HDFC Bank Earnings Call Nuggets: Further Margin Falls and CV Sell Downs

HDFC Bank Ltd ADR (NYSE:HDB) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Further Margin Falls

Rakesh Kumar – Elara Capital: So just one question on margin front, looking at growth what we are doing in this nine months on the – I guess asset and liability side, if we continue with this kind of growth, do we expect further fall in margin, because their net addition to the advances book will be quite lesser actually? So do we expect that the margin will fall further from here – from the third quarter number?

Paresh Sukthankar – Executive Director: Let me try and answer that in two ways. One is, in terms of how we see the margin trending and whether the asset growth has anything to do with the impact on margins. So, on the first one, I think we’ve been saying this for a long time and we’re still maintaining that the net interest margin range still remains a 3.9 to 4.3 or in more recent times, if you look at the last couple of years, maybe pretty much 4 to 4.2 sort of a range. The rate of growth in the loan book, which is, for this quarter was 24%, I don’t think that by itself has anything much to do with the margin at all. The movements in both directions that we’ve seen, because as I said, it was 4.1 in the corresponding quarter, it was 4.2 in the previous quarter, it’s 4.1 again, the movements in both directions has got more to do with what’s happening to the cost of funds, which is again a function of what’s happening to fixed deposit costs, which as you know are – right now have come off from the peaks.

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A slightly lower CASA ratio, again reflecting primarily a slightly slower growth in core current accounts, which again is because the one-off that we get from time to time from the capital markets related businesses in terms of the stock exchange activity or IPOs and so on and the level of current accounts that come with the level of activity in (trainees) and others, obviously that has been slightly lower with the slower growth rate in the economy. So one is the impact on NIMs because of the mix and cost of deposits, and the other is, of course, what’s happening to the mix of our loan book, which has pretty much for the last few quarters remained at this 52%, 53% Retail and the balance Wholesale.

Apart from the deposit piece, one relevant point from a cost of funds perspective is that in the last year or so, or certainly in this financial year, which was nine months. We have raised almost INR5,000 crores of Tier 2 capital. In fact, in this quarter itself as well we’ve raised about INR1,970 crores, let’s say, close to INR2,000 crores of Tier 2 capital, which again is obviously slightly higher, I mean, cost than as compared to on your average cost of deposits. So I would reiterate that the pace at which we would grow our loan book will be a little faster than the system loan growth, and I would not link the rate of growth on the loan book to any specific movement in margins, at least at this point of time.

Rakesh Kumar – Elara Capital: Secondly, on this (indiscernible) investment side, which has come down actually in this quarter, so is it like due to some profit we have booked also in the – like fixed income side or there is some other reason related to that?

Paresh Sukthankar – Executive Director: No, this is purely with the fact that if you – might have been in the call in the last quarter, the previous quarter we had dividend income that we had got from mutual fund units which, because we had surpluses and that was also therefore offset by to some extent the negative that we had on the mark-to-market of the units post the WDC claim. So the interest on investments includes the accrued interest on the bond portfolio and the dividend that we had earned during the quarter, which are not there because they had obviously been sold off at that point of time.

CV Sell Downs

Mahrukh Adjania – Standard Chartered: Paresh, Mahrukh here. Just wanted to check one or two things. Firstly in terms of your CVs during the quarter, were there any sell downs on the CV portfolio, CV/CE?

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Paresh Sukthankar – Executive Director: No, there wasn’t any sell downs. So on a sequential basis, if you see that that book has been more or less flat, so while there would have been some growth, there would have also been some run-offs but there has not been any sell in the portfolio. We’ve obviously slowed down the pace of growth a little bit in that portfolio and also the underlying sales of CVs themselves would have also moderated during this quarter. So the rate of growth on a year-on-year basis for the CV portfolio is still running at roughly in the high 20s, but sequentially that growth has come down.

Mahrukh Adjania – Standard Chartered: In terms of fee income, is the course fees that have grown very strongly quarter-on-quarter? What was the key swinger to be insurer and so…?

Paresh Sukthankar – Executive Director: See, on the fees in fact there are two aspects, one is the seasonality aspect. You will find that every year in the third quarter, there is slightly higher fees because of some fees that we get on annual basis which get build and then collected in the third quarter and also because there are some fees relating to the seasonal festive season sort of the thing because you have higher TARP spend and you have (indiscernible) gold coins sales and those kind of things which all happened during the third quarter, which usually give us a seasonal pick-up. In addition to that and which certainly contributes to the sequential growth every time in the third quarter. Having said that, there is also some one-off in a particular commission that we have got which would (indiscernible) the growth rate would have been couple of percent lower than what it was. So instead of the 24% it would have probably been somewhere in the 21%, 22%. So overall commission growth rate for a few quarters – if you look at the last several quarters, we have been running at high teens except for the third quarter which usually is around 20%, 21% and that 21% is a little – even further higher during this quarter with some one-off that we have got relating to certain franchise revenues.

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