HDFC: Easing competition During 1QFY12, ::CLSA

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Easing competition
During 1QFY12, HDFC reported net profit of Rs8.4bn, up 22% YoY. HDFC
is benefiting from an easing competitive environment as SBI, one of its
key competitors, has raised interest rates on mortgage and this is helping
HDFC to win market share. HDFC will continue to grow faster than banks,
but we expect some moderation in growth due to securitisation of loans.
Spreads were stable at 2.3% in spite of rise in cost of wholesale funds,
fee growth was strong and asset quality was stable. Over FY11-14, we
expect 20% Cagr in profits supported by 19% Cagr in loans. BUY.
Competitive environment has eased
During 1QFY12, HDFC reported a pick-up in its lending activity supported by
easing competitive intensity in mortgage financing. Over past few months
SBI, one of its key competitors, has raised mortgage rates that has helped
HDFC to win some market share. Last year HDFC’s mortgage rates were
about 25-50bps higher than SBI’s, but now its rate is at ~25bps discount. As
a result, HDFC’s loan growth of 22% has been faster than banking sector’s
growth of 17%. Loan growth is being led by smaller towns that have offset
some moderation in larger cities.
Pick-up in loan growth and stable spreads
During 1QFY12, HDFC reported 22% YoY growth in loans as well as uptick in
the approval and disbursal growth rate. We expect 20% loan growth for FY12
and part of the moderation would be due to securitisation of loans to HDFC
Bank (nil in 1QFY12). In spite of rise in cost of wholesale funds over past 12
months, HDFC is able to maintain spreads due to (1) balanced ALM and (2)
hike in lending rates. Easing competitive environment will further help HDFC.
Strong fee growth and stable asset quality
The growth in fee income was also strong at 145% due to a combination of
(1) low base and (2) better pricing environment that allowed HDFC to charge
higher fees from corporate and retail clients. Asset quality trends continue to
improve and gross NPL ratio was at 83bps and coverage ratio at 114%. HDFC
is also seeing operating efficiencies and C/I ratio declined by 50bps to 8.8%.
Maintain BUY
We expect HDFC to report 19% Cagr in loans over FY11-14 and this will drive
20% Cagr in net profit. EPS growth will be lower at 18% due to the warrant
conversion in August 2012. We maintain BUY on HDFC with a target price of
Rs800, based on sum of parts valuation.