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HDFC Bank (HDFCB)
Banks/Financial Institutions
Revenue under pressure despite consistent earnings growth. HDFC Bank’s
earnings were driven by lower provisions on the back of stable asset quality. Revenue
growth was under pressure due to marginal decline in NIM and weak fee income------a
trend that will likely extend over the next few quarters. While we like the consistency of
earnings growth reported, we have lower valuation comfort in comparison to peers.
Valuations at 3.3X FY2013E book and 18X EPS for RoEs at about 18-20% levels and
28% earnings growth for FY2011-13E are relatively expensive. Maintain ADD with TP
of `560.
Lower provisions offset the revenue growth pressure; asset quality stable
HDFC Bank declared another consistent quarter with healthy earnings growth of 32% yoy driven
primarily by lower provisions (20% decline yoy), but revenue growth is lower as compared to
overall earnings growth.
NIM pressure was visible (10 bps decline qoq to 4.1%) with NII growth at 17% yoy due to
sharp rise in cost of funds and limited pass-through in lending yields.
Fees (15% growth over the past two quarters) continue to remain weak on the back of a higher
base and lower pricing/volume in retail products.
Asset quality trends are broadly stable as most products (including retail) continued to exhibit
low delinquencies. The bank has made an additional floating provision for the quarter though
the quantum of provisions has been lower compared to previous quarters.
Premium valuations to continue though we see opportunities elsewhere; maintain ADD
While we continue to maintain a favorable outlook on the bank, we have limited comfort from a
valuation perspective. The bank has been the best performer among large BFSI companies across
most time periods and currently trades at 3.2X FY2013E book and 17X EPS for RoEs in the range
of 18-20% and EPS growth of 28% CAGR for FY2011-13E.
We believe that the recent outperformance is unlikely to continue as some of the macro concerns
appear to be addressed albeit slowly and interest rates are closer to peak levels. Moreover, HDFC
Bank will likely witness pressure on revenue growth for the next few quarters but lower provisions
will drive earnings growth. In this backdrop, we expect the premium over its peers like ICICI Bank
and Axis Bank to contract over the next few quarters. Prolonged fear of asset quality risks in the
sector, especially emerging from the infrastructure portfolio in PSU banks as well as cyclical effects
emerging from interest rates/economic cycle, would be the key risk to our call.
Asset quality stable for the quarter; coverage ratio healthy at 81%
Asset quality was stable for the quarter as gross NPLs increased by 3% qoq to `18.9 bn (1%
of loans) as compared to `18.3 bn (1% of loans) in June 2011. On the other hand, net NPLs
increased by 11% qoq to `3.6 bn (0.2% of loans) as compared to `3.2 bn (0.2% of loans)
in June 2011. Provision coverage ratio declined marginally to 81% as compared to 83% in
the June 2011. The management has indicated that slippages across retail products are not
a cause of serious concern (early warning signals are stable currently). The bank has made
additional floating provisions of `1 bn during the quarter. We are building loan-loss
provisions at 1.1% levels for FY2012-13E and slippages to increase to 1.7% of loans from
1.1% in FY2011.
Retail segment drives loan growth; high base impacts corporate loan growth
HDFC Bank’s loan book grew 20% yoy (7% qoq) to `1.9 tn as of September 2011 mainly
due to higher growth in retail loans. Corporate loans grew by 9% yoy (includes higher base
from lending to telecom companies in 2QFY11—adjusted growth is about 18% yoy) while
retail loans grew by 34% yoy (11% qoq) and now is about 49% of loans. In line with
previous years, we expect subdued 2HFY12E performance on loan growth for the bank.
Retail loan growth was fairly robust in almost all sub-segments. Housing loans grew by 35%
yoy, unsecured loans (personal loans grew by 29% yoy while credit cards grew by 42% yoy),
commercial loans by 63% yoy, business banking grew by 47% yoy. Unsecured loans to total
retail loans is about 19% compared to 20% in June 2011.
Overall CASA ratio healthy despite pressure in the current quarter
CASA ratio looks to have come under pressure partly due to sharp rise in interest rate
differential between term and CASA deposit rates. The current quarter saw 170 bps decline
qoq to 47% primarily led by weak current account growth. Savings deposits grew by 16%
yoy (7% qoq) while current account grew by 2% yoy (4% qoq).
