Emkay on HDFC Bank: downgrade stock to REDUCE

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* A strong 7.7% qoq growth in core operating profit without
diluting asset quality was highlight of Q2FY11 results. The
net profit grew by 32.7% yoy despite trading losses
*  The NII has grown by strong 5.2% qoq driven by 7.4% qoq
growth in advances and stable NIMs
* Other positive highlights were (1) CASA maintained at 50.6%
and (2) stable NPAs and (3) 30bps improvement in tier I CAR
despite strong growth in advances
*  Valuations unattractive at 4.5x/3.7x FY11E/12E ABV. Peak
valuations in CY07 were at 5.5x 1-yr f/w ABV. Downgrade to
REDUCE. But still better pick amongst private sector banks

NII growth in line with expectations
HDFC Bank’s NII has grown by 29.2% yoy to Rs25.3bn driven by 38% yoy growth in
advances (7.4% qoq) and stable NIMs.


Stable NIMs sequentially are commendable
HDFC Bank’s NIMs have contracted by just 10bps qoq (stable yoy) which we find
commendable as there were several factors working negatively on NIMs like
¾ Change in the calculation of SB interest to daily product basis. SB deposits form 20%
of HDFC Bank’s deposits
¾ The wholesale advances portfolio now forms 48% of the advances compared to 44%
in Q1FY10


Provisions continue to trend down
The pressure on credit costs have also moderated (which rose sharply post CBOP merger)
as the provisions for Q2Y11 were Rs4.5bn. The credit cost at 0.8% of advances is back to
pre-CBOP merger level.
Tier I CAR expands despite strong growth in advances
The bank’s CAR stood at comfortable 12.7% as at 30th September 2010, with tier I at
12.7%. The tier I CAR expanded by 30bps qoq despite the fact that the advances have
grown by strong 7.4% qoq.

Valuations and view
We had highlighted in our earlier notes that HDFC Bank was ready for strong growth as (1)
branch network stands strong (2) operating efficiencies back on path at <3% cost/assets (3)
strong tier I at 12%+ and (4) significantly decelerated slippage ratio. The strong growth in
core operating profit without diluting asset quality in H1FY11 vindicates our stand.
The valuations at 4.5x FY11E and 3.7x FY12E ABV are quite steep. The peak 1-year
forward valuations for HDFC Bank have stood at 5.5x. We find the valuations unattractive.
We downgrade stock to REDUCE. However, we continue to believe that HDFC Bank is
going to offer least negative surprises on earnings and asset quality front which makes it a
better pick amongst private sector banks.