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HDFC Bank (HDBK.BO)
2Q12 Results: Chugging Along Nicely
2Q12 profits up 32%; in-line with estimates — HDFC Bank’s 2Q12 profits were up
32% yoy – in-line with estimates. Qualitatively, it was a well rounded quarter with
comfort on growth, margins and asset quality. Key highlights were – a) Steady loan
growth at 21% yoy (+26% adjusted for one-offs); b) Healthy net interest margins at
410bps (slight moderation qoq); and c) Strong asset quality with low and stable credit
costs (80 bps annualized).
P&L: Slight moderation in NIMs, but fees healthy and credit costs low — HDBK’s
earnings growth remains strong despite slight NIM moderation and suggests
management has multiple levers to maintain its strong growth trajectory – a) NIMs were
down slightly (we expect stabilization here as incremental LDRs should rise in 2H); b)
Fee growth remained steady (20% yoy, though a bit more coming from forex related
fees than retail); c) MTM charges on the bond portfolio were low; d) Operating costs
remained stable (49% cost/income) despite high branch additions; and e) Credit costs
continued to be low at 80bps, no signs of asset quality deterioration.
Balance sheet: Healthy growth, strong deposits and superior quality — HDBK’s
balance sheet remains robust – a) Loan growth was healthy at 21% yoy (~26% yoy
adjusted for one-off short-term loans in 1H11); b) Deposit mix remains strong with 47%
CASA (slight moderation, but CASA growth high); c) Asset risks remain low –
management comfortable and not seeing early signs of deterioration yet – NPLs have
been almost flat yoy, slippages low (80-90bps annualized), stable credit costs and
reducing restructured assets; and d) Comfortable capital with Tier 1 at 11.4%. Overall,
another quarter with no surprises or let ups on growth and quality.
Best defensive play in the sector — HDBK’s stable and healthy growth-return
balance, low asset risks and high earnings visibility, makes it the best defensive play in
the sector and could continue to outperform near term. However, given strong
outperformance (+20% wrt Bankex) and premium valuations, we remain Neutral.
Summary — We name HDBK.BO a Least Preferred stock relative to our
fundamental analyst coverage for the next 3 Months, replacing LICH.BO, which we
last selected on 10 Aug 2011.
Furthermore, we name LICH.BO a Least Preferred stock relative to our fundamental
analyst coverage for the next 3 Months, replacing ADBK.BO (CIRA coverage
dropped on 9 September), which we last selected on 10 Aug 2011.
Rationale — We prefer Axis Bank to HDFC Bank and SBI to LIC Housing
Finance.
HDFC Bank
(HDBK.BO; Rs491.10; 2)
Catalyst and Thesis — While HDFC Bank has historically been a relative
beneficiary during an uncertain economic/asset quality environment, we remain
cautious on the back of limited absolute upsides on the stock given its premium
valuations.
LIC Housing Finance
(LICH.BO; Rs232.35; 3)
Catalyst and Thesis —We remain cautious on the back of increasing macro risks
from liquidity and inflation for LIC Housing. These could pressure its cost of funds
and incremental spreads and could moderate its loan growth. We expect valuations
to be capped at current levels.
HDFC Bank
Company description
HDFC Bank, which began operations in 1994, is 23%-owned by HDFC - India's
premier mortgage-finance institution. HDFC Bank has a network of more than 2,100
branches and more than 4,230 ATMs in 779 cities. HDFC Bank has had strong and
steady growth over the past 10 years and continues to grow at more than 25%.
HDFC Bank acquired Times Bank in 2000 and Centurion Bank of Punjab in 2008.
This has made HDBK the second-largest private sector bank in India, by a relatively
large margin.
Investment strategy
We rate HDFC Bank as Neutral with a target price of Rs500. HDBK has now been
through a couple of business cycles, and has distinguished itself consistently. While
we believe its relative value is most obvious in challenging times, its current
valuations are close to the peak they will likely generate in this cycle, and we expect
stock returns will be modest from current levels. We expect HDFC Bank to trade in
the 3-4x P/BV band over the longer term, the middle of its long-term trading band.
Any valuation upside from here would depend on a sustained ROE improvement
outlook (20%+), or a particularly favorable macro-environment, which we do not
foresee in the near term. We are positive on the bank's prospects and
management's ability to deliver, and believe it stands out relative to peers in the
currently challenging environment.
