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HDFC Bank
F3Q11: Strong Numbers
Quick Comment – HDFC Bank reported profits of
Rs10.9 bn: Profits were up 19% QoQ / 33% YoY and
compares with our estimate of Rs10.7 bn. EPS grew by
26% YoY.
The key trends from the results include:
a) Loan growth (ex-short term loans made in QE Jun-10)
continued to be strong at 33% YoY (vs. 32% YoY in
previous quarter). Deposit growth slowed to 24% YoY
from 30% YoY – partly weighed down by IPO-related CA
balances growth slowing (-8% QoQ).
b) Margins were stable on QoQ basis at 4.2%. However,
management expects compression in the coming
quarter to 4.0-4.1%.
c) Core fee income grew at 22% YoY – picking up from
the 16% YoY in previous quarter.
d) Asset quality trends were benign. LLP/avg loans
ticked down to 74 bps from 117 bps in previous quarter.
1/3 of the provisions made in the past two quarters were
floating in nature, which are counter-cyclical in nature
and are not included in reported coverage ratios.
e) Given the strong profitability – HDFC Bank has made
contingent provisions to the tune of Rs1.1 bn (7% of
PBT) for potential future issues related to their
microfinance sector exposure of ~Rs9-10 bn.
Maintain OW: If we adjust for the floating and MFI
related provisions (which other banks aren’t making) –
HDFC Bank’s PBT growth would have been 54% YoY
(See Exhibit 1 for details). Earnings quality has
continued to improve, with consumer banking
contribution to profitability moving up further. Unlike in
the previous cycle – competition in the retail segment is
still low. This, coupled with the strength of HDFC Bank’s
liability franchise (CASA), will imply that core ROA
(which has picked up to 1.6% – see Exhibit 3) could be
sustained at higher levels. In this context, the valuations
at 17.8x F2012 earnings and 3.8x BV could be
sustained
NII growth was robust at +25% YoY and +10% QoQ
Margins at 4.2% were stable sequentially but down 10 bps YoY.
Management indicated that they do expect some compression
in margins in the coming quarter owing to the impact of rise in
funding costs filtering through. They expect margins to be
maintained between 4-4.1% for QE Mar-11.
Loan growth slowed down sequentially as the short-term
3G-related loan have almost completely run off this quarter.
On a reported basis, loan growth slowed from 38% YoY to
33% YoY. If we exclude the 3G related loans, then the core
loan growth picked up from 32% YoY to 33% YoY as of the
previous quarter.
Retail loan growth continued to pick up – accelerating to 36%
YoY (+10% QoQ) versus 31% YoY (8% QoQ) in the previous
quarter. Non-retail loan growth slowed to 29% YoY (-8% QoQ)
versus 47% YoY (+7% QoQ) in the previous quarter owing to
the above mentioned 3G loans running off.
Within the retail segment, almost all segments showed good
growth momentum on a sequential basis. Mortgage loan
growth was stronger at 20% QoQ. In the previous quarter,
HDFC Bank did not purchase any loans from HDFC, as they
were awaiting some regulatory clarifications. However, this has
now been received and in this quarter they purchased loans for
both quarters, driving up the sequential growth.
Deposit growth slowed down to 24% YoY (-2% QoQ) from 30%
YoY (+7% QoQ) in the previous quarter. One of the factors that
drove this was slower current account balances growth (+8%
YoY, -8% QoQ) as the bank saw temporary IPO-related
balances come off. Savings account balances grew by 3%
QoQ and 31% YoY. Term deposit balances grew by 27% YoY
but were down 1% QoQ.
The loan-deposit ratio picked up to 83% from 80% in the
previous quarter. Part of the increase was driven by
quarter-end balances. On a daily average basis – LD ratio was
broadly stable QoQ at ~80%.
Fee income grew by 22% YoY partly aided by one-off
corporate fee income
Core fee income grew by 22% YoY and was flat QoQ. The
improvement vs. last quarter (16% YoY) was on account of a
pick up in general fees & commissions from branch banking
and some one-off corporate fee income. Even if we exclude the
one-off fee income, management indicated that the fee income
growth would have been robust at ~18-20% YoY.
Capital gains contribution to earnings was negative at Rs0.3 bn
(2% of PBT). This compares with a loss of Rs0.5 bn in the
previous quarter.
FX income was higher sequentially at Rs2.2 bn versus
Rs1.5 bn in the previous quarter. The bank was able to earn
higher spreads on customer flows owing to increased market
volatility/expectations of volatility.
Costs increased by +22% YoY (9% QoQ).
Employee costs were up 25% YoY (2% QoQ), while
non-employee expenses were up 20% YoY (14% QoQ).
The bank made a one-off provision of Rs500 mn on account of
retirement benefits in the previous quarter. Adjusted for the
same, employee costs growth was at 10% QoQ and total costs
growth was at 12% QoQ. HDFC Bank recruited 2,500-3,000
employees this quarter for the ~100 branches opened in the
last quarter that will be operational in the next couple of
quarters. This led to the rise in employee costs this quarter.
