. 5.49 billion, excluding dividend tax.
Material changes versus the prior comparable period
- Net income increased substantially, supported by lower interest expense and credit-loss provisions, stronger fee revenue and a favorable movement in derivative results. Fiscal 2010 derivative income was Rs. 2.9 billion, compared with a Rs. 2.1 billion loss in fiscal 2009.
- Net interest revenue rose despite nearly flat interest and dividend revenue, as total interest expense fell 9.7% to Rs. 77.7 billion. The average cost of deposits declined from 5.6% to 4.7%, with a higher share of current and savings balances and lower time-deposit costs.
- Wholesale loans grew 50.5% to Rs. 588.0 billion, while retail loans grew 18.1% to Rs. 733.0 billion. Wholesale loan yields declined from 10.5% to 7.9%, reflecting lower market rates and liquidity conditions.
- Net credit-loss provisions fell 10.8% to Rs. 18.2 billion. Management cited better collections, improving economic conditions and runoff of the acquired CBoP retail book.
- Non-interest expense rose 8.3% to Rs. 68.4 billion, but fell as a share of net revenue. The filing includes Rs. 1.2 billion of additional stock-compensation expense related to the abolition of fringe benefit tax, and Rs. 3.8 billion of amortization of CBoP-related intangible assets.
- The CBoP acquisition added branches, customers and assets; it generated Rs. 74.9 billion of goodwill, which management said was not impaired at March 31, 2010. The branch network expanded from 1,413 to 1,725 during the year.
Outlook, management commentary, risks and unusual items
- No formal earnings guidance is provided. The bank budgeted approximately Rs. 5.9 billion of fiscal 2011 capital expenditure, mainly for technology, data-center and network upgrades, branches and ATMs. The RBI estimated Indian GDP growth of 8.5% for fiscal 2011.
- Management’s strategy emphasizes growth in banking services, disciplined credit risk management, low-cost deposits and steady earnings with limited reliance on trading. The filing notes rising interest rates and significant exposure to interest-rate movements.
- Key risks include rapid growth and integration of CBoP, potential deterioration in credit quality, concentrated borrower and sector exposures, unsecured retail lending, funding rollover and maturity risk, competition, regulatory changes, operational or technology disruption, and economic or political conditions in India. The bank had no significant prolonged economic downturn experience, according to its risk discussion.
- The ten largest customer exposures totaled approximately Rs. 238.7 billion, or 97% of capital funds under RBI exposure calculations; none was classified as non-performing at year-end. The largest single exposure was approximately Rs. 42.0 billion.
- Off-balance-sheet commitments included Rs. 227.0 billion of guarantees and documentary credits and Rs. 311.2 billion of loan sanction letters; the bank stated it was not obligated to fund the latter. Derivative contracts had aggregate notional principal of Rs. 4,703.1 billion, which is not equivalent to credit exposure or expected loss.
- Claims against the bank not acknowledged as debts totaled Rs. 179.6 million. Management said it considered the likelihood of these claims becoming obligations remote and did not expect material adverse effects. The filing also reports unresolved SEC staff comments on the prior-year annual report; the bank had responded, but had received no further correspondence by the filing date.
- The independent auditor issued an unqualified opinion on the consolidated financial statements and internal controls. Management also concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2010.
Most important facts for investors to verify
- Assess comparability carefully: fiscal 2009 included only 313 days of CBoP operations, and the acquisition materially changed the balance sheet and branch footprint.
- Verify the sustainability of the profit increase, particularly the contribution from lower funding costs, fee income, derivative gains and securities-sale gains.
- Track wholesale loan growth and yields, NPL formation, restructurings, write-offs and the adequacy of credit-loss reserves across both U.S. GAAP and Indian GAAP measures.
- Monitor deposit mix and maturity, the sharp year-end increase in short-term borrowings, liquidity gaps and sensitivity to rising interest rates.
- Evaluate capital strength after loan growth and planned spending, and confirm progress in integrating acquired branches and realizing acquisition synergies without goodwill impairment.
- Review the largest exposures, guarantees, derivative positions and unresolved SEC comments, and distinguish notional commitments from amounts likely to be funded or lost.