UPDATE 1-HDFC Bank net up 32 pct, retail loan to drive growth

* Analysts expect bank to maintain profit rise pace in Q4

* Q3 loan growth 21 pct, above industry average of 13.7 pct (Recasts, adds detail from conference call, quotes, bylines)

MUMBAI, Jan 15 (Reuters) - HDFC Bank HDBK.BO reported a 32 percent rise in quarterly profit as the No. 2 Indian private sector lender rode robust loan growth, and analysts said they expected the bank to maintain the pace in the coming quarter.

Demand for bank loans in India has been sluggish, but the New York-listed HDFC Bank HDB.N continues to outperform because of its focus on retail loans.

“We are bullish on HDFC Bank. We expect auto and mortgage loans to be the key segments to drive the loan growth,” said a banking analyst at brokerage India Infoline Ltd.

Bad debt provisions fell 6 percent in the December quarter from a year earlier, while loans grew 21 percent, the bank said.

In comparison, the banking sector’s annual loan growth at the start of January was 13.7 percent after falling to 9.7 percent in October.

“We traditionally target growth rate of 3 to 4 percent faster than the banking system. At the current pace, we expect to have a similar rate of credit growth by end of March,” HDFC Bank Executive Director Paresh Sukthankar said in a conference call.

Indian banks were mostly insulated from the direct impact of the global credit crisis, but the world downturn hit Asia’s third-largest economy harder than expected leading to a sharp slowdown in credit growth in the current financial year.

While the Reserve Bank of India has projected an 18 percent growth in loans for 2009/10, banks say they may fall short and end the fiscal year at around 15-16 percent credit growth.

Angel Broking analyst Vaibhav Agrawal said HDFC Bank’s access to cheap funds -- 49 percent of the bank’s deposits were in current and savings accounts that cost zero to 3.5 percent -- would continue to help its earnings.

The bank’s net profit rose to 8.19 billion rupees ($179 million) in the December quarter from 6.22 billion a year earlier, as its net interest margin improved to 4.3 percent from 4.2 percent.

“We have gained market share in almost every retail loan product and retail makes up half our book. Even in wholesale, our diversified portfolio has helped growth,” Sukthankar said.

He said interest income would contribute more towards earnings in the coming quarter as rising bond yields hit treasury income.

The bank posted a loss of 265 million rupees on its bond holdings in the December quarter when bond yields rose around 50 basis points, compared with a treasury profit of 2.32 billion in the year earlier.

State Bank of India SBI.BO, the country's top lender, and the No. 2 ICICI Bank ICBK.BO are expected to report a drop in quarterly earnings later this month, largely due to treasury losses and higher provisioning norms, analysts said.

Shares in HDFC Bank, valued at $16.9 billion, ended up 0.3 percent at 1,691 rupees in a Mumbai market .BSESN that fell 0.2 percent.

The shares had risen 70.5 percent in 2009, lagging an 81 percent rise for the benchmark index and an 83.9 percent rise for the sector index .BSEBANK. ($1=45.8 rupees) (Editing by Ranjit Gangadharan)