Anand Rathi: HDFC Bank - 2Q11 - Strong credit growth, high CASA & NPA coverage

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HDFC Bank - 2Q11 - Strong credit growth, high CASA & NPA coverage

n       Net profit up 33%. Profits were driven by robust net interest income (29.2% yoy) and lower provisions (down 23.5% yoy). We maintain Hold as we expect FY11 and FY12 RoE to improve, led by strong business growth, better margins and lower credit costs.

n       Credit growth stellar; CASA share improves. At 38.2% yoy, credit growth was much higher than the industry’s ~19%. Corporate loans are driving overall loan growth (47.3% yoy), with retail loans seeing slower growth (30.8% yoy). While NIM declined 10bp qoq, at 4.2% it was flat yoy. CASA share improved 28bp yoy to 50.6%, one of the best among peers.

n       Better fee-income growth. Stronger credit growth, particularly from large and mid-corporate segments, has led to 16% growth in fees and commissions. Fees comprised 1.82% of average assets in 2QFY11, up from 1.75% last quarter. With credit growth revival, we expect fees from corporate clients to improve. Hence, we expect fees to comprise ~1.7% of average assets over FY10-12.

n       NPA coverage improves. Gross NPAs declined 9.2% yoy, with NPA coverage improving 753bp to 77.8%.  Total restructured assets are a mere 0.3% of gross advances. Due to continuing trend in asset quality improvement and lower levels of restructured assets, credit costs (NPA provisions as percent of average advances) are likely to be 1.63% in FY11 and 1.44% in FY12.

  n        Valuation. At our target of Rs2,201, HDFC Bank would trade at  FY11e and FY12e ABV of 4.2x and 3.6x respectively.