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HDFC Bank (HDFCB)
Banks/Financial Institutions
Steady earnings; downgrade to REDUCE on expensive valuations, limited upside.
HDFC Bank reported another strong quarter of earnings growth on the back of steady
margins, lower provisions and lower operating expenses. We remain positive on the
bank from an earnings perspective given the headroom available on provisions, but we
have limited comfort on valuations. Over the last few months, HDFC Bank has seen
significant outperformance over its peers. Valuations at 3.5X FY2013E book and 18X
EPS are very expensive for RoEs in the range of 18-20% levels. We see limited upsides
from current levels and downgrade the stock to REDUCE from ADD.
Limited upsides despite stretching valuations multiples; downgrade to REDUCE
HDFC Bank declared another consistent quarter with healthy earnings growth of 34% yoy.
Balance sheet and P&L continues to remain in the best of health. For the quarter, loan growth was
at 21% yoy, reported margins were stable at 4.2% (calculated margins down 20 bps qoq) and
marginal increase in gross NPLs mainly from MFI and change in guidelines on investments.
While we continue to maintain a favorable outlook on the bank, we have limited comfort from a
valuation perspective. The bank has been one of the best performers among BFSI companies
across most time periods and currently trades at 3.5X FY2013E book and 18X EPS for RoEs in the
range of 18-20%. The bank has outperformed the markets by 4% over a 1-month period and
20% over the last one year. We believe that the recent outperformance is also account of
increasing macro concerns and higher interest rates – which would have lower impact on HDFC
Bank than other financial entities. With short-term interest rates coming off, we are getting
comfortable in select wholesale funded institutions which trade attractively on valuations. We do
not expect the outperformance for HDFC Bank to continue.
Valuations at peak levels; premium expanded in recent months compared to peers
We highlight that valuations for HDFC Bank are at peak levels compared to its historical valuation
band, despite the bank being larger in size and incremental growth not as strong as witnessed
previously. Further, the valuation premium over its peers, i.e. ICICI Bank and Axis Bank are at peak
levels and has increased over last 3-6 months. HDFC Bank is now trading at 70% premium to Axis
Bank (average of 40% since July 2009) and 90% premium to ICICI Bank (average premium of
70% since July 2009).
While we do not expect the valuation premium to expand further, the key risk to our
recommendation would be prolonged fear of asset quality risks in the sector, especially emerging
from infrastructure portfolio in PSU banks as well as cyclical effects emerging from interest
rates/economic cycle which would result in HDFC Bank being the preferred pick.
Marginal weakness on asset quality; coverage ratio healthy
Asset quality showed marginal weakness with gross NPLs increasing by 8% qoq to `18.3 bn
(1% of loans) as compared to `16.9 bn (1.1% of loans) in 4QFY11 due to exposure to MFI
and change in guidelines on investments (non-dividend paying preference shares). On the
other hand, net NPLs increased by qoq to `18.3 bn (1% of loans) as compared to `16.9 bn
(1.1% of loans) in 4QFY11. Provision coverage remains healthy at 83% levels. Management
indicated that slippages across retail products are not seeing any serious deterioration but
we would remain cautious as they are at historic low levels and the bank has seen an
increase in unsecured loans. The bank has made additional floating provisions of `2.5 bn
during the quarter. We are building loan loss provisions at 1% levels for FY2012-13E and
slippages to increase to 1.7% of loans from 1.1% in FY2011.
Higher base results in slower loan growth at 21% yoy; retail impressive
HDFC Bank’s loan book grew 21% yoy (11% qoq) to `1.77 tn as of June 2011 mainly due
to higher growth in retail loans. Corporate loans grew by 15% yoy (includes higher base
from lending to telecom companies in 1QFY11) while retail loans grew by 28% yoy and now
is about 47% of loan book (the bank has reclassified some of its retail exposure into
corporate loans - loans which are above `50 mn/borrower or `0.5 bn on turnover basis).
Retail loan growth was largely driven by unsecured loans (personal loans grew by 24% yoy
while credit cards grew by 37% yoy), commercial loans by 43% yoy, business banking grew
by 45% yoy. Mortgages grew 15% yoy only as the bank does not look to have bought any
loans from HDFC during the quarter. Unsecured loans to total retail loans have increased to
20% compared to 16% in December 2010.
