HDFC BANK (HDFCB IN, 1-OW, PT RS590): STEADY PERFORMANCE ::Barclays Capital,

HDFC BANK (HDFCB IN, 1-OW, PT RS590): STEADY PERFORMANCE
HDFC Bank remains our top pick in the private sector banks space. Its strong liability
franchise, relatively conservative provisioning policies, and track record of consistent
delivery justifiably position it as a low-risk investment. Its strong pre-provision
profitability provides it a strong loss-absorbing cushion in the current environment. We
raise our price target to Rs590 from Rs539 as we roll forward the stock’s valuation on
22x one-year forward earnings. The key risk to our call is a slowdown in the bank’s
growth.

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Strong track record of consistent delivery
HDFC Bank has consistently delivered strong performance in the past decade, balancing
growth and profitability. Its ROE has ranged between 16% and 20%. EPS has grown at a
CAGR of 31% during the period (being 20%-plus in each of the years except FY09 when
growth dipped to 14%). Further HDFC Bank has conservative provisioning policies and has
built a substantial floating provisions buffer. In particular in FY12, floating provisions at
Rs7bn accounted for almost half of the total loans loss provisions.
Strong NIMs reflect deposit base and provide loss-absorbing
cushion
HDFC Bank has maintained its strong liability franchise. Its CASA ratio at 48% is the highest
among our coverage banks. In fact, only one other bank (SBI) has a CASA ratio greater than
45%. This strong liability franchise allows it to sustain strong NIMs (has consistently
maintained its NIMs in the 4.0-4.2% range). The strong NIMs translate into strong preprovision
profitability (again the highest in the industry) which provides a loss-absorbing
cushion.
Deepening penetration in the smaller towns will be key to
sustaining growth
After a successful expansion strategy in larger towns, the bank has been focusing on
building its network in semi-urban and under-banked markets. In FY12, the bank has
expanded its network by 558 branches during the year, taking its network to 2,544
branches. Importantly, a lot of the branches were opened in centres where the bank was
not previously present (number of centres covered increased by 403 to 1399 during the
year). Post this expansion, over 75% of the bank’s branches is now outside the top nine
Indian cities. The success of this network expansion will be key to HDFC Bank sustaining its
above industry growth over the longer term.
Raise price target and maintain 1-OW rating
We raise our price target as we roll forward our valuation. Our price target of Rs590 reflects
a 22.0x multiple over one-year forward earnings. We maintain our 1-OW rating.