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De-risking growth
HDFC Bank’s FY11 annual report underlines its ability to leverage on the
liability franchise to defend margins in a high rate environment and at the
same time de-risk the balance sheet. Bank is focussing on expanding in
rural belts that will also help to meet priority sector targets. Asset quality
is at its cyclical best and bank has improved coverage ratio. We expect
earnings to grow at 28% Cagr over FY11-14, led by loan growth. BUY.
Strong liability franchise supports margin defence…
During FY11, bank’s branch network expanded by 15% and over 80% of new
branches were in new areas. Branch expansion and improving productivity
have been key to its healthy CASA growth and faster growth in retail loans
(27% vs. 17% for sector). With a CASA ratio of 53%, balanced ALM and
lower share of wholesale deposits (33% of total) bank is better positioned to
defend market share and margins even as it picks quality assets. Rs6.7bn of
floating provision in FY11 is ~2x impact of 50bps rise in savings deposit costs.
… and de-risking the balance sheet
During FY11, bank’s loans grew by 27%, but more importantly it reduced the
risk profile of exposures. Not only was RWA/ asset ratio stable at 70% (much
lower than other banks), share of exposures to real estate, capital market
and unsecured loans declined & growth in off-balance sheet exposures lagged
loan growth. Exposures to infrastructure and metal sectors grew at a fast
pace (+100%) and overseas loans (mostly to Indians) grew by 135%.
Focus on rural lending will help to meet priority sector targets
Alike other private sector banks, HDFC Bank also had shortfall in meeting its
priority sector targets forcing it to increase investment in low-yielding assets
by ~70%. It has been expanding in rural belts that reflects in 56% growth in
agri-loans in FY11. Further expansion will enable it to meet priority sector
norms and mobilise deposits. It invested ~Rs4bn in HDB Financial Services,
its NBFC subsidiary that focuses on lower-end of the customer segment.
Asset quality at cyclical best; we expect rise from current levels
Asset quality trends were impressive with delinquency ratio falling to 1.1% of
last year’s loans- lowest in 6 years. Lower slippages and provisioning in retail
segment reflect in rise in segment’s pre-tax ROA to 3.8% (from 2.5% in
FY10), but NPL ratio of corporate loans rose. Slippages may rise from current
levels, but high coverage ratio will help to keep provision stable.
Maintain BUY
We expect earnings to grow at 28% Cagr over FY11-14, led by loan growth.
Quality of growth will support premium valuations. Our target price is based
on 3.7x FY13 adjusted PB. Maintain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
De-risking growth
HDFC Bank’s FY11 annual report underlines its ability to leverage on the
liability franchise to defend margins in a high rate environment and at the
same time de-risk the balance sheet. Bank is focussing on expanding in
rural belts that will also help to meet priority sector targets. Asset quality
is at its cyclical best and bank has improved coverage ratio. We expect
earnings to grow at 28% Cagr over FY11-14, led by loan growth. BUY.
Strong liability franchise supports margin defence…
During FY11, bank’s branch network expanded by 15% and over 80% of new
branches were in new areas. Branch expansion and improving productivity
have been key to its healthy CASA growth and faster growth in retail loans
(27% vs. 17% for sector). With a CASA ratio of 53%, balanced ALM and
lower share of wholesale deposits (33% of total) bank is better positioned to
defend market share and margins even as it picks quality assets. Rs6.7bn of
floating provision in FY11 is ~2x impact of 50bps rise in savings deposit costs.
… and de-risking the balance sheet
During FY11, bank’s loans grew by 27%, but more importantly it reduced the
risk profile of exposures. Not only was RWA/ asset ratio stable at 70% (much
lower than other banks), share of exposures to real estate, capital market
and unsecured loans declined & growth in off-balance sheet exposures lagged
loan growth. Exposures to infrastructure and metal sectors grew at a fast
pace (+100%) and overseas loans (mostly to Indians) grew by 135%.
Focus on rural lending will help to meet priority sector targets
Alike other private sector banks, HDFC Bank also had shortfall in meeting its
priority sector targets forcing it to increase investment in low-yielding assets
by ~70%. It has been expanding in rural belts that reflects in 56% growth in
agri-loans in FY11. Further expansion will enable it to meet priority sector
norms and mobilise deposits. It invested ~Rs4bn in HDB Financial Services,
its NBFC subsidiary that focuses on lower-end of the customer segment.
Asset quality at cyclical best; we expect rise from current levels
Asset quality trends were impressive with delinquency ratio falling to 1.1% of
last year’s loans- lowest in 6 years. Lower slippages and provisioning in retail
segment reflect in rise in segment’s pre-tax ROA to 3.8% (from 2.5% in
FY10), but NPL ratio of corporate loans rose. Slippages may rise from current
levels, but high coverage ratio will help to keep provision stable.
Maintain BUY
We expect earnings to grow at 28% Cagr over FY11-14, led by loan growth.
Quality of growth will support premium valuations. Our target price is based
on 3.7x FY13 adjusted PB. Maintain BUY.
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