HDFC Bank (HDFCB IN, INR 534, Hold)
We present key takeaways from our interaction with HDFC Bank management along with our read across from FY12 annual report. While the bank’s overall asset quality is robust, cheque bounce rate (retail) has risen marginally; however, it is not material enough to raise flags. Its expansion strategy is to delve deeper into interiors, also reflected in the geographical distribution of branches. Further, acquisition of retail liability continues to be healthy with competition from small private banks not making a dent with their 6-7% SA rates. The bank is likely to maintain steady growth and NIMs along with comfortable asset quality.
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Slight trend change in retail asset quality; overall still comfortable
The corporate segment is performing well with working capital cycles not getting stretched, indicating comfortable loan servicing position. Some corporates running large unhedged forex exposures are facing stress. The strategy to further prune exposure in real estate, gems & jewellery, amongst others, will hold the asset quality in good stead. While retail trends are also in line with the bank’s expectations, off late cheque bounce rate (auto and personal loans) has picked up slightly. However, the rise is marginal and does not warrant any preventive measures. But we remain watchful of emerging trends in this segment.
On an expansion spree with eyes on semi-urban/rural areas
Of the 2,544 branches, a third have been added over the past two fiscals. Addition is in line with two broad strategies: (a) footprint expansion as 620 cities got added with 820 branch additions over FY10-12; and (b) penetrating the hinterland with semi-urban and rural areas contributing 45% of branches, up from 30% in FY09, as alongwith increased business opportunities, they also enable PSL generation. Further additions will depend on profitability. FY12 being a good year saw addition of 550 branches.
Outlook and valuations: Fair; maintain ‘HOLD’
Earnings quality continues to improve given stable NIMs, steady growth and benign LLPs. The stock is trading at 3.4x FY13E ABV. We believe it has hit a sweet spot—strong growth and lower LLP—which will enhance return ratios {RoA to a new high of 1.9% and RoEs at 20% by FY13E} and hence support multiples. Maintain ‘HOLD’.
Regards,
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