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Action: Initiate with a Buy and a TP of INR570
We recommend buying HDFC Bank for its profit record, low-cost deposit
franchise which is back to its pre-CBOP levels, and strong retail lending
orientation which should help sustain earnings growth in the current
environment.
Robust liability franchise, highly liquid balance sheet, retail loan
orientation and a strong capital position
HDFC Bank’s strong CASA deposit base, which we expect to grow at 20%
for FY12-13F, should help shield core NIMs at 4.1% for FY12-13F. The
retail tilt in the loan book is a positive, in our view, as retail loans are
tracking strongly. A tier-1 capital of 11.4% (at 2Q FY12 excluding profits)
further strengthens the bank's ability to grow profitably.
The best asset-liability mix in the sector
HDFC Bank's focus on short-term corporate working capital loans with
minimum exposure to long-gestation projects backed by its sector-leading
CASA ratio should support high margins and maintain the profit track
record (30% y-y growth for the past 11 years). LLPs have ranged from
80bp-100bps over the past four quarters vs our conservative estimate of
105-120bps until FY13F. We still see 21% PAT growth in FY12F and 22%
in FY13F.
Valuation/catalyst: Trades at 3.3x FY13F ABV, ROE of 18.6%
HDFC Bank currently trades at 3.3x FY13F ABV of INR142.72 and 19.4x
FY13F EPS of INR24.71. At our TP, HDFCB trades at 4.0x FY13F ABV
and 23x FY13F EPS for an ROA of 1.52% and ROE of 18.6%.
Accelerated monetary policy easing is a potential catalyst.
Valuation
Initiate with BUY; TP of INR570
We expect HDFCB to grow its loan book at a CAGR of 25% over FY11-13F. We expect
this to drive a revenue and PAT CAGR of 20.9% and 21.6%, respectively, over this
period after factoring in a flat core margin of 4.1%. We expect HDFCB to record ROA
and ROE of 1.5% and 18.6%, respectively, for FY13F. HDFC Bank currently trades at
around its historical mean of 3.3x FY13F ABV of INR142.7. At our TP of IN570, the
implied P/ABV for FY13F is 3.8x.
We arrived at our target price of INR570 using a three-stage residual-income valuation
method that uses the following assumptions:
• We estimate loan book growth of 24.8% and 24.7% for FY12F and FY13F,
respectively.
• We expect fee income to grow at 22.6% in FY12F and by 25.1% in FY13F.
• We expect core NIM to stay flat at 4.1% in each of FY12F and FY13F, from 4.1% for
2QFY12.
• On the bad loan front, we are building in a GNPL ratio of 1.36% for FY12F and 1.64%
for FY13F. We expect a NNPL ratio of 0.26% for FY12F and 0.4% for FY13F with a
provision cover of 81% for FY12F and 76% for FY13F.
• HDFCB currently has a total capital adequacy ratio of 16.5% with about 11.4% in tier-1.
We are not building any dilution from capital issuance into our model.
• We expect the cost-income ratio to be at 48.2% in FY12F and 46.9% in FY13F,
compared with 48.1% in FY11.
• We expect a pro forma diluted EPS of INR20.25 for FY12F and INR24.71 for FY13F.
Our target price of INR570 implies 4.0x our FY13 adjusted BV of INR142.7 (adjusted
ROE of 18.6% for FY13F) and 23x our FY13F EPS of INR24.7.
Key catalysts: Accelerated monetary policy easing will be the key upside catalyst, in our
view.
Key risks: A longer-than-anticipated tight money policy, continued global risk aversion
and rapid deterioration of retail asset quality are the key risks to our thesis.
Residual income valuation
We have built the following assumptions into our three-stage residual-income model:
• We expect HDFCB to post a 22.7% CAGR for its average interest-earning assets over
FY11-14F. We expect this to be followed by a CAGR of 20.7% in FY15-20F and a
terminal growth rate of 4% beyond that.
• We have modelled for a net interest income CAGR of 21% over FY12F-20F and a noninterest
income CAGR of 22% over this period. Our discount rates range from 14.25%
(current cost of equity) for FY12F-16F, 12.25% for FY17F-21F and 10% terminal rate.
