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Summary
HDFC Bank Ltd. (HDFCB) has been a top performer compared to peers due to its consistent performance over last several years. With 30% profit growth, a maintained margin of 4%+ and superior risk management, the bank has been delivering RoAs of ~1.5% from last several quarters. The consistent performance over the years justifies the premium valuation at which HDFCB trades compared to peers. In the current macroeconomic environment, we believe that HDFCB will be a key participant in the flight to safety among Indian heavy weights. We estimate the bank’s earnings growth to be at 20% CAGR during FY11-13E, lower than its trademark ~30% growth. We estimate a lower earnings growth factoring in lower credit off take and a 15bps contraction in margins as worst case scenarios which can unfold in the event of further increase in saving rates and competition from domestic players. However, due to its consistent performance over the years, the bank will remain an all season’s pick and will be able to maintain its supremacy over peers. Further, during the season of multiple de-rating and estimate cuts historically, HDFCB has shown less severe impact amongst peers. We believe the trend will continue due to its flawless asset quality and sustainability of profitability. At CMP of Rs484, HDFCB is trading at 3.3x of its FY13E Book value of Rs148. We initiate coverage with an HOLD rating and price target of Rs503 (3.4x FY13E BV). Key Highlights
Liability franchisee holds the key
One of the major determinants in the performance of HDFCB is its high CASA ratio of ~50%, which benefits it with the lowest cost of funds compared to peers. Further, with an increase in savings rate, we expect the cost of funds will increase for the bank but will remain lowest amongst peers. With ~2,000 branches and focus on retail banking, we expect the CASA Ratio to remain in the range of 50%-52%. However, the key risk to our assumption of CASA ratio remains in the uncertainty regarding deregulation of saving rates and a resultant increase in competition to garner deposits by peers. This in turn could further increase the cost of funds for the entire sector.
Flawless asset quality
Despite having the highest exposure to retail sector, HDFCB has maintained its assets quality. With proper risk management practices in place, the bank was able to record a GNPA ratio of 1.1% and NNPA ratio of 0.2% in FY11. Further, the bank has the lowest restructured assets (0.4% of total advances) amongst peers. NPA coverage ratio based on specific provision was at 82.5% as on FY11.
Valuation
We estimate a book value of Rs127 for FY12E and Rs148 for FY13E. At CMP, the bank is trading at 3.8x/3.3x of its FY12E/FY13E Book value. With high CASA, balanced loan book and superior asset quality, we believe that HDFCB is the best conservative play in the current volatile environment. We value the bank at its 6 year historical P/BV multiple of 3.4x and arrive at target price of Rs503. Initiate coverage with HOLD.
HDFCB, one of the private sector banks in India, was formed in 1994-95 along with Axis and ICICI Bank. The key hallmark from 1994-95 for HDFCB is its consistent performance, as a result of which the bank trades at a premium to its peers. Consistent high margins among peers, lower levels of NPAs and high provision coverage gives an edge to HDFCB over its peers. HDFCB has also grown inorganically during its journey from 1994-95 acquiring times bank in the year 2000 and Centurion Bank of Punjab (CBoP) in 2008. The acquisition added significant value in terms of increased branch network, geographic reach and customer base. Investment Rationale
Balanced loan book
HDFCB has a diversified loan book with equal proportion to Retail and Corporate. Historically, the share of Retail has remained higher compared to Corporate segment. Total exposure of only 16% towards top twenty lenders shows the diversified nature of the book. Further, 43.7% of the loan book has a maturity of less than 1 year, which gives the bank an edge in the rising interest rate scenario.
Among Corporate, ~70% is working capital/short term loans and ~30% consists of loans in more than 1 year category. Recently the bank has also started lending in the Infrastructure space, currently ~1% of the total loan book. However, the bank has maintained its cautious stand on lending towards infrastructure segment and will continue to grow slow in this space. In the retail segment, the bank has a wide range of products. However, 37.6% of the retail loan consists of Cars, CVC and Two wheelers.