Valuation
Our target price of Rs500 is based on an EVA model, assuming a loan-loss ratio of
100bps, a long-term cost/income ratio of 42% and a spread of 310bps. We use the
EVA model as our standard valuation methodology for the India banking universe as
it dynamically adjusts the economic value of the business. As a secondary
benchmark, we apply 3.5x 1 year forward P/BV (Sep 2012) for a fair value of
Rs502. A 3.5x P/BV is a premium to almost all other Indian commercial banks, but is
justified, we believe, by HDBK's structurally higher margin, de-risked earnings and
balance sheet mix, as well as by gains in the consumer-lending franchise. This
multiple is in the middle of its PBV multiples in previous cycles.
Risks
The key downside and upside risks to our target price lie in: (1) any
negative/positive news on asset quality; (2) potential management changes; (3)
emergence of high quality and scale competitors; and (4) changing risk perceptions
of private banks. If any of these factors has a greater impact than we expect, the
stock could have difficulty achieving our target price.
LIC Housing Finance
Valuation
We value LIC Housing shares at Rs188 per share based on 1.6x one-year forward
P/BV (Sep'FY12E). LIC Housing's historical trading range is 0.5x - 2.5x one-year
forward P/BV and the stock is now trading at slightly above historical median
valuations. We believe a re-rating is warranted going forward given the company's
significant improvements in its market position, asset quality and return profile.
However, we also benchmark LIC Housing to other non-banking finance companies
in India and believe that LIC Housing should trade at a discount to peers due to its
lower return profile, weaker and inconsistent track record on asset quality and
significantly higher competition levels in the mortgage segment. Our target price is
also at a discount to our target multiples for private sector banks (2.0x – 3.0x oneyear
forward P/BV).
We also see a fair value basis for LIC Housing shares at Rs193 based on CIRA's
EVA model, which captures the long-term value of the business, and is a standard
valuation measure for the CIRA India Banking coverage. Our EVA model assumes:
a) risk-free rate of 8.0% in line with our assumptions for other banks; b) longer-term
loan loss provisions of 15bps given its low asset risk profile, c) loan spreads of
150bps which is lower than banking industry averages of 200bps, and d) long-term
fee income growth of 10%.
Risks
Key upside risks that could cause the stock to continue to trade above our target
price include: a) Stronger-than-expected economic and more specifically mortgage
financing growth, b) Reversal towards a lower interest rate / easy liquidity
environment which could support its net interest margins, c) Continued robust asset
quality environment in the mortgage segment, d) Any decrease in competitive
intensity, and e) Favourable regulatory changes.
AXIS Bank
(AXBK.BO; Rs1,131.20; 1)
Valuation
Our target price of Rs1,400 is based on an EVA model using the following key
assumptions: a) risk-free rate of 8.0%, b) long-term loan loss of 120bps per annum
(higher than sector averages, due to greater lumpiness in its loan book growth), and
c) long-term cost-to-income ratio of 42%. We prefer using an EVA-based valuation
benchmark to P/BV because EVA concentrates on the economic value creation of
the bank. We use P/BV as a secondary valuation methodology. Believing that Axis
should trade above government banks and in line with the highest multiples for
large private-sector banks given its ROE, we ascribe 2.5x 1yr Fwd P/BV to Axis,
equating to Rs1,454.
Risks
Key downside risks to achieving our target price include: 1) Greater-than-expected
asset quality pressures, as Axis has grown rapidly; 2) Sharp slowdown in rapidly
growing fee income; 3) The bank's large share of wholesale funding could be
exposed to tighter funding; 4) Dependence on treasury returns; 5) A governmentrelated
entity is a dominant shareholder in Axis; any disorderly sale would have an
impact on the stock.
State Bank of India
(SBI.BO; Rs1,919.10; 1)
Valuation
Our target price of Rs2,500 is based on our EVA model, in which we assume a riskfree
rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in line with the industry). Our target price for SBI includes a subsidiary
valuation of Rs540: Life Insurance at Rs98 per share, associate banks at 1.0x 1Yr
Fwd PBV (Rs346), value for SBI's Asset management business (Rs20, 4% of
assets) and incorporates capital markets subsidiary at Rs75 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs2,447 per share. In
this valuation, we benchmark the consolidated banking business off a 1.4x 1Yr Fwd
P/BV – slight premium to our benchmark valuation for its peers. We also add Rs194
per share for its non-banking subsidiary businesses as detailed earlier. We base our
target price on EVA, as we believe it better adjusts for the relatively dynamic cost of
capital and better captures the long-term value of the business.
