HDFC Bank Limited — FY2013 Form 20-F
Reporting period: Fiscal year ended March 31, 2013; this is an annual report, not a standalone 2012 fourth-quarter filing. Financial statements are consolidated and prepared under U.S. GAAP, except where noted. Amounts below are in Indian rupees (Rs.) unless stated otherwise.
Business context
HDFC Bank is an Indian private-sector bank operating in retail banking, wholesale banking and treasury services. It reported 3,062 branches, 10,743 ATMs and 28.7 million customers at year-end. Retail banking generated 82.7% of FY2013 segment net revenue.
Financial and operating performance
| Metric | FY2013 / year-end | Change from FY2012 |
|---|---|---|
| Net interest revenue | Rs. 157.1 billion | +24.3% |
| Net interest revenue after credit-loss provisions | Rs. 144.4 billion | +21.8% |
| Non-interest revenue, net | Rs. 65.2 billion | +23.9% |
| Net revenue | Rs. 209.6 billion | +22.4% |
| Non-interest expense | Rs. 117.6 billion | +20.8% |
| Income before tax | Rs. 92.0 billion | +24.6% |
| Net income attributable to HDFC Bank | Rs. 61.8 billion | +24.2% |
| Basic / diluted earnings per share | Rs. 26.18 / Rs. 25.91 | Prior year: Rs. 21.30 / Rs. 21.12 |
| Total assets | Rs. 4,370.9 billion | +22.4% |
| Net loans | Rs. 2,504.6 billion | +24.8% |
| Total deposits | Rs. 2,960.5 billion | +20.1% |
| Cash and cash equivalents | Rs. 218.7 billion | +16.3% |
- Margins and returns: Net interest margin was 4.6%, unchanged from FY2012; spread was 4.1%, down from 4.2%. Return on average assets was 1.6% and return on average equity was 14.2%, up from 13.3%.
- Credit quality: Gross non-performing customer assets were 0.8% of gross customer assets, versus 0.9%; net non-performing customer assets were 0.2%, unchanged. Total credit-loss allowance was Rs. 33.7 billion, or 159.4% of gross non-performing credit assets. Credit-loss provisions rose 61.9% to Rs. 12.7 billion, mainly reflecting retail commercial-vehicle and equipment finance.
- Capital and funding: Basel II total capital adequacy ratio was 16.8% (11.08% Tier 1), compared with 16.52% and 11.60%, respectively. Average cost of funds including equity was 5.2%; average deposit cost increased to 6.1% from 5.7%. Retail deposits were approximately 75% of total deposits.
- Debt and liquidity: Long-term debt was Rs. 295.2 billion and short-term borrowings Rs. 145.6 billion; securities sold under repurchase agreements were Rs. 205.0 billion. Deposits were Rs. 2,960.5 billion. The filing reports a positive cumulative asset-liability gap of Rs. 481.3 billion within one year, while describing funding-maturity mismatches as a risk.
- Cash flow: Operating cash flow was Rs. 71.5 billion, investing cash flow was negative Rs. 685.0 billion and financing cash flow was positive Rs. 642.6 billion. Cash and cash equivalents increased Rs. 30.7 billion to Rs. 218.7 billion. Investing outflows primarily reflected loan growth and securities purchases.
- Other metrics: FY2013 dividend was Rs. 5.50 per share, up from Rs. 4.30; the disclosed dividend payout ratio was 21.2%. Capital expenditure was Rs. 10.0 billion, principally for branch, technology and communications infrastructure.
Material changes versus FY2012
- Loan and deposit growth supported higher interest and fee income; net income rose 24.2% and total assets rose 22.4%.
- Interest expense increased 30.2%, faster than interest revenue growth of 27.5%, as interest-bearing deposits expanded and their average cost rose. NIM nevertheless held at 4.6%.
- Credit-loss provisions increased to Rs. 12.7 billion from Rs. 7.8 billion, reversing the prior-year decline. The bank attributed the rise chiefly to stress in commercial-vehicle and equipment finance.
