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We upgrade HDFC Bank to OUTPERFORM from
IN-LINE.
HDFC Bank stands out as a defensive play in a tough
macro environment. We expect it to continue to deliver
strong earnings growth of 30%/32% in FY12/13E.
Strong loan growth of 25%, 10bps decline in NIMs and
low credit cost and lower cost ratios likely to be the key
earnings drivers in FY12E. Strong earnings growth with
high earnings visibility and higher-than-sector RoA of
1.6% are the key rating drivers for the stock.
We tweak our price target as we build in 10bps lower
sustainable credit cost. We raise price target to Rs2,625
from Rs2,575. We value it at target P/BV of 4.2x.
Impressive asset quality in a tough macro. HDFC Bank
improved upon its already established track record of good
asset quality by reporting all-time low slippages and all-time
high floating provisions in FY11. HDFC Bank reported
slippages of 1.1% in FY11, the lowest in the banking sector
and the lowest in its own history since FY05. Net NPLs for
HDFC Bank are Rs2.9bn and the bank holds floating
provisions of Rs7.3bn. After netting off floating provisions
net NPLs are negative, a strong and unique position in the
sector.
Expect strong earnings growth. We expect HDFC Bank
to deliver strong earnings growth of 30% in FY12E and 32%
in FY11E on the back of resilient NIMs, lower cost ratios
and lower credit costs.
Now OUTPERFORM. We upgrade our rating on the stock
to OUTPERFORM with price target of Rs2,625. We see
better earnings clarity for HDFC Bank than any other bank.
High visibility of earnings, strong earnings growth, a huge
buffer of excess floating provisions and low risk profile of
loans will be the key earnings drivers. Our price target is
based on 4.2x FY12E P/BV. The stock currently trades at
3.6x FY12E P/BV. We expect the stock to continue to trade
at premium valuations given high visibility of earnings in an
uncertain macro environment.
Fig 1 – Price target derivation
% Target
Net int inc/assets 4.2
Non-int inc/assets 1.7
Non-oper profits /assets 0.1
Opex / assets 2.5
Oper profits/assets 3.5
Provisions/assets 0.6
(1-tax rate) 0.7
Minorities/assets
RoA 1.9
Assets/equity (x) 14.0
RoE 27.3
Risk free rate 7.5
Risk premium 5.0
Beta 1.0
CoE 12.6
g 8
Target P/BV (x) 4.2
BVPS, Rs. 630
Target price of standalone bank, Rs 2,623
Target price, rounded off 2,625
Source: Standard Chartered Research estimates
Key risks: Slower than expected loan growth and deregulation of savings rate are key risks to
our earnings and target price for HDFC Bank.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We upgrade HDFC Bank to OUTPERFORM from
IN-LINE.
HDFC Bank stands out as a defensive play in a tough
macro environment. We expect it to continue to deliver
strong earnings growth of 30%/32% in FY12/13E.
Strong loan growth of 25%, 10bps decline in NIMs and
low credit cost and lower cost ratios likely to be the key
earnings drivers in FY12E. Strong earnings growth with
high earnings visibility and higher-than-sector RoA of
1.6% are the key rating drivers for the stock.
We tweak our price target as we build in 10bps lower
sustainable credit cost. We raise price target to Rs2,625
from Rs2,575. We value it at target P/BV of 4.2x.
Impressive asset quality in a tough macro. HDFC Bank
improved upon its already established track record of good
asset quality by reporting all-time low slippages and all-time
high floating provisions in FY11. HDFC Bank reported
slippages of 1.1% in FY11, the lowest in the banking sector
and the lowest in its own history since FY05. Net NPLs for
HDFC Bank are Rs2.9bn and the bank holds floating
provisions of Rs7.3bn. After netting off floating provisions
net NPLs are negative, a strong and unique position in the
sector.
Expect strong earnings growth. We expect HDFC Bank
to deliver strong earnings growth of 30% in FY12E and 32%
in FY11E on the back of resilient NIMs, lower cost ratios
and lower credit costs.
Now OUTPERFORM. We upgrade our rating on the stock
to OUTPERFORM with price target of Rs2,625. We see
better earnings clarity for HDFC Bank than any other bank.
High visibility of earnings, strong earnings growth, a huge
buffer of excess floating provisions and low risk profile of
loans will be the key earnings drivers. Our price target is
based on 4.2x FY12E P/BV. The stock currently trades at
3.6x FY12E P/BV. We expect the stock to continue to trade
at premium valuations given high visibility of earnings in an
uncertain macro environment.
Fig 1 – Price target derivation
% Target
Net int inc/assets 4.2
Non-int inc/assets 1.7
Non-oper profits /assets 0.1
Opex / assets 2.5
Oper profits/assets 3.5
Provisions/assets 0.6
(1-tax rate) 0.7
Minorities/assets
RoA 1.9
Assets/equity (x) 14.0
RoE 27.3
Risk free rate 7.5
Risk premium 5.0
Beta 1.0
CoE 12.6
g 8
Target P/BV (x) 4.2
BVPS, Rs. 630
Target price of standalone bank, Rs 2,623
Target price, rounded off 2,625
Source: Standard Chartered Research estimates
Key risks: Slower than expected loan growth and deregulation of savings rate are key risks to
our earnings and target price for HDFC Bank.
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