HDFC Bank :: Low provision offsets the weakness in fees :- Avendus

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HOLD HDFC Bank - Avendus
Target Price (INR) 2,336 Low provision offsets the weakness in fees







Strong loan growth in the Sep10 quarter was partly due to the low
base. Retail loans saw strong traction, driven by the auto, mortgages
and CV segments. Despite CASA improvement, NIM declined by
10‐bp q‐o‐q primarily due to lower yield on advances arising from a
higher proportion of corporate loans. While fee income has revived in
the past two quarters to c16%, it still stays below its historical levels.
Further, MTM loss of INR521mn led to 5% decline in other income.
Total provisions declined by 18% q‐o‐q and 24% y‐o‐y. We lower our
assumption for incremental NPL in FY11f by 15‐bp to 0.30%. A decline
in loan‐loss provisions is likely to stay the key driver of earnings. We
raise our target price to INR2,336, following the rollover to Sep11 and
upward earnings revision. The target price values the stock at 3.5x
one‐year forward book value. We maintain the Hold rating.
Rebound in retail loan growth; NIM declines due to low loan yield
Loan growth was strong, at 38% y‐o‐y, partly due to a low base. Non‐retail
advances grew faster than the retail loan book due to the low base. Retail loans
saw strong traction, driven by the auto, mortgages and CV segments (growth at
36%, 42% and 41% y‐o‐y, respectively). Growth in savings deposits was also
strong, at 10% sequentially, improving the CASA proportion by 140‐bp q‐o‐q to
50.6%. Despite this, NIM declined by 10‐bp q‐o‐q primarily due to lower yield
on advances arising from a higher proportion of corporate loans.
Recent weakness in fee intensity may persist
HDFCB’s other income declined 5% y‐o‐y due to MTM losses of INR521mn on
its bond portfolio as against a profit of INR1.63bn in the Sep09 quarter. Core
fee income (commission, exchange and brokerage) grew 16% y‐o‐y. While fee
income has revived in the past two quarters to 15% to 16%, it still stays below
historical levels. We estimate fee intensity (fee/assets) to remain close to
1.71% during the next two years.
Declining loan‐loss provisions may be the key driver for rising RoA
Gross NPL ratio declined by 4‐bp sequentially to 1.16%, while net NPL remained
stable. Restructured assets stood at just 0.3% of total assets, the lowest in the
industry. Total provisions declined by 18% q‐o‐q and 24% y‐o‐y. We lower our
assumption for incremental NPL in FY11f by 15‐bp to 0.30%. Provision coverage
is estimated to stay between 75% and 80% during the next three years. A
decline in loan‐loss provisions may stay the key driver of earnings and result in
higher RoA.
Raise TP to INR2,336 following rollover to Sep11; maintain Hold
We raise our blended target price based on the P/E, P/B and DCF methods to
INR2,336, following the rollover to Sep11 and upward earnings revision. The
stock has appreciated by 14% since we initiated coverage on 10 Aug10. The
target price values the stock at 3.5x one‐year forward book value. We maintain
the Hold rating on the stock.