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HDFC Bank
F4Q11: Continued Delivery
What's Changed
Price Target Rs2,550 to Rs2,650
EPS F12e/F13e -1%/+3%
HDFC Bank reported profits of Rs11.1 bn: Profits
were up 2% QoQ / 33% YoY; our estimate was Rs11 bn.
EPS grew by 31% YoY. The key trends from the results
include:
1) NII grew by 2% QoQ and 21% YoY. Margins were
stable QoQ at 4.2% but were down 20 bps YoY.
Loans grew by 27% YoY while deposits grew by
25% YoY.
2) Core fee income grew at 23% YoY – picking up from
22% YoY in previous quarter.
3) Asset quality trends were benign. LLP/average
loans stayed low at 83 bps. Two-thirds of the
provisions made in this quarter were floating, which
are counter-cyclical in nature and are not included in
reported coverage ratios. Reported coverage ratio
was 83%; indeed, if we include the floating
provisions, the coverage ratio would be even higher
at 126%.
4) Given the strong profitability, HDFC Bank has made
additional contingent provisions to the tune of Rs0.5
bn (3% of PBT) for potential future issues related to
its microfinance sector exposure.
5) HDFC Bank has announced a 5:1 stock split
Maintain OW: HDFC Bank is trading at 20.3x F12e
earnings and 15.4x F13e earnings (our estimates are
fine-tuned) and 3.7x F12e BV and 3.1x F13e BV. We
believe the valuation could hold in the context of the
strong profitability that the bank is delivering. Indeed,
this is reflected in this quarter’s results as well -- if we
adjust for the floating and MFI related provisions (which
other banks aren’t making), HDFC Bank’s PBT growth
would have been 49% YoY
Investment Thesis
• Retail loan growth in India has started
to pick up – this will allow HDFC Bank
to maintain strong revenue
progression.
• Great long-term play – good funding
franchise. Low-cost deposits are
~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 12.2% as of Mar-2011.
• Valuations seem full at 20.3x F2012
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.
• Better cost control and margin
expansion.
• Faster than expected rebound in retail
loan growth,
Key Risks
• New NPL formation re-accelerates;
• Drop in consumer confidence impairs
retail loan growth;
• Greater competition in retail hampers
asset repricing.
Target Price Discussion
We arrive at our price target of Rs2650 using a base-case
valuation on a residual income model with three phases – a
five-year high growth period, a 10-year maturity period,
followed by a declining period. We use a cost of equity of
13.6%, assuming a beta of 1.0, a risk-free rate of 8.1% (current
Indian 10-year government bond yield), and a market risk
premium of 5.5%.
We have raised our base case valuation from Rs2550
previously to Rs2650, partly reflecting earnings estimate
changes (we have raised our F2013 EPS estimate by 3% on
account of better margin progression expectation).
We have also raised our bear case value from Rs1550 to
Rs1650 and our bull case value from Rs 2900 to Rs3000.
Exhibit 16
HDFC Bank: Residual Income Valuation
Base Bear Bull
Ke 13.6% 13.6% 13.6%
RI Based Value 2650 1650 3000
BVPS (F2013e) 753 753 753
Implied Target P/BV 3.5 2.2 4.0
Source: Company data, Morgan Stanley Research
Risks to Our Price Target
Key risks to our price target include slower-than-expected loan
growth, sharp compression in NIMs (owing to greater
competition) and significant deterioration in asset quality (new
NPL creation picks up on the retail side).
Upside catalysts 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
F4Q11: Continued Delivery
What's Changed
Price Target Rs2,550 to Rs2,650
EPS F12e/F13e -1%/+3%
HDFC Bank reported profits of Rs11.1 bn: Profits
were up 2% QoQ / 33% YoY; our estimate was Rs11 bn.
EPS grew by 31% YoY. The key trends from the results
include:
1) NII grew by 2% QoQ and 21% YoY. Margins were
stable QoQ at 4.2% but were down 20 bps YoY.
Loans grew by 27% YoY while deposits grew by
25% YoY.
2) Core fee income grew at 23% YoY – picking up from
22% YoY in previous quarter.
3) Asset quality trends were benign. LLP/average
loans stayed low at 83 bps. Two-thirds of the
provisions made in this quarter were floating, which
are counter-cyclical in nature and are not included in
reported coverage ratios. Reported coverage ratio
was 83%; indeed, if we include the floating
provisions, the coverage ratio would be even higher
at 126%.
4) Given the strong profitability, HDFC Bank has made
additional contingent provisions to the tune of Rs0.5
bn (3% of PBT) for potential future issues related to
its microfinance sector exposure.
5) HDFC Bank has announced a 5:1 stock split
Maintain OW: HDFC Bank is trading at 20.3x F12e
earnings and 15.4x F13e earnings (our estimates are
fine-tuned) and 3.7x F12e BV and 3.1x F13e BV. We
believe the valuation could hold in the context of the
strong profitability that the bank is delivering. Indeed,
this is reflected in this quarter’s results as well -- if we
adjust for the floating and MFI related provisions (which
other banks aren’t making), HDFC Bank’s PBT growth
would have been 49% YoY
Investment Thesis
• Retail loan growth in India has started
to pick up – this will allow HDFC Bank
to maintain strong revenue
progression.
• Great long-term play – good funding
franchise. Low-cost deposits are
~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 12.2% as of Mar-2011.
• Valuations seem full at 20.3x F2012
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.
• Better cost control and margin
expansion.
• Faster than expected rebound in retail
loan growth,
Key Risks
• New NPL formation re-accelerates;
• Drop in consumer confidence impairs
retail loan growth;
• Greater competition in retail hampers
asset repricing.
Target Price Discussion
We arrive at our price target of Rs2650 using a base-case
valuation on a residual income model with three phases – a
five-year high growth period, a 10-year maturity period,
followed by a declining period. We use a cost of equity of
13.6%, assuming a beta of 1.0, a risk-free rate of 8.1% (current
Indian 10-year government bond yield), and a market risk
premium of 5.5%.
We have raised our base case valuation from Rs2550
previously to Rs2650, partly reflecting earnings estimate
changes (we have raised our F2013 EPS estimate by 3% on
account of better margin progression expectation).
We have also raised our bear case value from Rs1550 to
Rs1650 and our bull case value from Rs 2900 to Rs3000.
Exhibit 16
HDFC Bank: Residual Income Valuation
Base Bear Bull
Ke 13.6% 13.6% 13.6%
RI Based Value 2650 1650 3000
BVPS (F2013e) 753 753 753
Implied Target P/BV 3.5 2.2 4.0
Source: Company data, Morgan Stanley Research
Risks to Our Price Target
Key risks to our price target include slower-than-expected loan
growth, sharp compression in NIMs (owing to greater
competition) and significant deterioration in asset quality (new
NPL creation picks up on the retail side).
Upside catalysts 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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