Margins decline 10 bps qoq; high investment yields cushion rise in cost of funds
NIM was at 4.1% (decline of 10 bps qoq) as the quarter saw a steep rise in cost of funds
which was partially offset by improvement in investment yields. CD ratio declined 140 bps
qoq to 82%. NII grew by 17% yoy (3% qoq) to `29 bn.
Despite a healthy improvement in lending rates, we note that HDFC Bank’s yield on
advances (KS calc) improved only by 20 bps (larger proportion of fixed interest rate loans)
while cost of funds (KS calc) increased sharply by 70 bps qoq to 6.2% (negative impact from
decline in CASA ratio and increase in term deposit rates). Investment yields (KS calc) have
improved by 80 bps qoq.
We believe that HDFC Bank would see pressure in their NIM in 2HFY12E primarily due to
continuous upward re-pricing of their liability book. We are building NIM to decline by 25
bps yoy but expect a stable performance in FY2013E as the incremental book built in retail
are fixed in nature and at relatively high yielding segments like CV and unsecured loans.
Fee income under pressure despite non-interest income growth of 26%
Non-interest income grew by 26% yoy to `12.1 bn, with strong contribution forex income
overcoming a weak core fee income performance. Core fee income grew by 15% yoy while
growth in foreign exchange income was impressive at 43% yoy (lower base of September
2010). Treasury income (including revaluation) reported a marginal loss of `13 mn compared
to `521 mn loss in 2QFY11. Given the higher share of income from bancassurance products,
HDFC Bank is seeing pressure in fee income growth with volumes from this segment not
offsetting the revised product pricing structures. We are factoring 18% CAGR for FY2011-13E.
Others key highlights
Cost-income ratio for the quarter was flat qoq at 49%. Overall operating costs have
increased by 21% yoy with non-staff costs increasing by 25% yoy.
The bank has opened 39 branches and 522 ATMs in 2QFY12 taking the total branch
network to 2,150 branches and 6,520 ATMs. The management indicated that it would
add another 100 branches in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDFCB)
Banks/Financial Institutions
Revenue under pressure despite consistent earnings growth. HDFC Bank’s
earnings were driven by lower provisions on the back of stable asset quality. Revenue
growth was under pressure due to marginal decline in NIM and weak fee income------a
trend that will likely extend over the next few quarters. While we like the consistency of
earnings growth reported, we have lower valuation comfort in comparison to peers.
Valuations at 3.3X FY2013E book and 18X EPS for RoEs at about 18-20% levels and
28% earnings growth for FY2011-13E are relatively expensive. Maintain ADD with TP
of `560.
Lower provisions offset the revenue growth pressure; asset quality stable
HDFC Bank declared another consistent quarter with healthy earnings growth of 32% yoy driven
primarily by lower provisions (20% decline yoy), but revenue growth is lower as compared to
overall earnings growth.
NIM pressure was visible (10 bps decline qoq to 4.1%) with NII growth at 17% yoy due to
sharp rise in cost of funds and limited pass-through in lending yields.
Fees (15% growth over the past two quarters) continue to remain weak on the back of a higher
base and lower pricing/volume in retail products.
Asset quality trends are broadly stable as most products (including retail) continued to exhibit
low delinquencies. The bank has made an additional floating provision for the quarter though
the quantum of provisions has been lower compared to previous quarters.
Premium valuations to continue though we see opportunities elsewhere; maintain ADD
While we continue to maintain a favorable outlook on the bank, we have limited comfort from a
valuation perspective. The bank has been the best performer among large BFSI companies across
most time periods and currently trades at 3.2X FY2013E book and 17X EPS for RoEs in the range
of 18-20% and EPS growth of 28% CAGR for FY2011-13E.
We believe that the recent outperformance is unlikely to continue as some of the macro concerns
appear to be addressed albeit slowly and interest rates are closer to peak levels. Moreover, HDFC
Bank will likely witness pressure on revenue growth for the next few quarters but lower provisions
will drive earnings growth. In this backdrop, we expect the premium over its peers like ICICI Bank
and Axis Bank to contract over the next few quarters. Prolonged fear of asset quality risks in the
sector, especially emerging from the infrastructure portfolio in PSU banks as well as cyclical effects
emerging from interest rates/economic cycle, would be the key risk to our call.
