HDFC Bank 4Q11 results: Hard to find a flaw:: Macquarie Research,

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HDFC Bank
4Q11 results: Hard to find a flaw
Event
 Nos marginally surprise due to higher than expected NIMs: HDFC Bank
reported 33% YoY growth in net profits of Rs11.15bn marginally ahead of our
estimate of Rs10.96bn mainly on account of higher than expected NIMs. Our
expectation was a 10bps QoQ decline in NIMs to 4.1% vs. the 4.2% NIMs
reported this quarter.

Impact
 Margins more important than volume growth: HDFC Bank has wisely
decided to hold onto their margins at 4.2% levels and in the process has
decided to grow its loan book just 1% sequentially. The weakness in loan
growth was mainly due to run-off of corporate loan book. Sell down has been
marginal this quarter. Retail loan growth remains healthy and the bank is
seeing strong demand in car loans and commercial vehicle segments.
 Asset quality continues to improve: Gross NPLs are down 5% on a QoQ
basis driven by improving asset quality in the retail segment. The bank
continues to do prudential counter-cyclical provisioning and has beefed up its
coverage ratio to 83% (excluding floating provisions) and including floating
provisions it is 125%. Credit costs now stand at 90bps and expected to
increase further as the bank begins to increase its standard asset provisioning
as the excess buffer that it carries is likely to exhaust in a quarter or so.
 Excellent liabilities franchise; however unlikely to sustain at current
levels: The bank’s CASA ratio at 52% (highest in the sector) this quarter was
mainly on account of a sharp 30% QoQ increase in current account balance
part of which was contributed by fertiliser companies having redeemed their
bonds with government of India and thereby receiving the cash. The savings
deposit growth is in line with its overall term deposit growth at 4% this quarter.
 Conference call takeaways: 1) There could be some impact on demand in
retail loans if rates were to go up another 50-100bps from current levels but
still growth would be strong. 2) Asset quality outlook continues to be very
robust. Slippages have reduced 45% YoY to Rs14.5bn. 3) They have made
some prudent provisioning towards MFIs even in this quarter. 4) Opex has
increased this quarter due to addition of branches. 5) MFI exposure stands at
0.5% of overall loan book, part of which is likely to be restructured. 6) Savings
rate de-regulation is likely to happen though the timing is difficult to predict.
They expect RBI to do de-regulation under conditions of stable liquidity and
they don’t expect margins to get impacted significantly.
Earnings and target price revision
 No change. We are introducing FY14E estimates.
Price catalyst
 12-month price target: Rs2,570.00 based on a Gordon growth methodology.
 Catalyst: Continued improvements in asset quality, strong earnings growth
Action and recommendation
 Maintain Outperform with TP of Rs2570.