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Momentum intact: 30% plus PAT growth; quality continues to improve
In Q3FY11, HDFC Bank (HDFCB) delivered 33% Y-o-Y profit growth (with
continued improvement in earnings quality). Core earnings came in strong, with
sequential stable margin at 4.2% and better fee income traction, steady
operating efficiencies and, most importantly, lower loan loss provisioning charge
(reducing dependence on treasury gains). Best-in-class asset quality was
sustained, with gross NPLs improving to 1.11% and NNPLs at 0.2%. The pace of
saving bank deposit accretion was steady (31% Y-o-Y and 3% Q-o-Q). We
believe the intrinsic profitability during the quarter was higher than the reported
32.7%, owing to the bank’s MFI exposure and utilisation of strong earnings to
make higher contingent provisions towards floating provisions (YTD – INR 3bn).
Asset quality continues to improve; LLP at historic low at 0.75%
The bank’s gross NPA ratio declined 5bps Q-o-Q, to 1.11%, with an absolute
decline of 3.2% to INR 17.8bn. Credit cost came in at historic low of 0.75%
(including floating provisions of ~INR 1.0 bn), much lower than 1.7% posted
over the past eight quarters, bolstering core profitability. Our interaction with the
management indicates that incremental delinquencies in retail book continued to
remain low (cheque bounce rate, lead indicator of retail slippages, continues to
remain down). We expect credit cost to increase, going forward, as the bank
starts providing for standard asset provisions; however, it is likely to continue to
average at relatively low level of 1.3% - a key trigger for RoA improvement.
Outlook and valuations: Rich; maintain ‘HOLD’
Quality of HDFCB’s earnings continues to improve on the back of stable margins,
steady loan book growth and declining provisioning pressure. With current gross
stressed assets (restructured + NPA) at 1.4%, the lowest in the system and
best-in-class liabilities franchise, the bank is best-placed to navigate pressure on
asset quality and rising funding cost. The stock is trading at rich valuations of
3.3x FY12E adjusted book and 18.3x FY12E earnings. We believe the bank has
hit a sweet spot—strong growth and lower credit cost—which will enhance return
ratios {RoAs to a new high of ~1.7% (FY06-10 average: 1.5%) and ROEs to
~20% by FY12E} and support current multiples. We maintain ‘HOLD’ on the
stock and rate it ‘Sector Performer’ on relative return basis.
Strong business momentum
Loan book growth Q-o-Q optically appears low at 1.3% (33% Y-o-Y) to INR 1.6tn due to
run-down of one-off loans to telecom (of INR 60-70 bn) provided in Q1FY11. Bank
maintained its focus on working capital funding (70% of wholesale book) and
term/project lending (especially to existing customers). With the pace of run-down of e-
CBoP slowing, coupled with increased traction in the business banking (13% Q-o-Q, 41%
Y-o-Y), CVs (12% Q-o-Q, 49% Y-o-Y) and loan against securities (9.5% Q-o-Q, 35% Yo-
Y) and credit cards (9.6% q-O-q, 20% Y-o-Y), retail book grew 9.7% sequentially.
Within the retail portfolio, mortgage portfolio grew (41% Y-o-Y/20% Q-o-Q) as the bank
bought INR 15 bn of HDFC’s mortgage portfolio. We estimate 28% loan book growth for
FY11.
Retail franchise stronger; CASA steady
In Q3FY11, HDFCB continued to improve the utilisation of its branch network, leading to
growth rates of 31% Y-o-Y and 2.5% Q-o-Q in savings bank balances. Along with decline
in advance book, the bank witnessed 1.3% Q-o-Q dip in term deposit balances. CASA
continues to stay at impressive levels of 50.5% - best in the industry. Going forward, as
the bank embarks on fresh branch additions during the course of next 12 months and
better utilisation of e-CBoP branches, CASA balances are likely to continue to trend
upwards. We believe CASA can be sustained at the current level of 51%, making HDFCB
best placed in the rising interest rate environment.
Stable margin performance against the expected decline
Reported core margins remained stable sequentially at 4.2% supported by: (a) 2% point
improvement in average CD ratio to 80% and (b) stable average CASA ratio of 50.2%
(Q2: 50.5%). As the bank is currently not holding any excess SLR, further expansion in
balance sheet will warrant deposit growth. While build-up on CASA will cushion NIMs,
rising cost pressures will lead to NIMs stabilising at ~4-4.1%.
