Customers line up for a teller in a Housing Development Finance Corp. (HDFC) bank in New Delhi, India (Photographer: Amit Bhargava/Bloomberg News)

Key Takeaways From HDFC Bank’s Annual Report

HDFC Bank Ltd. continues to push digitisation to keep costs low even as the share of its dominant retail business increased, according to its annual report. Here are the key highlights:

Retail Dominance Gets Bigger

HDFC Bank continues to focus on its retail segment—for loans, deposits and fee income. The share of retail loans stands at 70 percent of the total advances, while retail deposits (current and savings account, and time deposits) account for 75 percent of the total deposits.

“It is worth pointing out the aggressive positioning on the retail asset classes where the mix has improved 9 percent in the last five years—up from 61 percent in 2013-14 to 70 percent in 2017-18,” Nilanjan Karfa, an equity analyst at Jefferies, wrote in a note to clients.

Karfa also said the bulk of the change has happened through the unsecured portfolio—personal loans and credit cards—and through the small-ticket business banking segment. Both these segments, according to the analyst, are considered to be the riskiest in terms of asset quality and thereby higher yielding.

Digitisation Push

The lender with 4,787 banking outlets said in its annual report for 2017-18 that close to 85 percent of its transactions occur through digital channels. “This has led to a larger distribution footprint and a superior customer experience, resulting in higher market share at low cost,” Chairperson Shyamala Gopinath has said in the directors’ report.

The bank is betting on digitisation to cross-sell the financial product portfolio and maintain low cost of funds, according to the report. It has issued 2.43 crore debit and 1.07 crore credit cards, and has 4.04 lakh point-of-sale terminals and m-PoS installations. HDFC Bank’s DigiPOS offers customers various digital payment options such as unified payments interface, Bharat QR, SMS Pay and PayZapp, besides the facility to pay through debit and credit cards

Uptick In Core Fee Income Margin

The lender’s core fee income margin, the dominant contributor to its non-interest income, improved in the financial year through March 2018, helped by third-party distribution. The margin had been declining steadily since the financial year ended March 2010.

Low-Cost Deposits Help Net Interest Margin

HDFC Bank maintained its net interest margin within a range of 4.3-4.5 percent for nearly 20 years, led by its low cost of deposits. In 2017-18, the bank’s cost of deposits dropped 54 basis points year-on-year to 4.82 percent.

Deterioration In Asset Quality

The ratio of gross non-performing assets to gross advances rose from 1.05 percent in 2016-17 to 1.3 percent in the previous financial year, owing to an increase in bad loans in the agriculture and allied segments. For risk mitigation, HDFC Bank had purchased Rs 27,800-crore of priority sector lending certificates in 2017-18.

“While gross non-performing loan ratio has inched up, we believe this is reasonably under control,” Jefferies’ Karfa said. “There’s been a significant focus on recoveries and the bank has managed to recover nearly 25 percent of its written-off loans in FY18.”

Ninety-one percent of the analysts covering the stock have a ‘Buy’ rating, 5 percent have a ‘Hold’ and only 4 percent advise ‘Sell’, according to Bloomberg data. The 12-month consensus price target for HDFC Bank is Rs 2,344—that implies a potential upside of 10 percent.