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HDFC Bank
Reuters: HDBK.BO Bloomberg: HDFCB IN Exchange: BSE Ticker: HDBK
Strongest in the sector in uncertain times
Tend to outperform when sector's NIMs & credit quality seem at risk
We maintain Buy on HDFC Bank with a target price of INR2,610 and re-iterate its
status as the top pick in the sector. The bank tends to perform better in times of
difficult interest rates and concerns of credit quality deterioration, because of its
track record on maintaining margins within a narrow band and keeping asset
quality under check. These we believe could be overriding features of FY12, an
environment that could make the bank stand out even more.
Management feels growth might moderate, but spike in credit costs unlikely
The management indicated that retail loan demand may moderate from the high of
FY11, but expect corporate loan demand for them to remain strong, contrary to
perception. They believe that we have covered most of the ground in the rising
rate cycle – deposit rates may peak out after another 25-50bps increase. They do
not feel that savings account rate deregulation would lead to sharp rise in rates, as
is widely feared. While they warn that FY11 credit cost could have been a cyclical
low, it does not mean it will necessarily rise in FY12.
Strong CASA to buffer NIM, operating cost ratios could improve
We believe that the bank can comfortably grow its loan book by ~25% in FY12,
with healthy loan demand from corporates and its pre-eminent position in retail.
NIM should be buffered by a low-cost deposit ratio of 50%+. The bank has shown
remarkable consistency on credit quality even in times of higher interest rates -
they came out of the sectoral problems with unsecured loans the fastest. We
expect this to continue in FY12. Operating cost ratios could marginally improve as
the bank is unlikely to expand its network as much as it did in the last two years.
1-stage Gordon growth valuation; already elevated margins the key risk
We value HDFC Bank on a premium to the single-stage Gordon growth model.
Assumptions for the single-stage model: sustainable RoE = 18.0%, FY12E RoE
=19.0%, cost of equity of 13.2% (using DB estimates), perpetual growth = 5%.
Key risks are a reduction in the bank’s strong sources of low-cost deposits due to
lower float funds or slowdown in branch expansion, which would hurt funding
costs, and rising delinquencies from a large, unsecured retail loan book
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank
Reuters: HDBK.BO Bloomberg: HDFCB IN Exchange: BSE Ticker: HDBK
Strongest in the sector in uncertain times
Tend to outperform when sector's NIMs & credit quality seem at risk
We maintain Buy on HDFC Bank with a target price of INR2,610 and re-iterate its
status as the top pick in the sector. The bank tends to perform better in times of
difficult interest rates and concerns of credit quality deterioration, because of its
track record on maintaining margins within a narrow band and keeping asset
quality under check. These we believe could be overriding features of FY12, an
environment that could make the bank stand out even more.
Management feels growth might moderate, but spike in credit costs unlikely
The management indicated that retail loan demand may moderate from the high of
FY11, but expect corporate loan demand for them to remain strong, contrary to
perception. They believe that we have covered most of the ground in the rising
rate cycle – deposit rates may peak out after another 25-50bps increase. They do
not feel that savings account rate deregulation would lead to sharp rise in rates, as
is widely feared. While they warn that FY11 credit cost could have been a cyclical
low, it does not mean it will necessarily rise in FY12.
Strong CASA to buffer NIM, operating cost ratios could improve
We believe that the bank can comfortably grow its loan book by ~25% in FY12,
with healthy loan demand from corporates and its pre-eminent position in retail.
NIM should be buffered by a low-cost deposit ratio of 50%+. The bank has shown
remarkable consistency on credit quality even in times of higher interest rates -
they came out of the sectoral problems with unsecured loans the fastest. We
expect this to continue in FY12. Operating cost ratios could marginally improve as
the bank is unlikely to expand its network as much as it did in the last two years.
1-stage Gordon growth valuation; already elevated margins the key risk
We value HDFC Bank on a premium to the single-stage Gordon growth model.
Assumptions for the single-stage model: sustainable RoE = 18.0%, FY12E RoE
=19.0%, cost of equity of 13.2% (using DB estimates), perpetual growth = 5%.
Key risks are a reduction in the bank’s strong sources of low-cost deposits due to
lower float funds or slowdown in branch expansion, which would hurt funding
costs, and rising delinquencies from a large, unsecured retail loan book
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