HDFC Bank - The best one in this turbulent environment :: Macquarie Research,

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HDFC Bank
The best one in this turbulent
environment
Event
 Reiterate HDFC Bank as our top pick in the sector with a TP of Rs615.
Impact
 Least exposed to all stressed sectors: HDFC Bank has the lowest
exposure to sectors such as SMEs, infrastructure, etc., relative to its peers
and has a large retail portfolio for which the stresses are generally much
lower. We expect stressed assets as a percentage of net worth by FY13E to
be around 2% for HDFC Bank compared with 30% for its private sector peers
and 100% for PSU peers.
 Excellent NPL coverage: Unlike the PSUs, which include all kinds of
technical write-offs and report 70% NPL coverage, HDFC Bank has NPL
coverage of close to 130%, including floating provisions but excluding any
technical write-offs. In our view, the bank clearly is well-cushioned against any
adverse environment.
 Robust liabilities franchise: HDFC Bank’s sector-beating CASA ratio of
49% is clearly the best in the sector and is likely to protect NIMs.
Management has consistently delivered a margin of 4.2%, and we expect that
to continue.
 Key risks – sharp slowdown in loan growth and savings rate
deregulation: We expect HDFC Bank to deliver strong loan growth of 23–
25% over the next two years. HDFC Bank has consistently delivered loan
growth 500bp+ above the system loan growth, and any sharp slowdown could
see a de-rating of the stock. In addition, if savings rate de-regulation occurs,
the stock could be de-rated sharply.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs615.00 based on a Gordon growth methodology.
 Catalyst: Continued strong earnings growth.
Action and recommendation
 HDFC Bank is our top pick: We do not think the expensive multiple that the
market awards the stock is likely to change. Irrespective of the interest rate
cycle, asset quality cycle or economic cycle, HDFC Bank continues to
maintain its robust liabilities franchise and consistently reports strong earnings
growth. Maintain Outperform with TP of Rs615.

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