HDFC Bank Will you ever disappoint? :Macquarie Research,

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HDFC Bank
Will you ever disappoint?
Event
 2QFY12 - 30% for the umpteenth time, as expected provisions used to
smoothen: HDFC Bank’s net profit numbers hardly surprise in any way as
they continue reporting ~30% YoY growth. As expected they smoothed the
numbers through the provisions line item which was down 19% YoY and 17%
QoQ. In 1QFY12, they made floating provisions of Rs2.5bn, which was less
this quarter. Maintain Outperform with TP of Rs615.
Impact
 Loan growth slows down but due to higher base: HDFC Bank funded the
telecom sector for 3G financing in 1HFY11, which was absent this quarter.
Hence loan growth on a reported basis was 20% YoY; however adjusted for
the short-term one-off loans of last year, loan growth was healthy at 25%.
 Moving up the risk curve, credit costs unsustainable at these levels:
Looking at HDFC Bank’s retail portfolio, which registered 34% YoY growth,
segments like personal loans, credit cards, business banking, etc, have been
growing at a very rapid pace. However if we look at credit costs, they are just
at 80-90bps for 1HFY12, which is clearly unsustainable in our view.
 Sharp decline in CASA a worry – just watch out for other banks: HDFC
Bank, as the best bank in the country with respect to liabilities franchise, saw
a sharp 170 bps QoQ decline in CASA to 47.3%. Management attributed this
to higher traction in term deposits relative to savings deposits due to elevated
interest rate levels and migration from savings to term. Consequently margins
also declined by 10bps QoQ to 4.1% inline with our expectations. We believe
even other banks are likely to see a sharp decline in CASA going ahead.
 Stable asset quality remains the biggest positive: Asset quality remained
stable with the slippage ratio at less than 100bps. The NPL coverage ratio
including floating provisions is highest in the sector at 125%+. Restructured
standard advances at 10bps are also among the lowest in the sector.
 Key conference call takeaways: 1) Retail loan demand remains good
despite high interest rates because of increases in wages and, hence,
affordability is good. The bank is gaining market share across several retail
loan categories. 2) Despite an increase in retail assets and 15bps increase in
investment yields, a lower CASA and higher mobilisation of term deposits
affected NIMs. NIMs are expected to be in a range of 3.9-4.2%. 3) Floating
provisions are created not to smooth out earnings but to create a counter
cyclical cushion and they are included as a part of Tier-II capital.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs615.00 based on a Gordon growth methodology.
 Catalyst: Continued strong earnings growth and asset quality improvements
Action and recommendation
 HDFC Bank is one of our top financials picks in India: Reiterate Outperform