HDFC Bank- Consistent quality:: Macquarie Research

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HDFC Bank
Consistent quality
Event
 HDFC Bank is the second largest private sector bank in India. The bank has
1,780 branches and 5,121 ATMs. It also has the highest low cost deposit
proportion in the sector at 51%. The bank is unique among Indian banks in
that it has delivered more than 40 straight quarters of 30%+ profit growth.

Impact
 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 at 4.2%, well above management’s stated intention of
keeping it in the 3.9-4.0% range.
 Asset quality – sustained improvement. Asset quality has shown a
sustained improvement at the bank with the 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 cut down on its credit cost to 0.8% of loans.
Simultaneously NPL coverage is up 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 and grew at 36%YoY in 3Q11. The bank has shown the ability to
combine growth with prudence in retail lending. Growth drivers have been
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 has been robust at
~36%YoY. A key driver of retail growth has been larger penetration into tier-2
and tier-3 cities and capturing market share from some of the larger players.
 CBOP merger, synergies visible. From a high of 3.4% post merger with
CBOP, cost to average assets have consistently declined due to significant
synergies and productivity benefits extracted out of the merger. Low cost mix
(CASA ratio) has registered an impressive 140bps sequential increase to
50.6%.
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. We
believe current valuations provide an attractive entry opportunity to enter into
the stock.


HDFC Bank Aide Memoire
1. What are the incremental lending spreads you are making? How does that compare with a couple of quarters back?
2. What is your view on the tight liquidity situation?
3. What NIMs would you be comfortable maintaining in the next couple of quarters given the expected ramp-up of funding
costs?
4. How do you see loan growth panning out for your bank as well as the sector as a whole?
5. How are you able to keep NPLs low in an unsecured business unlike other banks?
6. Auto loans have been a key driver of loan growth at the bank. How does the bank hope to sustain the growth? What
initiatives do banks have in smaller towns/rural areas to tap loan demand?
7. What is the exposure of banks to the MFI segment? How is the segment behaving in terms of repayments?
8. Are there any more synergy benefits left out of CBOP acquisitions?
9. How many branches do you expect to open this year? How soon do the new branches typically break even?
10. What are your views on consolidation in the banking space and the increased competition from the entry of new private
players in banking?