See Why This Bank Issued An Impressive Report

Lost in this morning’s drama is the fact we’re launching into the heaviest few weeks of the earnings season.  Over 100 S&P 500 (NYSE:SPY) companies will report this week, and due to the holiday this will be crammed in 4 days.  Of course, there are interesting companies outside the S&P 500 (NYSE:SPY) as well; we’ll turn our focus more company specific the next few weeks as long as the macro picture stays relatively benign.

One of India’s top banks – HDFC Bank (NYSE:HDB) – is out this morning with yet another impressive report, especially considering the rising rate environment in India.  The stock took a big hit along with everything in India at the beginning of 2011, but has rebounded very nicely the past two months.  I’ve had a tough time with the valuation since this time last year, but it first traded around the current price last August, so has had 3/4 of a year to “grow into its valuation”.  It also remains one of the relatively few ways to play India via U.S. ADRs, and showcases impressive growth – especially for a financial firm.

Via WSJ:

  • India’s HDFC Bank Ltd. (NYSE:HDB) Monday beat market expectations to post a more than 33% jump in its fiscal fourth-quarter net profit, helped by higher earnings on loans and strong fee income.  Net profit for the January-March period rose to 11.15 billion rupees ($252 million) from 8.37 billion rupees a year earlier, higher than the 10.90 billion rupees estimated in a Dow Jones Newswires poll of 13 analysts.
  • Net interest income–the difference between interest earned and interest expended–rose 21% to 28.40 billion rupees from 23.51 billion rupees a year earlier, the country’s third largest lender by assets said.  The higher net interest income was led by a wide net interest margin of 4.2% and a strong loan growth of over 27%. Net interest margin is broadly the difference between yields on advances and cost of funds over the net loans.
  • But loan growth in the next quarter is likely to slow as the central bank’s continuous interest rate tightening to tame stubbornly high inflation may start impacting growth.  “It [inflation and rate tightening] certainly could shave off a bit from what the underlying growth potential [could be] in the economy,” Paresh Sukthankar, HDFC’s executive director, said during a post-earnings conference call.

HDFC seems to believe they can maintain net interest margins, despite the central bank increases

  • Banking analysts say the continued tightening may put pressure on lenders’ net interest margin in April-June, which is traditionally a slower quarter for businesses.  But HDFC begs to differ.  “I don’t see net interest margins, despite the pressure [from the rising cost of deposits], moving outside the 3.9% to 4.3% range, which we have maintained over the last many years,” Mr. Sukthankar said on the call.
  • The confidence partly stems from the bank’s ability to keep fund costs low through its large share of low-cost current and saving bank deposits. Current and saving bank deposits amounted to about 51% of the bank’s total deposits of 2.09 trillion rupees as at the end of March.
  • Mr. Sukthankar also said the lender is likely to outpace the banking system’s expected 20% loan growth this fiscal year. He doesn’t expect lending or deposit rates to rise further near-term.
  • Fees and commissions alone contributed 10.01 billion rupees to other income followed by foreign exchange and derivatives gains of 2.45 billion rupees, it said.

Other metrics also continue to impress:

  • Other income, including fees, commissions, treasury and foreign exchange transactions, for the bank jumped 32% to 12.56 billion rupees.
  • The asset quality of the bank improved with gross bad loans as a percentage of total advances falling to 1.1% from 1.4% a year earlier.
  • The capital adequacy of the bank declined to 16.2% from 17.4% in the year ago period but remained far above the regulatory minimum of 9%.

Other companies to note in the category include: ICICI Bank (NYSE:IBN), Shinhan Financial (NYSE:SHG), Mitsubishi (NYSE:MTU), Woori Finance (NYSE:WF), National Australia Bank (NABZY), Sumitomo (NYSE:SMFG), KB Financial (NYSE:KB), and HSBC (NYSE:HBC)

Disclosure: No position

Follow the latest from earnings season here>>

This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.

Improve Your 2011 Financial Health: Join the winning team of stock pickers with Wall St. Cheat Sheet’s acclaimed premium newsletter >>

More from The Cheat Sheet