The cost-to-core-income ratio ticked down to 46.5% compared
to 47.5% in 2Q and 47.6% in F3Q10. Costs to average assets
was higher sequentially by 15 bps at 2.93% as the bank did
not grow its asset base and employee costs went up as
discussed above.
Asset quality trends continue to be benign
Net new NPL creation continued to be very low. On a reported
basis, credit costs came off by 43 bps QoQ to 74 bps (of avg.
loans, annualized) versus 117 bps in the previous quarter.
However, about a third of the provisions made during this
quarter were counter-cyclical “floating” provisions. These aren’t
added to the provisions while computing the coverage ratios.
Despite this, reported coverage ratio showed good
improvement to 81.4% from 77.8% in the previous quarter.
HDFC Bank has made ad hoc contingent provisions on
MFI exposure
The bank made some additional provisions of Rs1.73 bn
this quarter (vs. Rs95 mn in F2Q11 and vs. Rs98 mn in
F3Q10). ~2/3rd of these provisions (~Rs1.15 bn) were made
as contingent provisions with regards the bank’s
microfinance exposure.
The bank’s MFI exposure is ~Rs 9-10 bn (~0.6% of their loan
book vs. Rs 13.3 bn as of Sep’10) and ~1/3 of this exposure is
concentrated in Andhra Pradesh. The bank has reduced its
assigned loan portfolio significantly (Rs2-3 bn vs. Rs4.3 bn as
of Sep’10). Almost ~Rs7-8 bn of the total microfinance
exposure is in the form of direct lending to MFIs. They have
used this quarter’s high profits to make some contingent
provisions in the event of stress on this sector, leading to asset
quality issues (although so far they haven’t seen any issues.)
Target price discussion
We arrive at our price target of Rs2,550 using a base-case
valuation on a residual income model. We value the stock
using a three-phase residual income model – a five-year high
growth period, 10-year maturity period followed by a declining
period. We use a cost of equity of 13.6%, assuming a beta of
1.2, a risk-free rate of 7.6% (current Indian 10-year government
bond yield), and a market risk premium of 5%.
Risks to Our Price Target
Key risks to our price target include slower-than-expected loan
growth, sharp compression in NIMs (on account of greater
competition) and significant deterioration in asset quality (new
NPL creation picks up on the retail side).
Upside risks include – faster-than-expected asset growth, fee
income being stronger than expectations, margins remaining
elevated for longer and credit costs being lower than
expectations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank
F3Q11: Strong Numbers
Quick Comment – HDFC Bank reported profits of
Rs10.9 bn: Profits were up 19% QoQ / 33% YoY and
compares with our estimate of Rs10.7 bn. EPS grew by
26% YoY.
The key trends from the results include:
a) Loan growth (ex-short term loans made in QE Jun-10)
continued to be strong at 33% YoY (vs. 32% YoY in
previous quarter). Deposit growth slowed to 24% YoY
from 30% YoY – partly weighed down by IPO-related CA
balances growth slowing (-8% QoQ).
b) Margins were stable on QoQ basis at 4.2%. However,
management expects compression in the coming
quarter to 4.0-4.1%.
c) Core fee income grew at 22% YoY – picking up from
the 16% YoY in previous quarter.
d) Asset quality trends were benign. LLP/avg loans
ticked down to 74 bps from 117 bps in previous quarter.
1/3 of the provisions made in the past two quarters were
floating in nature, which are counter-cyclical in nature
and are not included in reported coverage ratios.
e) Given the strong profitability – HDFC Bank has made
contingent provisions to the tune of Rs1.1 bn (7% of
PBT) for potential future issues related to their
microfinance sector exposure of ~Rs9-10 bn.
Maintain OW: If we adjust for the floating and MFI
related provisions (which other banks aren’t making) –
HDFC Bank’s PBT growth would have been 54% YoY
(See Exhibit 1 for details). Earnings quality has
continued to improve, with consumer banking
contribution to profitability moving up further. Unlike in
the previous cycle – competition in the retail segment is
still low. This, coupled with the strength of HDFC Bank’s
liability franchise (CASA), will imply that core ROA
(which has picked up to 1.6% – see Exhibit 3) could be
sustained at higher levels. In this context, the valuations
at 17.8x F2012 earnings and 3.8x BV could be
sustained
NII growth was robust at +25% YoY and +10% QoQ
Margins at 4.2% were stable sequentially but down 10 bps YoY.
Management indicated that they do expect some compression
in margins in the coming quarter owing to the impact of rise in
funding costs filtering through. They expect margins to be
maintained between 4-4.1% for QE Mar-11.
Loan growth slowed down sequentially as the short-term
3G-related loan have almost completely run off this quarter.
On a reported basis, loan growth slowed from 38% YoY to
33% YoY. If we exclude the 3G related loans, then the core
loan growth picked up from 32% YoY to 33% YoY as of the
previous quarter.