Pick-up in fee income
The bank’s fee income (adjusted), Y-o-Y, grew at an impressive 26%, led by 18%
growth in core fees (after adjusting for one-off in corporate segment) and commissions
and 40.5% growth in Forex and derivative revenues. Going forward, we expect fee
income growth to pick up as productivity improves for the newly opened branches and
other channel expansion; growth is, however, likely to be modest given the stricture on
mutual fund distribution commissions and recent cap on charges by IRDA for unit-linked
policies. We are building in 21% fee income growth over FY11E.
Company Description
HDFC Bank has a balance sheet size stands at INR 2,500 bn at the end of Q3FY11. It is
amongst the leading private sector banks with a market cap over INR 952 bn. The key
promoter, HDFC, holds 24% stake, and FIIs and public hold the balance. The distribution
network has got a boost with merger with CBoP with 1725 branches and 4,000 ATMs in
528 cities. HDFC Bank is among the top three players in auto loans, personal loans,
commercial vehicles, cash management, and supply chain management. It holds 3.7%
share in deposits and 3.6% in loans in the industry among the leading players. The
bank’s strengths include its brand equity, professional management, distribution reach,
high CASA, clean book, and focus on profitability.
Investment Theme
HDFC Bank has a track record of consistent growth in earnings and assets. Earnings
have grown at a steady pace of 30% in the past few years. The bank enjoys best-inclass
interest margins of ~4% on the back of more retail oriented franchise. Retail
advances constitute 55% of its loan book. Even on the liability front, retail deposit
(CASA) mix stands healthy of total deposits among the industry. We expect its loan book
to grow at 26% CAGR over FY10-12E and CASA ratio to be sustained at these levels.
Keeping asset quality healthy would be one of bank’s key strengths. The bank continues
to create higher loan loss provisions to maintain net NPA ratio at below 0.5% of
advances. With higher provision coverage, net NPAs are likely to be maintained at below
0.5% levels. The merger with CBoP will provide a thrust to its liability franchise with
50% increase in network and CBoP retail concentration will complement HDFCB’s loan
book.
Key Risks
Higher-than-expected decline in CASA ratio and change in macro environment may
impact cost of funds and consequently margins.
Higher than expected delinquencies due to the loan mix and also vulnerable to systemwide
deterioration in the quality of retail assets is the key risk.
Valuations de-rating of the stock due to structural changes within the bank (like change
in management etc.).
Lower than expected asset growth.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Momentum intact: 30% plus PAT growth; quality continues to improve
In Q3FY11, HDFC Bank (HDFCB) delivered 33% Y-o-Y profit growth (with
continued improvement in earnings quality). Core earnings came in strong, with
sequential stable margin at 4.2% and better fee income traction, steady
operating efficiencies and, most importantly, lower loan loss provisioning charge
(reducing dependence on treasury gains). Best-in-class asset quality was
sustained, with gross NPLs improving to 1.11% and NNPLs at 0.2%. The pace of
saving bank deposit accretion was steady (31% Y-o-Y and 3% Q-o-Q). We
believe the intrinsic profitability during the quarter was higher than the reported
32.7%, owing to the bank’s MFI exposure and utilisation of strong earnings to
make higher contingent provisions towards floating provisions (YTD – INR 3bn).
Asset quality continues to improve; LLP at historic low at 0.75%
The bank’s gross NPA ratio declined 5bps Q-o-Q, to 1.11%, with an absolute
decline of 3.2% to INR 17.8bn. Credit cost came in at historic low of 0.75%
(including floating provisions of ~INR 1.0 bn), much lower than 1.7% posted
over the past eight quarters, bolstering core profitability. Our interaction with the
management indicates that incremental delinquencies in retail book continued to
remain low (cheque bounce rate, lead indicator of retail slippages, continues to
remain down). We expect credit cost to increase, going forward, as the bank
starts providing for standard asset provisions; however, it is likely to continue to
average at relatively low level of 1.3% - a key trigger for RoA improvement.
Outlook and valuations: Rich; maintain ‘HOLD’
Quality of HDFCB’s earnings continues to improve on the back of stable margins,
steady loan book growth and declining provisioning pressure. With current gross
stressed assets (restructured + NPA) at 1.4%, the lowest in the system and
best-in-class liabilities franchise, the bank is best-placed to navigate pressure on
asset quality and rising funding cost. The stock is trading at rich valuations of
3.3x FY12E adjusted book and 18.3x FY12E earnings. We believe the bank has
hit a sweet spot—strong growth and lower credit cost—which will enhance return
ratios {RoAs to a new high of ~1.7% (FY06-10 average: 1.5%) and ROEs to
~20% by FY12E} and support current multiples. We maintain ‘HOLD’ on the
stock and rate it ‘Sector Performer’ on relative return basis.
