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HDFC BANK
Management update: business as usual
We met with HDFC Bank’s management team for an update. Management expects the
bank’s loans to grow 4-5ppt higher than the industry rate in FY13 (with a balanced
mix between retail and corporate) and its net interest margin to remain at about 4%.
While management expects credit costs to rise from the cyclical low of 0.5% for FY11,
it believes this will be offset by a reduction in countercyclical provisioning. HDFC Bank
plans to bring down its cost/income ratio by 2-3ppt over FY12-15. We believe the
market justifiably views the stock as a relatively low-risk investment in the current
uncertain environment, which we believe supports its premium valuation. We
maintain our 1-Overweight on HDFC Bank and our 12-month price target of Rs539.
Loan growth targeted to be 4-5% above the industry rate and be balanced across
segments: Management expects loan growth to be 4-5ppt higher than the industry loan
growth rate, which it expects to be about 17% in FY13. Although loan growth in 3Q FY12
for the corporate segment was low at 15% compared with the overall growth rate of
22%, management expects growth to be more balanced going forward.
Management expects the competitive environment in the deposits market to ease as
interest rates start to fall. This should enable HDFC Bank to maintain its NIM at about
4%. HDFC Bank expects the large banks to maintain savings deposit rates at 4%, which it
sees as an equilibrium price (given that the savings bank deposits involve transaction
costs of 2-3% and short-term deposits rates are less than 7%).
Credit costs to move up from cyclical lows, but this should be offset by lower
countercyclical provisioning: Credit costs (at 0.5% for FY11) have been at cyclical lows
due to lower NPA formation and recoveries from written-off pools, but management
expects costs to move up to normal levels of 1.2-1.4% in the next 2-3 years. However, it
expects the increase to be offset by lower countercyclical provisioning. In FY11, the bank
also made higher countercyclical provisions at 0.5% of average advances.
Focusing on improving operating efficiencies: With network growth moderating,
management plans to improve the C/I ratio by 2-3ppt to 45-46% in the next three years.
This should be possible since the burden placed by new branches will be lower. Although
HDFC Bank plans to open about 250 branches each year, these will account for a smaller
and smaller share of the total network over time.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC BANK
Management update: business as usual
We met with HDFC Bank’s management team for an update. Management expects the
bank’s loans to grow 4-5ppt higher than the industry rate in FY13 (with a balanced
mix between retail and corporate) and its net interest margin to remain at about 4%.
While management expects credit costs to rise from the cyclical low of 0.5% for FY11,
it believes this will be offset by a reduction in countercyclical provisioning. HDFC Bank
plans to bring down its cost/income ratio by 2-3ppt over FY12-15. We believe the
market justifiably views the stock as a relatively low-risk investment in the current
uncertain environment, which we believe supports its premium valuation. We
maintain our 1-Overweight on HDFC Bank and our 12-month price target of Rs539.
Loan growth targeted to be 4-5% above the industry rate and be balanced across
segments: Management expects loan growth to be 4-5ppt higher than the industry loan
growth rate, which it expects to be about 17% in FY13. Although loan growth in 3Q FY12
for the corporate segment was low at 15% compared with the overall growth rate of
22%, management expects growth to be more balanced going forward.
Management expects the competitive environment in the deposits market to ease as
interest rates start to fall. This should enable HDFC Bank to maintain its NIM at about
4%. HDFC Bank expects the large banks to maintain savings deposit rates at 4%, which it
sees as an equilibrium price (given that the savings bank deposits involve transaction
costs of 2-3% and short-term deposits rates are less than 7%).
Credit costs to move up from cyclical lows, but this should be offset by lower
countercyclical provisioning: Credit costs (at 0.5% for FY11) have been at cyclical lows
due to lower NPA formation and recoveries from written-off pools, but management
expects costs to move up to normal levels of 1.2-1.4% in the next 2-3 years. However, it
expects the increase to be offset by lower countercyclical provisioning. In FY11, the bank
also made higher countercyclical provisions at 0.5% of average advances.
Focusing on improving operating efficiencies: With network growth moderating,
management plans to improve the C/I ratio by 2-3ppt to 45-46% in the next three years.
This should be possible since the burden placed by new branches will be lower. Although
HDFC Bank plans to open about 250 branches each year, these will account for a smaller
and smaller share of the total network over time.
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