• Our book value estimates do not factor any equity dilution.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiate with a Buy and a TP of INR570
We recommend buying HDFC Bank for its profit record, low-cost deposit
franchise which is back to its pre-CBOP levels, and strong retail lending
orientation which should help sustain earnings growth in the current
environment.
Robust liability franchise, highly liquid balance sheet, retail loan
orientation and a strong capital position
HDFC Bank’s strong CASA deposit base, which we expect to grow at 20%
for FY12-13F, should help shield core NIMs at 4.1% for FY12-13F. The
retail tilt in the loan book is a positive, in our view, as retail loans are
tracking strongly. A tier-1 capital of 11.4% (at 2Q FY12 excluding profits)
further strengthens the bank's ability to grow profitably.
The best asset-liability mix in the sector
HDFC Bank's focus on short-term corporate working capital loans with
minimum exposure to long-gestation projects backed by its sector-leading
CASA ratio should support high margins and maintain the profit track
record (30% y-y growth for the past 11 years). LLPs have ranged from
80bp-100bps over the past four quarters vs our conservative estimate of
105-120bps until FY13F. We still see 21% PAT growth in FY12F and 22%
in FY13F.
Valuation/catalyst: Trades at 3.3x FY13F ABV, ROE of 18.6%
HDFC Bank currently trades at 3.3x FY13F ABV of INR142.72 and 19.4x
FY13F EPS of INR24.71. At our TP, HDFCB trades at 4.0x FY13F ABV
and 23x FY13F EPS for an ROA of 1.52% and ROE of 18.6%.
Accelerated monetary policy easing is a potential catalyst.
Valuation
Initiate with BUY; TP of INR570
We expect HDFCB to grow its loan book at a CAGR of 25% over FY11-13F. We expect
this to drive a revenue and PAT CAGR of 20.9% and 21.6%, respectively, over this
period after factoring in a flat core margin of 4.1%. We expect HDFCB to record ROA
and ROE of 1.5% and 18.6%, respectively, for FY13F. HDFC Bank currently trades at
around its historical mean of 3.3x FY13F ABV of INR142.7. At our TP of IN570, the
implied P/ABV for FY13F is 3.8x.
We arrived at our target price of INR570 using a three-stage residual-income valuation
method that uses the following assumptions:
• We estimate loan book growth of 24.8% and 24.7% for FY12F and FY13F,
respectively.
• We expect fee income to grow at 22.6% in FY12F and by 25.1% in FY13F.
• We expect core NIM to stay flat at 4.1% in each of FY12F and FY13F, from 4.1% for
2QFY12.
• On the bad loan front, we are building in a GNPL ratio of 1.36% for FY12F and 1.64%
for FY13F. We expect a NNPL ratio of 0.26% for FY12F and 0.4% for FY13F with a
provision cover of 81% for FY12F and 76% for FY13F.
• HDFCB currently has a total capital adequacy ratio of 16.5% with about 11.4% in tier-1.
We are not building any dilution from capital issuance into our model.
• We expect the cost-income ratio to be at 48.2% in FY12F and 46.9% in FY13F,
compared with 48.1% in FY11.
• We expect a pro forma diluted EPS of INR20.25 for FY12F and INR24.71 for FY13F.
Our target price of INR570 implies 4.0x our FY13 adjusted BV of INR142.7 (adjusted
ROE of 18.6% for FY13F) and 23x our FY13F EPS of INR24.7.
Key catalysts: Accelerated monetary policy easing will be the key upside catalyst, in our
view.
Key risks: A longer-than-anticipated tight money policy, continued global risk aversion
and rapid deterioration of retail asset quality are the key risks to our thesis.
Residual income valuation
We have built the following assumptions into our three-stage residual-income model:
• We expect HDFCB to post a 22.7% CAGR for its average interest-earning assets over
FY11-14F. We expect this to be followed by a CAGR of 20.7% in FY15-20F and a
terminal growth rate of 4% beyond that.
• We have modelled for a net interest income CAGR of 21% over FY12F-20F and a noninterest
income CAGR of 22% over this period. Our discount rates range from 14.25%
(current cost of equity) for FY12F-16F, 12.25% for FY17F-21F and 10% terminal rate.
• Our book value estimates do not factor any equity dilution.
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