CASA healthy at about 50% levels; current account grows slower at 7% yoy
Despite a strong rise in interest rates, CASA trends appear fairly comfortable. HDFC Bank
saw a decline of 360 bps qoq to 49% (period ending CASA) mainly due to slower growth in
current account deposits. However, overall average daily CASA declined only by 100 bps
qoq. Savings deposits grew impressively by 20% yoy (2% qoq) while current account grew
by 7% yoy (decline of 16% qoq). CASA ratio continues to grow impressively giving HDFC
Bank a structural advantage compared to peers in a high interest rate environment.
Margins maintained at 4.2%; CD ratio increases sharply by 640 bps qoq to 83%
NIMs for the quarter was at 4.2% (maintained sequentially) with rise in asset yields being
compensated by rise in deposits. CD ratio increased to 83% in July 2011 from 77% in
March 2011 as the bank raised tier-2 bonds resulting in lower dependence of deposits for
the quarter. NII grew by 19% yoy to `28.5 bn. Calculated margins have declined by about
20 bps as against reported flat margins due to certain charge-offs on loan origination and
uneven growth in loans during the quarter. Yield on advances (KS calc) has improved by 40
bps while cost of funds (KS calc) has increased sharply by 60 bps qoq to 5.5%. Investment
yields (KS calc) have remained flat for the quarter. We continue to build a decline of over 30
bps in NIMs for FY2011-13E.
Fee income performance weak at 16% yoy; exchange income impressive
Non-interest income increased by 13% yoy to `11.2 bn, with strong contribution forex
income overcoming a poor performance from core fee income. Core fee income grew by
16% yoy while growth in foreign exchange income was impressive at 34% yoy. Treasury
income (including revaluation of investments) reported a marginal loss of `413 mn
compared to `215 mn gains in 1QFY11. The bank has revised its fee income for the previous
year adjusting ATM expenses in non-staff expenses as against netting off from other income.
Given the higher share of income from bancassurance products, HDFC Bank is seeing
pressure in fee income growth with volumes from this segment not offsetting the revised
product pricing structures. We are factoring 22% CAGR for FY2011-13E.
Others key highlights
Operating costs have increased by 18% yoy, one of the slowest growths in the past five
quarters mainly due to lower staff expenses growth (17% yoy as against a run rate of
over 20% in the past few quarters). Cost-income ratio for the quarter was maintained at
49% qoq.
The bank has opened 125 branches and 527 ATMs in 1QFY11 taking the total branch
network to 2,111 branches and 5,998 ATMs, respectively. The management indicated
that it would add another 100 branches in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDFCB)
Banks/Financial Institutions
Steady earnings; downgrade to REDUCE on expensive valuations, limited upside.
HDFC Bank reported another strong quarter of earnings growth on the back of steady
margins, lower provisions and lower operating expenses. We remain positive on the
bank from an earnings perspective given the headroom available on provisions, but we
have limited comfort on valuations. Over the last few months, HDFC Bank has seen
significant outperformance over its peers. Valuations at 3.5X FY2013E book and 18X
EPS are very expensive for RoEs in the range of 18-20% levels. We see limited upsides
from current levels and downgrade the stock to REDUCE from ADD.
Limited upsides despite stretching valuations multiples; downgrade to REDUCE
HDFC Bank declared another consistent quarter with healthy earnings growth of 34% yoy.
Balance sheet and P&L continues to remain in the best of health. For the quarter, loan growth was
at 21% yoy, reported margins were stable at 4.2% (calculated margins down 20 bps qoq) and
marginal increase in gross NPLs mainly from MFI and change in guidelines on investments.
While we continue to maintain a favorable outlook on the bank, we have limited comfort from a
valuation perspective. The bank has been one of the best performers among BFSI companies
across most time periods and currently trades at 3.5X FY2013E book and 18X EPS for RoEs in the
range of 18-20%. The bank has outperformed the markets by 4% over a 1-month period and
20% over the last one year. We believe that the recent outperformance is also account of
increasing macro concerns and higher interest rates – which would have lower impact on HDFC
Bank than other financial entities. With short-term interest rates coming off, we are getting
comfortable in select wholesale funded institutions which trade attractively on valuations. We do
not expect the outperformance for HDFC Bank to continue.
Valuations at peak levels; premium expanded in recent months compared to peers
We highlight that valuations for HDFC Bank are at peak levels compared to its historical valuation
band, despite the bank being larger in size and incremental growth not as strong as witnessed
previously. Further, the valuation premium over its peers, i.e. ICICI Bank and Axis Bank are at peak
levels and has increased over last 3-6 months. HDFC Bank is now trading at 70% premium to Axis
Bank (average of 40% since July 2009) and 90% premium to ICICI Bank (average premium of
70% since July 2009).