Outlook and Valuation We have estimated 15bps decline in margins factoring in increased savings rate and lower credit off take in FY12E due to prevailing industry wide uncertainty regarding growth. Thus, we estimate a 19% CAGR in NII (Net interest income) during FY11-13E. We have factored a 30bps increase in credit cost compared to FY11 for the bank and estimate PAT growth of 18.9% in FY12E and 21.3% in FY13E. With slightly lower profit growth due to margin compression, RoA would at best marginally fall by 5bps-7bps and will remain in the range of 1.5%. DuPont comparison of HDFCB with its peer group highlights the following: Higher margins compared to peers, flawless assets quality and consistency that together remain a key for supremacy of this bank over its peers. While higher operating expenses and employee to assets ratio negate impact of higher margins, asset quality compared to peers provides a comfort to HDFCB. With best liability franchisee and lower level of NPAs we believe that HDFCB is the best conservative play in the current environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Summary
HDFC Bank Ltd. (HDFCB) has been a top performer compared to peers due to its consistent performance over last several years. With 30% profit growth, a maintained margin of 4%+ and superior risk management, the bank has been delivering RoAs of ~1.5% from last several quarters. The consistent performance over the years justifies the premium valuation at which HDFCB trades compared to peers. In the current macroeconomic environment, we believe that HDFCB will be a key participant in the flight to safety among Indian heavy weights. We estimate the bank’s earnings growth to be at 20% CAGR during FY11-13E, lower than its trademark ~30% growth. We estimate a lower earnings growth factoring in lower credit off take and a 15bps contraction in margins as worst case scenarios which can unfold in the event of further increase in saving rates and competition from domestic players. However, due to its consistent performance over the years, the bank will remain an all season’s pick and will be able to maintain its supremacy over peers. Further, during the season of multiple de-rating and estimate cuts historically, HDFCB has shown less severe impact amongst peers. We believe the trend will continue due to its flawless asset quality and sustainability of profitability. At CMP of Rs484, HDFCB is trading at 3.3x of its FY13E Book value of Rs148. We initiate coverage with an HOLD rating and price target of Rs503 (3.4x FY13E BV). Key Highlights
Liability franchisee holds the key
One of the major determinants in the performance of HDFCB is its high CASA ratio of ~50%, which benefits it with the lowest cost of funds compared to peers. Further, with an increase in savings rate, we expect the cost of funds will increase for the bank but will remain lowest amongst peers. With ~2,000 branches and focus on retail banking, we expect the CASA Ratio to remain in the range of 50%-52%. However, the key risk to our assumption of CASA ratio remains in the uncertainty regarding deregulation of saving rates and a resultant increase in competition to garner deposits by peers. This in turn could further increase the cost of funds for the entire sector.
Flawless asset quality
Despite having the highest exposure to retail sector, HDFCB has maintained its assets quality. With proper risk management practices in place, the bank was able to record a GNPA ratio of 1.1% and NNPA ratio of 0.2% in FY11. Further, the bank has the lowest restructured assets (0.4% of total advances) amongst peers. NPA coverage ratio based on specific provision was at 82.5% as on FY11.
Valuation
We estimate a book value of Rs127 for FY12E and Rs148 for FY13E. At CMP, the bank is trading at 3.8x/3.3x of its FY12E/FY13E Book value. With high CASA, balanced loan book and superior asset quality, we believe that HDFCB is the best conservative play in the current volatile environment. We value the bank at its 6 year historical P/BV multiple of 3.4x and arrive at target price of Rs503. Initiate coverage with HOLD.
HDFCB, one of the private sector banks in India, was formed in 1994-95 along with Axis and ICICI Bank. The key hallmark from 1994-95 for HDFCB is its consistent performance, as a result of which the bank trades at a premium to its peers. Consistent high margins among peers, lower levels of NPAs and high provision coverage gives an edge to HDFCB over its peers. HDFCB has also grown inorganically during its journey from 1994-95 acquiring times bank in the year 2000 and Centurion Bank of Punjab (CBoP) in 2008. The acquisition added significant value in terms of increased branch network, geographic reach and customer base. Investment Rationale
Balanced loan book
HDFCB has a diversified loan book with equal proportion to Retail and Corporate. Historically, the share of Retail has remained higher compared to Corporate segment. Total exposure of only 16% towards top twenty lenders shows the diversified nature of the book. Further, 43.7% of the loan book has a maturity of less than 1 year, which gives the bank an edge in the rising interest rate scenario.
Among Corporate, ~70% is working capital/short term loans and ~30% consists of loans in more than 1 year category. Recently the bank has also started lending in the Infrastructure space, currently ~1% of the total loan book. However, the bank has maintained its cautious stand on lending towards infrastructure segment and will continue to grow slow in this space. In the retail segment, the bank has a wide range of products. However, 37.6% of the retail loan consists of Cars, CVC and Two wheelers.
Outlook and Valuation We have estimated 15bps decline in margins factoring in increased savings rate and lower credit off take in FY12E due to prevailing industry wide uncertainty regarding growth. Thus, we estimate a 19% CAGR in NII (Net interest income) during FY11-13E. We have factored a 30bps increase in credit cost compared to FY11 for the bank and estimate PAT growth of 18.9% in FY12E and 21.3% in FY13E. With slightly lower profit growth due to margin compression, RoA would at best marginally fall by 5bps-7bps and will remain in the range of 1.5%. DuPont comparison of HDFCB with its peer group highlights the following: Higher margins compared to peers, flawless assets quality and consistency that together remain a key for supremacy of this bank over its peers. While higher operating expenses and employee to assets ratio negate impact of higher margins, asset quality compared to peers provides a comfort to HDFCB. With best liability franchisee and lower level of NPAs we believe that HDFCB is the best conservative play in the current environment.
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