Asset quality stable for the quarter; coverage ratio healthy at 81%
Asset quality was stable for the quarter as gross NPLs increased by 3% qoq to `18.9 bn (1%
of loans) as compared to `18.3 bn (1% of loans) in June 2011. On the other hand, net NPLs
increased by 11% qoq to `3.6 bn (0.2% of loans) as compared to `3.2 bn (0.2% of loans)
in June 2011. Provision coverage ratio declined marginally to 81% as compared to 83% in
the June 2011. The management has indicated that slippages across retail products are not
a cause of serious concern (early warning signals are stable currently). The bank has made
additional floating provisions of `1 bn during the quarter. We are building loan-loss
provisions at 1.1% levels for FY2012-13E and slippages to increase to 1.7% of loans from
1.1% in FY2011.
Retail segment drives loan growth; high base impacts corporate loan growth
HDFC Bank’s loan book grew 20% yoy (7% qoq) to `1.9 tn as of September 2011 mainly
due to higher growth in retail loans. Corporate loans grew by 9% yoy (includes higher base
from lending to telecom companies in 2QFY11—adjusted growth is about 18% yoy) while
retail loans grew by 34% yoy (11% qoq) and now is about 49% of loans. In line with
previous years, we expect subdued 2HFY12E performance on loan growth for the bank.
Retail loan growth was fairly robust in almost all sub-segments. Housing loans grew by 35%
yoy, unsecured loans (personal loans grew by 29% yoy while credit cards grew by 42% yoy),
commercial loans by 63% yoy, business banking grew by 47% yoy. Unsecured loans to total
retail loans is about 19% compared to 20% in June 2011.
Overall CASA ratio healthy despite pressure in the current quarter
CASA ratio looks to have come under pressure partly due to sharp rise in interest rate
differential between term and CASA deposit rates. The current quarter saw 170 bps decline
qoq to 47% primarily led by weak current account growth. Savings deposits grew by 16%
yoy (7% qoq) while current account grew by 2% yoy (4% qoq).
Margins decline 10 bps qoq; high investment yields cushion rise in cost of funds
NIM was at 4.1% (decline of 10 bps qoq) as the quarter saw a steep rise in cost of funds
which was partially offset by improvement in investment yields. CD ratio declined 140 bps
qoq to 82%. NII grew by 17% yoy (3% qoq) to `29 bn.
Despite a healthy improvement in lending rates, we note that HDFC Bank’s yield on
advances (KS calc) improved only by 20 bps (larger proportion of fixed interest rate loans)
while cost of funds (KS calc) increased sharply by 70 bps qoq to 6.2% (negative impact from
decline in CASA ratio and increase in term deposit rates). Investment yields (KS calc) have
improved by 80 bps qoq.
We believe that HDFC Bank would see pressure in their NIM in 2HFY12E primarily due to
continuous upward re-pricing of their liability book. We are building NIM to decline by 25
bps yoy but expect a stable performance in FY2013E as the incremental book built in retail
are fixed in nature and at relatively high yielding segments like CV and unsecured loans.
Fee income under pressure despite non-interest income growth of 26%
Non-interest income grew by 26% yoy to `12.1 bn, with strong contribution forex income
overcoming a weak core fee income performance. Core fee income grew by 15% yoy while
growth in foreign exchange income was impressive at 43% yoy (lower base of September
2010). Treasury income (including revaluation) reported a marginal loss of `13 mn compared
to `521 mn loss in 2QFY11. Given the higher share of income from bancassurance products,
HDFC Bank is seeing pressure in fee income growth with volumes from this segment not
offsetting the revised product pricing structures. We are factoring 18% CAGR for FY2011-13E.
Others key highlights
Cost-income ratio for the quarter was flat qoq at 49%. Overall operating costs have
increased by 21% yoy with non-staff costs increasing by 25% yoy.
The bank has opened 39 branches and 522 ATMs in 2QFY12 taking the total branch
network to 2,150 branches and 6,520 ATMs. The management indicated that it would
add another 100 branches in FY2012E.
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