While we do not expect the valuation premium to expand further, the key risk to our
recommendation would be prolonged fear of asset quality risks in the sector, especially emerging
from infrastructure portfolio in PSU banks as well as cyclical effects emerging from interest
rates/economic cycle which would result in HDFC Bank being the preferred pick.
Marginal weakness on asset quality; coverage ratio healthy
Asset quality showed marginal weakness with gross NPLs increasing by 8% qoq to `18.3 bn
(1% of loans) as compared to `16.9 bn (1.1% of loans) in 4QFY11 due to exposure to MFI
and change in guidelines on investments (non-dividend paying preference shares). On the
other hand, net NPLs increased by qoq to `18.3 bn (1% of loans) as compared to `16.9 bn
(1.1% of loans) in 4QFY11. Provision coverage remains healthy at 83% levels. Management
indicated that slippages across retail products are not seeing any serious deterioration but
we would remain cautious as they are at historic low levels and the bank has seen an
increase in unsecured loans. The bank has made additional floating provisions of `2.5 bn
during the quarter. We are building loan loss provisions at 1% levels for FY2012-13E and
slippages to increase to 1.7% of loans from 1.1% in FY2011.
Higher base results in slower loan growth at 21% yoy; retail impressive
HDFC Bank’s loan book grew 21% yoy (11% qoq) to `1.77 tn as of June 2011 mainly due
to higher growth in retail loans. Corporate loans grew by 15% yoy (includes higher base
from lending to telecom companies in 1QFY11) while retail loans grew by 28% yoy and now
is about 47% of loan book (the bank has reclassified some of its retail exposure into
corporate loans - loans which are above `50 mn/borrower or `0.5 bn on turnover basis).
Retail loan growth was largely driven by unsecured loans (personal loans grew by 24% yoy
while credit cards grew by 37% yoy), commercial loans by 43% yoy, business banking grew
by 45% yoy. Mortgages grew 15% yoy only as the bank does not look to have bought any
loans from HDFC during the quarter. Unsecured loans to total retail loans have increased to
20% compared to 16% in December 2010.
CASA healthy at about 50% levels; current account grows slower at 7% yoy
Despite a strong rise in interest rates, CASA trends appear fairly comfortable. HDFC Bank
saw a decline of 360 bps qoq to 49% (period ending CASA) mainly due to slower growth in
current account deposits. However, overall average daily CASA declined only by 100 bps
qoq. Savings deposits grew impressively by 20% yoy (2% qoq) while current account grew
by 7% yoy (decline of 16% qoq). CASA ratio continues to grow impressively giving HDFC
Bank a structural advantage compared to peers in a high interest rate environment.
Margins maintained at 4.2%; CD ratio increases sharply by 640 bps qoq to 83%
NIMs for the quarter was at 4.2% (maintained sequentially) with rise in asset yields being
compensated by rise in deposits. CD ratio increased to 83% in July 2011 from 77% in
March 2011 as the bank raised tier-2 bonds resulting in lower dependence of deposits for
the quarter. NII grew by 19% yoy to `28.5 bn. Calculated margins have declined by about
20 bps as against reported flat margins due to certain charge-offs on loan origination and
uneven growth in loans during the quarter. Yield on advances (KS calc) has improved by 40
bps while cost of funds (KS calc) has increased sharply by 60 bps qoq to 5.5%. Investment
yields (KS calc) have remained flat for the quarter. We continue to build a decline of over 30
bps in NIMs for FY2011-13E.
Fee income performance weak at 16% yoy; exchange income impressive
Non-interest income increased by 13% yoy to `11.2 bn, with strong contribution forex
income overcoming a poor performance from core fee income. Core fee income grew by
16% yoy while growth in foreign exchange income was impressive at 34% yoy. Treasury
income (including revaluation of investments) reported a marginal loss of `413 mn
compared to `215 mn gains in 1QFY11. The bank has revised its fee income for the previous
year adjusting ATM expenses in non-staff expenses as against netting off from other income.
Given the higher share of income from bancassurance products, HDFC Bank is seeing
pressure in fee income growth with volumes from this segment not offsetting the revised
product pricing structures. We are factoring 22% CAGR for FY2011-13E.
Others key highlights
Operating costs have increased by 18% yoy, one of the slowest growths in the past five
quarters mainly due to lower staff expenses growth (17% yoy as against a run rate of
over 20% in the past few quarters). Cost-income ratio for the quarter was maintained at
49% qoq.
The bank has opened 125 branches and 527 ATMs in 1QFY11 taking the total branch
network to 2,111 branches and 5,998 ATMs, respectively. The management indicated
that it would add another 100 branches in FY2012E.
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