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Operating parameters best in the class
Superior return ratios; however, valuations are rich; Neutral
HDFC Bank is set to deliver EPS CAGR of 29% over FY10-13 v/s 25% over FY05-10. Strong
loan growth, led by expansion in rural and semi-urban areas, superior margins of over
4%+, improving operating efficiency impeccable asset quality will ensure RoA of 1.6%+,
RoE will improve to 20% by FY13 against 17% expected in FY11. While we are positive about
the bank's business, we believe valuations at PBV of 3.4x FY12E and P/E of 19.5x are rich.
Maintain Neutral.
Best placed in a rising rate scenario, NIM at 4%+: Strong deposit franchise and a
higher share of retail loans helped the bank post NIM of 4%+. Bank is expected to
retain its funding cost advantage through its strong focus on new customer acquisitions
and floats from multiple transaction banking franchises. Even the proportion of high
yielding retail loans is expected to remain at over 50%. Strong retail distribution and
focused strategies will enable the bank to maintain its margin advantage over its
peers.
Branch expansion to aid market share gain: HDFC Bank increased the number
of its branches by 2.3x from 760 in FY08 to 1,780 in December 2010 through mergers
and organic expansion. This will help it to maintain growth above that of the industry
and will keep the CASA ratio higher than the industry average and improve fee income
growth. Led by a sharp increase in term deposit rates, CASA ratio is expected to
moderate to 46% from 50% in FY11. We factor in fee income CAGR of 22% over
FY11-13.
Loan growth to be above industry average: Loan growth will be strong due to (1)
increased focus on medium/long tenure corporate (especially infrastructure) loans,
(2) strong demand for auto loans, (3) selective disbursement in unsecured loans like
personal loans and credit cards, (4) strong growth from rural and semi-urban areas for
existing products and (5) continued buy-back of home loans from HDFC Limited to
fulfill priority sector targets. We expect loan growth of 25% over FY12 and FY13.
Fee income to grow 20-22%, C/I ratio to improve gradually: Increased focus on
rural and semi urban areas, selectively accelerating growth in unsecured retail loans
and increased customer acquisition will lead to 20-22% fee income growth despite
pressure on third party distribution fees (15% of overall fee income). Increased volume
growth would compensate for an expected decline in insurance commission.
Asset quality one of the best in class: HDFC Bank has the best asset quality
metrics in the industry, with net NPA at 0.2% of loans, restructured loans of ~0.3%
and overall coverage (including general provisioning) in excess of 100%. Better risk
management practices and conservative provisioning policies have enabled the bank
to create adequate cushion to absorb negative shocks. Strong margins and prudent
provisioning policies resulted in superior risk-adjusted returns, leading to improvement
in RoA.
3QFY11 highlights
Key positives
3QFY11 margins were sequentially stable at 4.2%
led by a high CASA mix. Overall CASA deposits
grew 21% YoY and savings deposits grew 31% YoY.
Asset quality is among the best in industry with
coverage ratio improving to ~81% (v/s 78% quarter
earlier). Credit costs declined to 0.74% from 1.17%
a quarter earlier and 1.5% a year earlier. Decline in
credit cost was despite the bank creating a buffer
for MFI exposure (Rs1b of ad-hoc provisions).
Key negatives
The bank's CD ratio is on the high side at ~83%.
RBI has voiced concern over the high CD ratio in
the system.
Other highlights
Other income grew 17% QoQ and 25% YoY to
Rs11.3b on account strong growth in fee income
and higher forex income. Fee income growth was
strong at 9% QoQ and 22% YoY to Rs9.4b. On a
lower base, Forex income grew 40%+ QoQ and YoY
to Rs2.2b (partially helped by higher trading profits
in 3QFY11).
Excess general provisions is likely to get over by
4QFY11; thus, in FY12 standard asset provision is
likely to increase
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Operating parameters best in the class
Superior return ratios; however, valuations are rich; Neutral
HDFC Bank is set to deliver EPS CAGR of 29% over FY10-13 v/s 25% over FY05-10. Strong
loan growth, led by expansion in rural and semi-urban areas, superior margins of over
4%+, improving operating efficiency impeccable asset quality will ensure RoA of 1.6%+,
RoE will improve to 20% by FY13 against 17% expected in FY11. While we are positive about
the bank's business, we believe valuations at PBV of 3.4x FY12E and P/E of 19.5x are rich.
Maintain Neutral.
Best placed in a rising rate scenario, NIM at 4%+: Strong deposit franchise and a
higher share of retail loans helped the bank post NIM of 4%+. Bank is expected to
retain its funding cost advantage through its strong focus on new customer acquisitions
and floats from multiple transaction banking franchises. Even the proportion of high
yielding retail loans is expected to remain at over 50%. Strong retail distribution and
focused strategies will enable the bank to maintain its margin advantage over its
peers.
Branch expansion to aid market share gain: HDFC Bank increased the number
of its branches by 2.3x from 760 in FY08 to 1,780 in December 2010 through mergers
and organic expansion. This will help it to maintain growth above that of the industry
and will keep the CASA ratio higher than the industry average and improve fee income
growth. Led by a sharp increase in term deposit rates, CASA ratio is expected to
moderate to 46% from 50% in FY11. We factor in fee income CAGR of 22% over
FY11-13.
Loan growth to be above industry average: Loan growth will be strong due to (1)
increased focus on medium/long tenure corporate (especially infrastructure) loans,
(2) strong demand for auto loans, (3) selective disbursement in unsecured loans like
personal loans and credit cards, (4) strong growth from rural and semi-urban areas for
existing products and (5) continued buy-back of home loans from HDFC Limited to
fulfill priority sector targets. We expect loan growth of 25% over FY12 and FY13.
Fee income to grow 20-22%, C/I ratio to improve gradually: Increased focus on
rural and semi urban areas, selectively accelerating growth in unsecured retail loans
and increased customer acquisition will lead to 20-22% fee income growth despite
pressure on third party distribution fees (15% of overall fee income). Increased volume
growth would compensate for an expected decline in insurance commission.
Asset quality one of the best in class: HDFC Bank has the best asset quality
metrics in the industry, with net NPA at 0.2% of loans, restructured loans of ~0.3%
and overall coverage (including general provisioning) in excess of 100%. Better risk
management practices and conservative provisioning policies have enabled the bank
to create adequate cushion to absorb negative shocks. Strong margins and prudent
provisioning policies resulted in superior risk-adjusted returns, leading to improvement
in RoA.
3QFY11 highlights
Key positives
3QFY11 margins were sequentially stable at 4.2%
led by a high CASA mix. Overall CASA deposits
grew 21% YoY and savings deposits grew 31% YoY.
Asset quality is among the best in industry with
coverage ratio improving to ~81% (v/s 78% quarter
earlier). Credit costs declined to 0.74% from 1.17%
a quarter earlier and 1.5% a year earlier. Decline in
credit cost was despite the bank creating a buffer
for MFI exposure (Rs1b of ad-hoc provisions).
Key negatives
The bank's CD ratio is on the high side at ~83%.
RBI has voiced concern over the high CD ratio in
the system.
Other highlights
Other income grew 17% QoQ and 25% YoY to
Rs11.3b on account strong growth in fee income
and higher forex income. Fee income growth was
strong at 9% QoQ and 22% YoY to Rs9.4b. On a
lower base, Forex income grew 40%+ QoQ and YoY
to Rs2.2b (partially helped by higher trading profits
in 3QFY11).
Excess general provisions is likely to get over by
4QFY11; thus, in FY12 standard asset provision is
likely to increase
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