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HDFC Bank (HDFCB)
Banks/Financial Institutions
Absolute upside; upgrade to ADD. We see limited concerns relating to the banks
business model and believe HDFC Bank is well positioned to deliver 28-30% earnings
growth for FY2011-13E. Higher provisions will drive earnings in FY2012E but we expect
the normalization of revenues to drive earnings in FY2013E. The stock is currently
trading at 3X FY2013E book and 16X EPS delivering RoEs of 18-19% levels. Upgrade to
ADD (from REDUCE) with an upside of 20% (no change in TP).
Limited concerns regarding near-term earnings growth; upgrade to ADD
We upgrade HDFC Bank to ADD (from REDUCE) earlier -- our upgrade is driven by the recent price
correction. We maintain our target price at Rs560 valuing the bank at 3.8X FY2013E book and
20X EPS. We expect the premium multiples to be maintained given the limited risk to its
retail/working capital loan book, consistent earnings growth and comfort on the liability franchise.
Our ADD rating is driven by the fact that we do see other banks offering better risk-reward tradeoffs
at current levels. We believe that HDFC Bank’s balance sheet is well positioned to deliver RoEs
in the range of 18-19% and 28% EPS growth for FY2011-13E. At current levels, the stock is
trading at 3X FY2013E book and 16X EPS and offers an upside of 20%.
Earnings growth driven by lower provisions; revenue growth to remain under pressure in FY2012E
We broadly maintain our earnings and expect 28% earnings CAGR for FY2011-13E. FY2012E
would see earnings growth driven by lower provisions with subdued revenue growth (18% levels)
on the back of margin moderation and lower fee income. However, FY2011 saw the bank making
higher provisions for (1) improving coverage ratio to 83% (from 78%) (2) Rs6.7 bn (50 bps of
loans) of floating provisions (3) contingent provisions for MFI, change in accounting for MTM
(client related) and certain CBoP related expenses.
Liability franchise to remain a key strength; continues to gain market share
We maintain our positive outlook on HDFC Bank’s business, especially its low-cost deposit
franchise, which remains strong at 49% levels, on the back of its strong branch franchise in critical
centers as well as the strength of its delivery platform. Of the 25 banks that we have used for our
analysis, we find HDFC Bank has been able to consistently improve its market share across the
years.
No near-term concern on asset quality beyond cyclical rise in slippages
We see limited concerns regarding the asset quality of the bank. Its retail book is seeing slippages
at historic low levels and is yet to show any serious stress signals. We expect slippages to rise
(driven from cyclical events) to 1.7% levels by FY2013E from 1.1% levels in FY2011 and broadly
factor higher provisions at 1.1% levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDFCB)
Banks/Financial Institutions
Absolute upside; upgrade to ADD. We see limited concerns relating to the banks
business model and believe HDFC Bank is well positioned to deliver 28-30% earnings
growth for FY2011-13E. Higher provisions will drive earnings in FY2012E but we expect
the normalization of revenues to drive earnings in FY2013E. The stock is currently
trading at 3X FY2013E book and 16X EPS delivering RoEs of 18-19% levels. Upgrade to
ADD (from REDUCE) with an upside of 20% (no change in TP).
Limited concerns regarding near-term earnings growth; upgrade to ADD
We upgrade HDFC Bank to ADD (from REDUCE) earlier -- our upgrade is driven by the recent price
correction. We maintain our target price at Rs560 valuing the bank at 3.8X FY2013E book and
20X EPS. We expect the premium multiples to be maintained given the limited risk to its
retail/working capital loan book, consistent earnings growth and comfort on the liability franchise.
Our ADD rating is driven by the fact that we do see other banks offering better risk-reward tradeoffs
at current levels. We believe that HDFC Bank’s balance sheet is well positioned to deliver RoEs
in the range of 18-19% and 28% EPS growth for FY2011-13E. At current levels, the stock is
trading at 3X FY2013E book and 16X EPS and offers an upside of 20%.
Earnings growth driven by lower provisions; revenue growth to remain under pressure in FY2012E
We broadly maintain our earnings and expect 28% earnings CAGR for FY2011-13E. FY2012E
would see earnings growth driven by lower provisions with subdued revenue growth (18% levels)
on the back of margin moderation and lower fee income. However, FY2011 saw the bank making
higher provisions for (1) improving coverage ratio to 83% (from 78%) (2) Rs6.7 bn (50 bps of
loans) of floating provisions (3) contingent provisions for MFI, change in accounting for MTM
(client related) and certain CBoP related expenses.
Liability franchise to remain a key strength; continues to gain market share
We maintain our positive outlook on HDFC Bank’s business, especially its low-cost deposit
franchise, which remains strong at 49% levels, on the back of its strong branch franchise in critical
centers as well as the strength of its delivery platform. Of the 25 banks that we have used for our
analysis, we find HDFC Bank has been able to consistently improve its market share across the
years.
No near-term concern on asset quality beyond cyclical rise in slippages
We see limited concerns regarding the asset quality of the bank. Its retail book is seeing slippages
at historic low levels and is yet to show any serious stress signals. We expect slippages to rise
(driven from cyclical events) to 1.7% levels by FY2013E from 1.1% levels in FY2011 and broadly
factor higher provisions at 1.1% levels.
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