Retail loan growth continued to pick up – accelerating to 36%
YoY (+10% QoQ) versus 31% YoY (8% QoQ) in the previous
quarter. Non-retail loan growth slowed to 29% YoY (-8% QoQ)
versus 47% YoY (+7% QoQ) in the previous quarter owing to
the above mentioned 3G loans running off.
Within the retail segment, almost all segments showed good
growth momentum on a sequential basis. Mortgage loan
growth was stronger at 20% QoQ. In the previous quarter,
HDFC Bank did not purchase any loans from HDFC, as they
were awaiting some regulatory clarifications. However, this has
now been received and in this quarter they purchased loans for
both quarters, driving up the sequential growth.
Deposit growth slowed down to 24% YoY (-2% QoQ) from 30%
YoY (+7% QoQ) in the previous quarter. One of the factors that
drove this was slower current account balances growth (+8%
YoY, -8% QoQ) as the bank saw temporary IPO-related
balances come off. Savings account balances grew by 3%
QoQ and 31% YoY. Term deposit balances grew by 27% YoY
but were down 1% QoQ.
The loan-deposit ratio picked up to 83% from 80% in the
previous quarter. Part of the increase was driven by
quarter-end balances. On a daily average basis – LD ratio was
broadly stable QoQ at ~80%.
Fee income grew by 22% YoY partly aided by one-off
corporate fee income
Core fee income grew by 22% YoY and was flat QoQ. The
improvement vs. last quarter (16% YoY) was on account of a
pick up in general fees & commissions from branch banking
and some one-off corporate fee income. Even if we exclude the
one-off fee income, management indicated that the fee income
growth would have been robust at ~18-20% YoY.
Capital gains contribution to earnings was negative at Rs0.3 bn
(2% of PBT). This compares with a loss of Rs0.5 bn in the
previous quarter.
FX income was higher sequentially at Rs2.2 bn versus
Rs1.5 bn in the previous quarter. The bank was able to earn
higher spreads on customer flows owing to increased market
volatility/expectations of volatility.
Costs increased by +22% YoY (9% QoQ).
Employee costs were up 25% YoY (2% QoQ), while
non-employee expenses were up 20% YoY (14% QoQ).
The bank made a one-off provision of Rs500 mn on account of
retirement benefits in the previous quarter. Adjusted for the
same, employee costs growth was at 10% QoQ and total costs
growth was at 12% QoQ. HDFC Bank recruited 2,500-3,000
employees this quarter for the ~100 branches opened in the
last quarter that will be operational in the next couple of
quarters. This led to the rise in employee costs this quarter.
The cost-to-core-income ratio ticked down to 46.5% compared
to 47.5% in 2Q and 47.6% in F3Q10. Costs to average assets
was higher sequentially by 15 bps at 2.93% as the bank did
not grow its asset base and employee costs went up as
discussed above.
Asset quality trends continue to be benign
Net new NPL creation continued to be very low. On a reported
basis, credit costs came off by 43 bps QoQ to 74 bps (of avg.
loans, annualized) versus 117 bps in the previous quarter.
However, about a third of the provisions made during this
quarter were counter-cyclical “floating” provisions. These aren’t
added to the provisions while computing the coverage ratios.
Despite this, reported coverage ratio showed good
improvement to 81.4% from 77.8% in the previous quarter.
HDFC Bank has made ad hoc contingent provisions on
MFI exposure
The bank made some additional provisions of Rs1.73 bn
this quarter (vs. Rs95 mn in F2Q11 and vs. Rs98 mn in
F3Q10). ~2/3rd of these provisions (~Rs1.15 bn) were made
as contingent provisions with regards the bank’s
microfinance exposure.
The bank’s MFI exposure is ~Rs 9-10 bn (~0.6% of their loan
book vs. Rs 13.3 bn as of Sep’10) and ~1/3 of this exposure is
concentrated in Andhra Pradesh. The bank has reduced its
assigned loan portfolio significantly (Rs2-3 bn vs. Rs4.3 bn as
of Sep’10). Almost ~Rs7-8 bn of the total microfinance
exposure is in the form of direct lending to MFIs. They have
used this quarter’s high profits to make some contingent
provisions in the event of stress on this sector, leading to asset
quality issues (although so far they haven’t seen any issues.)
Target price discussion
We arrive at our price target of Rs2,550 using a base-case
valuation on a residual income model. We value the stock
using a three-phase residual income model – a five-year high
growth period, 10-year maturity period followed by a declining
period. We use a cost of equity of 13.6%, assuming a beta of
1.2, a risk-free rate of 7.6% (current Indian 10-year government
bond yield), and a market risk premium of 5%.
Risks to Our Price Target
Key risks to our price target include slower-than-expected loan
growth, sharp compression in NIMs (on account of greater
competition) and significant deterioration in asset quality (new
NPL creation picks up on the retail side).
Upside risks include – faster-than-expected asset growth, fee
income being stronger than expectations, margins remaining
elevated for longer and credit costs being lower than
expectations.
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