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Growth to remain 4-5% higher than industry
Buffer created in P&L for 25%+ earnings CAGR
HDFC Bank is best placed in the current environment, with (1) CASA ratio of ~49%, (2) strong growth
outlook of 25%+, (3) improving operating efficiency, and (4) lower credit costs, led by best-in-class
asset quality. The bank has effectively utilized excess profits (on the back of a benign retail credit
cycle) to create buffer. Pricing power in retail loans remains strong, which will help HDFCB to
maintain margins despite increase in cost of funds. We expect EPS CAGR of ~28% over FY11-13
against 25% over FY05-10.
Focused retail asset strategy to drive growth: HDFC Bank's (HDFCB) loan growth is expected to
remain strong due to (1) improving market share for auto loans, (2) growth from rural and semi-urban areas
for existing products, (3) continued buy-back of home loans from HDFC Ltd and (4) increased focus on
medium/long tenure corporate (especially infrastructure) loans.
Sharp increase in branch network; high CASA ratio a boon: HDFCB increased its branch network
by 2.3x from 760 in FY08 to 2,100+ as on June 2011. The increase in branch network has kept CASA ratio
higher than the industry average. However, led by sharp increase in term deposit rates, CASA ratio is
expected to moderate from 49% in 1QFY12 to 47%, but still among the best in the sector.
Asset quality impeccable; slippages running at historical low: FY11 slippage ratio of 1.1% was
lowest since FY05. Steady economic growth along with risk management practices led to further
improvement in asset quality. With net NPA at 0.2% of loans, restructured loans of ~0.4%, and overall
coverage (including general provisioning) in excess of 100%, HDFCB's asset quality remains impeccable.
Better risk management practices and conservative provisioning policies have enabled HDFCB to create
adequate P&L buffer to absorb negative shocks, if any, going forward.
Strong return ratios; Earnings CAGR of 25%+: Strong margins and prudent provisioning policies have
resulted in superior risk-adjusted returns. We expect RoAs to remain at 1.6%+ and RoE to improve to
20% by FY13 from 17% in FY11. While we are positive about HDFCB's business, valuations are rich.
Maintain Neutral.
Growth to remain higher than industry; focused branch expansion strategy
HDFCB's strong presence across the retail
products and increasing share of longer tenor
home loans (for PSL) will keep growth rates
strong. Even higher inflation will keep working
capital loan demand strong which is a key focus
area in corporate loans
In FY11, on a higher base, average retail savings
deposits grew 28% YoY, savings accounts/debit
cards increased ~18% to 11.6m and total
customer base increased to ~21m (vs 19m),
which demonstrates the effective execution of
strategies by HDFCB. Strong CASA ratio
remains a key strength of HDFCB.
Healthy economic growth, further improvement
in risk management and focused retail strategy
drove down HDFC Bank's slippage ratio to its
lowest level since FY05. The bank reported
slippage ratio of 1.1% for FY11 v/s 2.6% for
FY10.
Branch network has increased at ~35% CAGR
over FY05-11 to 1,986 and ATMs increased by
~30% to 5,471. 70% of its branches are outside
the top nine cities of India. The success of its
multi-channel banking is highlighted by 80% of
the transactions happening through non-bank
channels.
1QFY12: NIMs at 4%+ across the cycle; unlike industry facing least asset quality issues
Strong growth in high yielding loans, higher share
of CASA ratio and superior ALM is leading to
stable NIM across cycles. Higher NIMs also
leads to superior risk adjusted returns
Superior margins and focused fee income
strategies have kept the share of core income
higher in the overall income. Higher core income
provides comfort for higher credit cost.