- Non-interest revenue benefited from fees and foreign-exchange transactions, and a swing to realized gains on available-for-sale securities. Net derivative gains fell sharply to Rs. 0.2 billion from Rs. 2.8 billion, including losses on interest-rate derivatives and currency options/swaps.
- Cost-to-net-revenue ratio improved to 56.1% from 56.9%, despite network expansion and higher operating expenses.
Outlook, risks and unusual items
- Economic outlook: Management described India’s environment as challenging: GDP growth slowed to 5.0% in FY2013 from 6.2%. It expected only modest improvement to 5.5% in FY2014 and projected the current-account deficit could decline from 4.8% to 3.8% of GDP. These are management’s macroeconomic expectations, not bank earnings guidance.
- Investment plans: Planned FY2014 capital expenditure was approximately Rs. 5.8 billion, including Rs. 4.3 billion for technology and systems; actual spending could differ.
- Rupee exposure: The rupee weakened from Rs. 54.52 per U.S. dollar at March 29, 2013 to Rs. 59.37 at July 19, 2013, an 8.9% decline. Management warned of potential effects on ADS translations, customers’ repayment capacity and domestic liquidity and interest rates.
- Regulatory penalty after year-end: In June 2013, the RBI imposed and the Bank paid a Rs. 45 million penalty for compliance and control deficiencies, including certain KYC, customer-risk-review and check-payment safeguards. The filing says remedial steps were initiated. The Bank also reported a Rs. 1.5 million RBI penalty paid in FY2012.
- Capital regulation: Basel III implementation began April 1, 2013 and is scheduled to phase in through March 31, 2018; the filing describes an eventual 11.5% capital requirement including the conservation buffer. Higher requirements could constrain growth or require capital raising.
- Commitments and contingencies: Outstanding guarantees and documentary credits totaled Rs. 390.2 billion; loan sanction letters contemplated Rs. 789.9 billion of loans, but were not binding commitments. Claims against the Bank not acknowledged as debts totaled Rs. 7.2 billion; management considered the likelihood of material adverse outcomes remote. Separately, the filing states no ordinary-course legal proceeding was expected to materially affect results.
- Key risks: Interest-rate volatility, rapid growth and execution, unsecured retail lending, credit concentrations, collateral recovery, short- and medium-term funding rollover, directed-lending requirements, competition, cyber and operational incidents, and evolving Indian regulation. India’s weaker growth and the Bank’s exposure to large borrowers and specific sectors add credit risk.
- Accounting and audit: U.S. GAAP net income and asset measures may differ materially from Indian statutory figures. Deloitte Haskins & Sells issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Goodwill of Rs. 74.9 billion from the Centurion Bank of Punjab acquisition was not impaired in FY2013.
Important facts for investors to verify
- Whether the higher FY2013 retail credit-loss provisions, particularly in vehicle and equipment finance, persist or lead to rising NPLs.
- How deposit pricing, interest-rate changes and funding mix affect NIM and cost of funds.
- Rupee movements and their effects on U.S.-dollar ADS value, customer credit quality and reported translations.
- Progress and effectiveness of remediation following the RBI’s Rs. 45 million penalty, and any subsequent regulatory findings.
- Liquidity and refinancing exposure, including repurchase agreements, short-term funding and contractual maturity gaps.
- Priority-sector shortfalls: direct agricultural lending was 12.6% against a stated 13.5% sub-target and weaker-section lending was 6.0% against a 10.0% target; the Bank reported Rs. 142.7 billion in directed deposits.
- Potential exposure to the Rs. 7.2 billion of unacknowledged claims, guarantee and documentary-credit obligations, and the non-binding sanction-letter pipeline.
- Use the annual FY2013 comparisons rather than treating the filing as a standalone 2012 Q4 report; the filing does not provide a clear standalone Q4 financial result.