Risks
Downside risks that could impede the stock from reaching our target price include:
(1) A sharp rise in interest rates; (2) Asset quality concerns given strong loan growth
and high interest rates; (3) Lack of liquidity or deposit growth; (4) Government
involvement could be contrary to the interests of minority shareholders; and (5) A
lack of capital to support growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDBK.BO)
2Q12 Results: Chugging Along Nicely
2Q12 profits up 32%; in-line with estimates — HDFC Bank’s 2Q12 profits were up
32% yoy – in-line with estimates. Qualitatively, it was a well rounded quarter with
comfort on growth, margins and asset quality. Key highlights were – a) Steady loan
growth at 21% yoy (+26% adjusted for one-offs); b) Healthy net interest margins at
410bps (slight moderation qoq); and c) Strong asset quality with low and stable credit
costs (80 bps annualized).
P&L: Slight moderation in NIMs, but fees healthy and credit costs low — HDBK’s
earnings growth remains strong despite slight NIM moderation and suggests
management has multiple levers to maintain its strong growth trajectory – a) NIMs were
down slightly (we expect stabilization here as incremental LDRs should rise in 2H); b)
Fee growth remained steady (20% yoy, though a bit more coming from forex related
fees than retail); c) MTM charges on the bond portfolio were low; d) Operating costs
remained stable (49% cost/income) despite high branch additions; and e) Credit costs
continued to be low at 80bps, no signs of asset quality deterioration.
Balance sheet: Healthy growth, strong deposits and superior quality — HDBK’s
balance sheet remains robust – a) Loan growth was healthy at 21% yoy (~26% yoy
adjusted for one-off short-term loans in 1H11); b) Deposit mix remains strong with 47%
CASA (slight moderation, but CASA growth high); c) Asset risks remain low –
management comfortable and not seeing early signs of deterioration yet – NPLs have
been almost flat yoy, slippages low (80-90bps annualized), stable credit costs and
reducing restructured assets; and d) Comfortable capital with Tier 1 at 11.4%. Overall,
another quarter with no surprises or let ups on growth and quality.
Best defensive play in the sector — HDBK’s stable and healthy growth-return
balance, low asset risks and high earnings visibility, makes it the best defensive play in
the sector and could continue to outperform near term. However, given strong
outperformance (+20% wrt Bankex) and premium valuations, we remain Neutral.
Summary — We name HDBK.BO a Least Preferred stock relative to our
fundamental analyst coverage for the next 3 Months, replacing LICH.BO, which we
last selected on 10 Aug 2011.
Furthermore, we name LICH.BO a Least Preferred stock relative to our fundamental
analyst coverage for the next 3 Months, replacing ADBK.BO (CIRA coverage
dropped on 9 September), which we last selected on 10 Aug 2011.
Rationale — We prefer Axis Bank to HDFC Bank and SBI to LIC Housing
Finance.
HDFC Bank
(HDBK.BO; Rs491.10; 2)
Catalyst and Thesis — While HDFC Bank has historically been a relative
beneficiary during an uncertain economic/asset quality environment, we remain
cautious on the back of limited absolute upsides on the stock given its premium
valuations.
LIC Housing Finance
(LICH.BO; Rs232.35; 3)
Catalyst and Thesis —We remain cautious on the back of increasing macro risks
from liquidity and inflation for LIC Housing. These could pressure its cost of funds
and incremental spreads and could moderate its loan growth. We expect valuations
to be capped at current levels.
HDFC Bank
Company description
HDFC Bank, which began operations in 1994, is 23%-owned by HDFC - India's
premier mortgage-finance institution. HDFC Bank has a network of more than 2,100
branches and more than 4,230 ATMs in 779 cities. HDFC Bank has had strong and
steady growth over the past 10 years and continues to grow at more than 25%.
HDFC Bank acquired Times Bank in 2000 and Centurion Bank of Punjab in 2008.
This has made HDBK the second-largest private sector bank in India, by a relatively
large margin.
Investment strategy
We rate HDFC Bank as Neutral with a target price of Rs500. HDBK has now been
through a couple of business cycles, and has distinguished itself consistently. While
we believe its relative value is most obvious in challenging times, its current
valuations are close to the peak they will likely generate in this cycle, and we expect
stock returns will be modest from current levels. We expect HDFC Bank to trade in
the 3-4x P/BV band over the longer term, the middle of its long-term trading band.
Any valuation upside from here would depend on a sustained ROE improvement
outlook (20%+), or a particularly favorable macro-environment, which we do not
foresee in the near term. We are positive on the bank's prospects and
management's ability to deliver, and believe it stands out relative to peers in the
currently challenging environment.
