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HDFC Bank
Good things in life rarely come cheap
Event
Our top pick and the only Outperform in the banking space: HDFC Bank
is our top pick in the banking space. We reiterate our Outperform with a
revised TP of Rs625.
Impact
Asset quality expected to remain exceptionally good: HDFC Bank’s
experience on loss rates in various retail product categories continues to be
even better than what it had budgeted. Current credit costs of 1% are likely to
stabilise more around 120bps over the longer term, according to
management. It continues to judiciously make floating provisions which help it
create a countercyclical buffer. The NPL coverage ratio, including floating
provisions, is at ~125%+ – by far the best in the sector. It has largely avoided
stressed sectors, exposure to infrastructure is largely in the form of working
capital loans and is lower than its peers, and in the CV segment it isn’t
exposed much to the mining belts like Karnataka, Orissa etc. Overall we don’t
expect that credit costs will spike up, but will be around 120bps.
Liquidity and capital position – pretty comfortable: Loan growth has
broadly matched deposit growth and moreover HDFC doesn’t have a large
dependence on wholesale funding. The current Tier-1 ratio at 11.4% is very
comfortable and its internal Basel-III analysis submitted to RBI also shows
that the impact on capital ratios is minimal. It doesn’t have any hybrids in Tier-
I and other issues like investment in subsidiaries, intangibles etc. are not
there. So we don’t envisage any risk of equity dilution in the next 12-18
months.
Growth continues to surprise us: HDFC Bank for the past several years
has grown at least 500bps faster than the system. Loan growth of 22% YoY in
3Q12 was much higher than system loan growth of 17%. Growth so far has
been predominantly driven by retail assets. It is surprising that HDFC Bank
continues to grow its retail portfolio like CVs, 2-Wheelers, personal loans and
credit cards at impressive growth rates whereas other banks continue to
struggle in these segments.
Earnings and target price revision
We have reduced EPS by 3% and 6% for FY13E and FY14E on account of
slightly lower margins and higher opex. TP is marginally adjusted upwards by
2% owing to cost of equity changes.
Price catalyst
12-month price target: Rs625.00 based on a Gordon growth methodology.
Catalyst: Strong earnings growth and return ratios
Action and recommendation
Expensive valuations to stay: HDFC Bank’s expensive valuations are
unlikely to come down owing to its strong fundamentals relative to its peers.
We reiterate as our top pick with a TP of Rs625.
So why is asset quality going to be far better than other banks?
It is predominantly a retail bank and exposure to corporates is mainly in the form of working capital
loans where risk is lower.
Exposure to stressed sectors is relatively lower than peers.
It has one of the lowest exposures to the SME sector which has been affected by the current
deteriorating macroeconomic scenario.
It has one of the lowest restructured assets ratios amongst its peers.
It has the highest NPL coverage ratio in the sector, including floating provisions at 125%+.
Valuations and TP
We value HDFC Bank on a two-stage Gordon Growth method as the bank continues to be in a high
growth stage and a single-stage Gordon Growth model cannot capture its high growth aspect.
P/BV = RoE * {(p(1+g) * (1- (1+g)n/(1+r)n)) + (pn(1+g)n(1+gn))/((r-gn)(1+r)n)}, where g=growth rate
for the first n (high-growth period) years, p=payout ratio in the first n years, gn=perpetual growth rate,
pn=perpetual payout ratio.
Fig 3 HDFC Bank – Two stage Gordon growth model
Key Parameters Assumptions
RoE 22.0%
g (initial growth) 19%
r (CoE) 13%
gn (perpetual growth rate) 4%
n (initial growth period, yrs) 10
payout1 15%
Payoutn 80%
K1 3.05
K2 15.28
P/BV 4.03x
Target price based on two stage Gordon growth model 625
Source: Macquarie Research, March 2012
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank
Good things in life rarely come cheap
Event
Our top pick and the only Outperform in the banking space: HDFC Bank
is our top pick in the banking space. We reiterate our Outperform with a
revised TP of Rs625.
Impact
Asset quality expected to remain exceptionally good: HDFC Bank’s
experience on loss rates in various retail product categories continues to be
even better than what it had budgeted. Current credit costs of 1% are likely to
stabilise more around 120bps over the longer term, according to
management. It continues to judiciously make floating provisions which help it
create a countercyclical buffer. The NPL coverage ratio, including floating
provisions, is at ~125%+ – by far the best in the sector. It has largely avoided
stressed sectors, exposure to infrastructure is largely in the form of working
capital loans and is lower than its peers, and in the CV segment it isn’t
exposed much to the mining belts like Karnataka, Orissa etc. Overall we don’t
expect that credit costs will spike up, but will be around 120bps.
Liquidity and capital position – pretty comfortable: Loan growth has
broadly matched deposit growth and moreover HDFC doesn’t have a large
dependence on wholesale funding. The current Tier-1 ratio at 11.4% is very
comfortable and its internal Basel-III analysis submitted to RBI also shows
that the impact on capital ratios is minimal. It doesn’t have any hybrids in Tier-
I and other issues like investment in subsidiaries, intangibles etc. are not
there. So we don’t envisage any risk of equity dilution in the next 12-18
months.
Growth continues to surprise us: HDFC Bank for the past several years
has grown at least 500bps faster than the system. Loan growth of 22% YoY in
3Q12 was much higher than system loan growth of 17%. Growth so far has
been predominantly driven by retail assets. It is surprising that HDFC Bank
continues to grow its retail portfolio like CVs, 2-Wheelers, personal loans and
credit cards at impressive growth rates whereas other banks continue to
struggle in these segments.
Earnings and target price revision
We have reduced EPS by 3% and 6% for FY13E and FY14E on account of
slightly lower margins and higher opex. TP is marginally adjusted upwards by
2% owing to cost of equity changes.
Price catalyst
12-month price target: Rs625.00 based on a Gordon growth methodology.
Catalyst: Strong earnings growth and return ratios
Action and recommendation
Expensive valuations to stay: HDFC Bank’s expensive valuations are
unlikely to come down owing to its strong fundamentals relative to its peers.
We reiterate as our top pick with a TP of Rs625.
So why is asset quality going to be far better than other banks?
It is predominantly a retail bank and exposure to corporates is mainly in the form of working capital
loans where risk is lower.
Exposure to stressed sectors is relatively lower than peers.
It has one of the lowest exposures to the SME sector which has been affected by the current
deteriorating macroeconomic scenario.
It has one of the lowest restructured assets ratios amongst its peers.
It has the highest NPL coverage ratio in the sector, including floating provisions at 125%+.
Valuations and TP
We value HDFC Bank on a two-stage Gordon Growth method as the bank continues to be in a high
growth stage and a single-stage Gordon Growth model cannot capture its high growth aspect.
P/BV = RoE * {(p(1+g) * (1- (1+g)n/(1+r)n)) + (pn(1+g)n(1+gn))/((r-gn)(1+r)n)}, where g=growth rate
for the first n (high-growth period) years, p=payout ratio in the first n years, gn=perpetual growth rate,
pn=perpetual payout ratio.
Fig 3 HDFC Bank – Two stage Gordon growth model
Key Parameters Assumptions
RoE 22.0%
g (initial growth) 19%
r (CoE) 13%
gn (perpetual growth rate) 4%
n (initial growth period, yrs) 10
payout1 15%
Payoutn 80%
K1 3.05
K2 15.28
P/BV 4.03x
Target price based on two stage Gordon growth model 625
Source: Macquarie Research, March 2012
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