Strong business momentum
Loan book growth Q-o-Q optically appears low at 1.3% (33% Y-o-Y) to INR 1.6tn due to
run-down of one-off loans to telecom (of INR 60-70 bn) provided in Q1FY11. Bank
maintained its focus on working capital funding (70% of wholesale book) and
term/project lending (especially to existing customers). With the pace of run-down of e-
CBoP slowing, coupled with increased traction in the business banking (13% Q-o-Q, 41%
Y-o-Y), CVs (12% Q-o-Q, 49% Y-o-Y) and loan against securities (9.5% Q-o-Q, 35% Yo-
Y) and credit cards (9.6% q-O-q, 20% Y-o-Y), retail book grew 9.7% sequentially.
Within the retail portfolio, mortgage portfolio grew (41% Y-o-Y/20% Q-o-Q) as the bank
bought INR 15 bn of HDFC’s mortgage portfolio. We estimate 28% loan book growth for
FY11.
Retail franchise stronger; CASA steady
In Q3FY11, HDFCB continued to improve the utilisation of its branch network, leading to
growth rates of 31% Y-o-Y and 2.5% Q-o-Q in savings bank balances. Along with decline
in advance book, the bank witnessed 1.3% Q-o-Q dip in term deposit balances. CASA
continues to stay at impressive levels of 50.5% - best in the industry. Going forward, as
the bank embarks on fresh branch additions during the course of next 12 months and
better utilisation of e-CBoP branches, CASA balances are likely to continue to trend
upwards. We believe CASA can be sustained at the current level of 51%, making HDFCB
best placed in the rising interest rate environment.
Stable margin performance against the expected decline
Reported core margins remained stable sequentially at 4.2% supported by: (a) 2% point
improvement in average CD ratio to 80% and (b) stable average CASA ratio of 50.2%
(Q2: 50.5%). As the bank is currently not holding any excess SLR, further expansion in
balance sheet will warrant deposit growth. While build-up on CASA will cushion NIMs,
rising cost pressures will lead to NIMs stabilising at ~4-4.1%.
Pick-up in fee income
The bank’s fee income (adjusted), Y-o-Y, grew at an impressive 26%, led by 18%
growth in core fees (after adjusting for one-off in corporate segment) and commissions
and 40.5% growth in Forex and derivative revenues. Going forward, we expect fee
income growth to pick up as productivity improves for the newly opened branches and
other channel expansion; growth is, however, likely to be modest given the stricture on
mutual fund distribution commissions and recent cap on charges by IRDA for unit-linked
policies. We are building in 21% fee income growth over FY11E.
Company Description
HDFC Bank has a balance sheet size stands at INR 2,500 bn at the end of Q3FY11. It is
amongst the leading private sector banks with a market cap over INR 952 bn. The key
promoter, HDFC, holds 24% stake, and FIIs and public hold the balance. The distribution
network has got a boost with merger with CBoP with 1725 branches and 4,000 ATMs in
528 cities. HDFC Bank is among the top three players in auto loans, personal loans,
commercial vehicles, cash management, and supply chain management. It holds 3.7%
share in deposits and 3.6% in loans in the industry among the leading players. The
bank’s strengths include its brand equity, professional management, distribution reach,
high CASA, clean book, and focus on profitability.
Investment Theme
HDFC Bank has a track record of consistent growth in earnings and assets. Earnings
have grown at a steady pace of 30% in the past few years. The bank enjoys best-inclass
interest margins of ~4% on the back of more retail oriented franchise. Retail
advances constitute 55% of its loan book. Even on the liability front, retail deposit
(CASA) mix stands healthy of total deposits among the industry. We expect its loan book
to grow at 26% CAGR over FY10-12E and CASA ratio to be sustained at these levels.
Keeping asset quality healthy would be one of bank’s key strengths. The bank continues
to create higher loan loss provisions to maintain net NPA ratio at below 0.5% of
advances. With higher provision coverage, net NPAs are likely to be maintained at below
0.5% levels. The merger with CBoP will provide a thrust to its liability franchise with
50% increase in network and CBoP retail concentration will complement HDFCB’s loan
book.
Key Risks
Higher-than-expected decline in CASA ratio and change in macro environment may
impact cost of funds and consequently margins.
Higher than expected delinquencies due to the loan mix and also vulnerable to systemwide
deterioration in the quality of retail assets is the key risk.
Valuations de-rating of the stock due to structural changes within the bank (like change
in management etc.).
Lower than expected asset growth.
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