Shares of HDFC Bank command a premium in the market place with the price earnings multiplying 28 times its trailing earnings and 26 times its most estimated earnings in 2010-11. The estimated Sensex long-term price earnings average for the current fiscal is around 18 times and the banking sector at around 20 times.
And this premium is not without a reason. HDFC Bank has been consistently returning strong performances. For the quarter ended December 2009, it has grown its net profits by 31.6% over the same quarter of the previous year to Rs 818.5 crore in the quarter in reckoning. The net interest margin has now grown from 4.2% in the previous year to around 4.3% in the current year. What pleases analysts is the fact that the bank has maintained a focussed strategy to maintain its growth trend. The costs of funds has been consistently decreasing after peaking at 6.68% in the previous year, the cost is expected to have come down to 5% levels. And this is thanks to the focus on sources of low cost of funds from the current account and savings account (CASA) which has grown from 40% in December 2008, to 49% for the quarter ended December 2009. Gross advances have also leaped up by 21% and this is expected to outshine the expected 12% growth for the sector, say analysts. Access to low cost of funds has seen the net interest income grow by 12.4% to touch Rs 2,223.9 crore.
The sector is expected to see a 6-7% growth according to analyst surveys. Clearly the integration with CBoP, which was acquired by the bank in February 2008, has been smoothly accomplished. Moreover, strong profitability focus can be noticed from the fact that while revenues from wholesale banking shrunk by nearly 35% the profit before tax grew by 70% over the same period of the last year. Similarly, in the retail segment revenues grew by a meagre 1% but the profits nearly doubled.
And this took care of the losses recorded on the treasury front. The asset quality of the bank, with net non performing assets at 0.45%, remains amongst the best of its class. It is this consistent performance that enables the bank to attract a premium against the market and also amongst peers.