Valuation
Our target price of Rs500 is based on an EVA model, assuming a loan-loss ratio of
100bps, a long-term cost/income ratio of 42% and a spread of 310bps. We use the
EVA model as our standard valuation methodology for the India banking universe as
it dynamically adjusts the economic value of the business. As a secondary
benchmark, we apply 3.5x 1 year forward P/BV (Sep 2012) for a fair value of
Rs502. A 3.5x P/BV is a premium to almost all other Indian commercial banks, but is
justified, we believe, by HDBK's structurally higher margin, de-risked earnings and
balance sheet mix, as well as by gains in the consumer-lending franchise. This
multiple is in the middle of its PBV multiples in previous cycles.
Risks
The key downside and upside risks to our target price lie in: (1) any
negative/positive news on asset quality; (2) potential management changes; (3)
emergence of high quality and scale competitors; and (4) changing risk perceptions
of private banks. If any of these factors has a greater impact than we expect, the
stock could have difficulty achieving our target price.
LIC Housing Finance
Valuation
We value LIC Housing shares at Rs188 per share based on 1.6x one-year forward
P/BV (Sep'FY12E). LIC Housing's historical trading range is 0.5x - 2.5x one-year
forward P/BV and the stock is now trading at slightly above historical median
valuations. We believe a re-rating is warranted going forward given the company's
significant improvements in its market position, asset quality and return profile.
However, we also benchmark LIC Housing to other non-banking finance companies
in India and believe that LIC Housing should trade at a discount to peers due to its
lower return profile, weaker and inconsistent track record on asset quality and
significantly higher competition levels in the mortgage segment. Our target price is
also at a discount to our target multiples for private sector banks (2.0x – 3.0x oneyear
forward P/BV).
We also see a fair value basis for LIC Housing shares at Rs193 based on CIRA's
EVA model, which captures the long-term value of the business, and is a standard
valuation measure for the CIRA India Banking coverage. Our EVA model assumes:
a) risk-free rate of 8.0% in line with our assumptions for other banks; b) longer-term
loan loss provisions of 15bps given its low asset risk profile, c) loan spreads of
150bps which is lower than banking industry averages of 200bps, and d) long-term
fee income growth of 10%.
Risks
Key upside risks that could cause the stock to continue to trade above our target
price include: a) Stronger-than-expected economic and more specifically mortgage
financing growth, b) Reversal towards a lower interest rate / easy liquidity
environment which could support its net interest margins, c) Continued robust asset
quality environment in the mortgage segment, d) Any decrease in competitive
intensity, and e) Favourable regulatory changes.
AXIS Bank
(AXBK.BO; Rs1,131.20; 1)
Valuation
Our target price of Rs1,400 is based on an EVA model using the following key
assumptions: a) risk-free rate of 8.0%, b) long-term loan loss of 120bps per annum
(higher than sector averages, due to greater lumpiness in its loan book growth), and
c) long-term cost-to-income ratio of 42%. We prefer using an EVA-based valuation
benchmark to P/BV because EVA concentrates on the economic value creation of
the bank. We use P/BV as a secondary valuation methodology. Believing that Axis
should trade above government banks and in line with the highest multiples for
large private-sector banks given its ROE, we ascribe 2.5x 1yr Fwd P/BV to Axis,
equating to Rs1,454.
Risks
Key downside risks to achieving our target price include: 1) Greater-than-expected
asset quality pressures, as Axis has grown rapidly; 2) Sharp slowdown in rapidly
growing fee income; 3) The bank's large share of wholesale funding could be
exposed to tighter funding; 4) Dependence on treasury returns; 5) A governmentrelated
entity is a dominant shareholder in Axis; any disorderly sale would have an
impact on the stock.
State Bank of India
(SBI.BO; Rs1,919.10; 1)
Valuation
Our target price of Rs2,500 is based on our EVA model, in which we assume a riskfree
rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in line with the industry). Our target price for SBI includes a subsidiary
valuation of Rs540: Life Insurance at Rs98 per share, associate banks at 1.0x 1Yr
Fwd PBV (Rs346), value for SBI's Asset management business (Rs20, 4% of
assets) and incorporates capital markets subsidiary at Rs75 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs2,447 per share. In
this valuation, we benchmark the consolidated banking business off a 1.4x 1Yr Fwd
P/BV – slight premium to our benchmark valuation for its peers. We also add Rs194
per share for its non-banking subsidiary businesses as detailed earlier. We base our
target price on EVA, as we believe it better adjusts for the relatively dynamic cost of
capital and better captures the long-term value of the business.
Risks
Downside risks that could impede the stock from reaching our target price include:
(1) A sharp rise in interest rates; (2) Asset quality concerns given strong loan growth
and high interest rates; (3) Lack of liquidity or deposit growth; (4) Government
involvement could be contrary to the interests of minority shareholders; and (5) A
lack of capital to support growth.
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