Post merger with CBoP cost to income had
increased sharply however, sooner than
expected improvement in productivity of CBoP
branches has led to sharp fall in cost to income
ratio to 48-50% range. Management is targeting
to improve cost to income ratio further to 46-
48%
Lower incremental slippages are leading to
lower core credit cost. However, management
is effectively utilizing the excess profit to create
contingency and floating provisions to increase
the balance sheet strength.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth to remain 4-5% higher than industry
Buffer created in P&L for 25%+ earnings CAGR
HDFC Bank is best placed in the current environment, with (1) CASA ratio of ~49%, (2) strong growth
outlook of 25%+, (3) improving operating efficiency, and (4) lower credit costs, led by best-in-class
asset quality. The bank has effectively utilized excess profits (on the back of a benign retail credit
cycle) to create buffer. Pricing power in retail loans remains strong, which will help HDFCB to
maintain margins despite increase in cost of funds. We expect EPS CAGR of ~28% over FY11-13
against 25% over FY05-10.
Focused retail asset strategy to drive growth: HDFC Bank's (HDFCB) loan growth is expected to
remain strong due to (1) improving market share for auto loans, (2) growth from rural and semi-urban areas
for existing products, (3) continued buy-back of home loans from HDFC Ltd and (4) increased focus on
medium/long tenure corporate (especially infrastructure) loans.
Sharp increase in branch network; high CASA ratio a boon: HDFCB increased its branch network
by 2.3x from 760 in FY08 to 2,100+ as on June 2011. The increase in branch network has kept CASA ratio
higher than the industry average. However, led by sharp increase in term deposit rates, CASA ratio is
expected to moderate from 49% in 1QFY12 to 47%, but still among the best in the sector.
Asset quality impeccable; slippages running at historical low: FY11 slippage ratio of 1.1% was
lowest since FY05. Steady economic growth along with risk management practices led to further
improvement in asset quality. With net NPA at 0.2% of loans, restructured loans of ~0.4%, and overall
coverage (including general provisioning) in excess of 100%, HDFCB's asset quality remains impeccable.
Better risk management practices and conservative provisioning policies have enabled HDFCB to create
adequate P&L buffer to absorb negative shocks, if any, going forward.
Strong return ratios; Earnings CAGR of 25%+: Strong margins and prudent provisioning policies have
resulted in superior risk-adjusted returns. We expect RoAs to remain at 1.6%+ and RoE to improve to
20% by FY13 from 17% in FY11. While we are positive about HDFCB's business, valuations are rich.
Maintain Neutral.
Growth to remain higher than industry; focused branch expansion strategy
HDFCB's strong presence across the retail
products and increasing share of longer tenor
home loans (for PSL) will keep growth rates
strong. Even higher inflation will keep working
capital loan demand strong which is a key focus
area in corporate loans
In FY11, on a higher base, average retail savings
deposits grew 28% YoY, savings accounts/debit
cards increased ~18% to 11.6m and total
customer base increased to ~21m (vs 19m),
which demonstrates the effective execution of
strategies by HDFCB. Strong CASA ratio
remains a key strength of HDFCB.
Healthy economic growth, further improvement
in risk management and focused retail strategy
drove down HDFC Bank's slippage ratio to its
lowest level since FY05. The bank reported
slippage ratio of 1.1% for FY11 v/s 2.6% for
FY10.
Branch network has increased at ~35% CAGR
over FY05-11 to 1,986 and ATMs increased by
~30% to 5,471. 70% of its branches are outside
the top nine cities of India. The success of its
multi-channel banking is highlighted by 80% of
the transactions happening through non-bank
channels.
1QFY12: NIMs at 4%+ across the cycle; unlike industry facing least asset quality issues
Strong growth in high yielding loans, higher share
of CASA ratio and superior ALM is leading to
stable NIM across cycles. Higher NIMs also
leads to superior risk adjusted returns
Superior margins and focused fee income
strategies have kept the share of core income
higher in the overall income. Higher core income
provides comfort for higher credit cost.
Post merger with CBoP cost to income had
increased sharply however, sooner than
expected improvement in productivity of CBoP
branches has led to sharp fall in cost to income
ratio to 48-50% range. Management is targeting
to improve cost to income ratio further to 46-
48%
Lower incremental slippages are leading to
lower core credit cost. However, management
is effectively utilizing the excess profit to create
contingency and floating provisions to increase
the balance sheet strength.
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