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Investment Thesis
• Retail loan growth in India has started
picking up – will allow HDFC Bank to
maintain strong revenue progression.
• Great long-term play - good funding
franchise with low-cost deposits at
~50% of deposits which will be
beneficial in a rising rate environment.
• Unlike corporate lenders, HDFC Bank
has virtually no legacy asset quality
issues in the form of restructured loan
balance implying greater visibility on
credit costs.
• HDFC Bank is well capitalized with a
Tier I ratio of 12.3% as of Dec-2010.
• Valuations look rich at 18.8x F2012e
earnings. However, earnings are likely
to be strong – both in terms of
momentum and quality – hence driving
our OW call.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• Strength of economic growth in F2012.
• Ability to sustain cost reductions.
• Trend in New NPL formation rate.
Key Risks
• Downside: new NPL formation
re-accelerates; drop in consumer
confidence hampers retail loan growth;
greater competition in retail space
restraining asset repricing.
• Upside: faster than expected rebound
in retail loan growth, better cost control
and margin expansion.
Price Target Rs2550 Derived from our base case residual income model
Bull
Case
Rs2900
4.6x
F2013E
BVPS
Recovery is stronger than expected – credit costs drop materially below
normalized levels. Loan growth is stronger than base case estimate.
Credit costs drop materially below risk tendency levels in F2012. Core
fee income grows ahead of total asset growth.
Base
Case
Rs2550
4.1x
F2013E
BVPS
Robust loan growth and credit costs drop below normalized levels.
Loan growth remains strong at 28% CAGR in F2012-13. Credit costs
average 132 bps in F2012-13 vs 163 bps in F2009-11. NIMs remain
stable in F2011-12.
Bear
Case
Rs1550
2.5x
F2013E
BVPS
Slowdown in macro growth; asset quality concerns return. System loan
growth is below base case expectations and hence HDFC Bank’s loan
book growth slows. Credit costs return to elevated levels seen in
F1H2010 as new NPL formation in the consumer loan book increases
again.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Retail loan growth in India has started
picking up – will allow HDFC Bank to
maintain strong revenue progression.
• Great long-term play - good funding
franchise with low-cost deposits at
~50% of deposits which will be
beneficial in a rising rate environment.
• Unlike corporate lenders, HDFC Bank
has virtually no legacy asset quality
issues in the form of restructured loan
balance implying greater visibility on
credit costs.
• HDFC Bank is well capitalized with a
Tier I ratio of 12.3% as of Dec-2010.
• Valuations look rich at 18.8x F2012e
earnings. However, earnings are likely
to be strong – both in terms of
momentum and quality – hence driving
our OW call.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• Strength of economic growth in F2012.
• Ability to sustain cost reductions.
• Trend in New NPL formation rate.
Key Risks
• Downside: new NPL formation
re-accelerates; drop in consumer
confidence hampers retail loan growth;
greater competition in retail space
restraining asset repricing.
• Upside: faster than expected rebound
in retail loan growth, better cost control
and margin expansion.
Price Target Rs2550 Derived from our base case residual income model
Bull
Case
Rs2900
4.6x
F2013E
BVPS
Recovery is stronger than expected – credit costs drop materially below
normalized levels. Loan growth is stronger than base case estimate.
Credit costs drop materially below risk tendency levels in F2012. Core
fee income grows ahead of total asset growth.
Base
Case
Rs2550
4.1x
F2013E
BVPS
Robust loan growth and credit costs drop below normalized levels.
Loan growth remains strong at 28% CAGR in F2012-13. Credit costs
average 132 bps in F2012-13 vs 163 bps in F2009-11. NIMs remain
stable in F2011-12.
Bear
Case
Rs1550
2.5x
F2013E
BVPS
Slowdown in macro growth; asset quality concerns return. System loan
growth is below base case expectations and hence HDFC Bank’s loan
book growth slows. Credit costs return to elevated levels seen in
F1H2010 as new NPL formation in the consumer loan book increases
again.
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