Buy HDFC Bank -Another solid quarter; Target Rs 2,570: Macquarie

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HDFC Bank
Another solid quarter
Event
 HDFC Bank reported yet another quarter of solid performance with PAT of
Rs10.9bn, up 33%YoY and 2% above our estimate. We maintain our
Outperform rating on the stock.

Impact
 Asset quality – good show. Gross NPLs were down 3% QoQ. Asset quality
has shown a sustained improvement at the bank with Gross NPL ratio coming
down from a peak of 2.1% in 1Q10 to 1.1% presently. The improvement in
asset quality has helped the bank to cut down on its credit cost to 0.8% of
loans (from 2.6% in 1Q10). Simultaneously, NPL coverage is up by 200bp
QoQ to 81%. We expect credit costs to stabilize at ~0.9% of assets going
forward.
 Retail lending growth continues to be robust... Retail lending continues to
be strong at 36%YoY in the quarter. The bank has shown the ability to
combine growth with prudence in retail lending. Growth was driven by auto
lending where CV lending has been particularly strong. The other area for
growth has been business banking. Even without home loans, which are
basically loans bought from HDFC Ltd, retail loan growth was 35.5%YoY. A
key driver of retail growth has been larger penetration into tier-2 and tier-3
cities and capturing of market share from some of the larger players
 Overall loan growth moderates on lower corporate lending. Corporate
lending declined 8%QoQ. Despite the pullback in corporate lending, the bank
has been able to grow at 33%YoY, 800bp above the system.
 Best in class liabilities franchise supports healthy margins. CASA has
been stable at 50.5% – the highest in our coverage. The high CASA has
helped maintain NIMs flat QoQ at 4.2%, well above the management’s stated
intention of keeping it in the 3.9–4.0% range.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,570.00 based on a Gordon growth methodology.
 Catalyst: Stable asset quality and margins
Action and recommendation
 Return ratios remain robust, maintain Outperform. HDFC Bank’s ROA of
1.6% ex treasury is one of the best in the sector. We believe the bank
deserves premium valuations for its consistent quality performance. Current
valuations provide attractive entry opportunity to enter into the stock. Maintain
Outperform.