HDFC Bank - Q1FY13 Result Update - Centrum

Q1FY13 Result Update/Rating Change

HDFC Bank

Neutral

Target Price: Rs580

CMP: Rs587          

Downside: 1.2%

Consistently consistent but fairly valued

HDFC Bank’s Q1FY13 performance was in line with our expectations (PAT at Rs14.2bn). The bottom-line performance was primarily driven by healthy growth in NII and non-interest income. Asset quality held up well with sequential stability in %GNPA, restructuring & PCR. While the consistent performance and strong asset quality make the stock one of the safest bets in banking sector, at current level it is fairly valued and hence we assign Neutral rating.

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m  NIM expands 10bps QoQ, Loan growth ~ 22%: NII grew by a healthy22.3% yoy (in-line) to Rs34.8bn led by a healthy credit growth (21.5% yoy) while the reported NIM expanded sequentially at 4.3%. Loan yields benefitted from higher share of unsecured/high yield products (credit cards up 42%, personal loans up 35% YoY). However, this was partly offset by increase in cost of funds leading to marginal expansion in NIM QoQ to 4.3%.

m  Asset quality holds up well: Asset quality continued to remain strong with %GNPA stable in relative terms, though in absolute terms increased by 4% QoQ. Restructured loans (including applications received and under process) came down to 0.3% of gross advances. Despite higher provisions sequentially, PCR was stable QoQ at 81% in Q1FY13). While the slippage rate for FY12 was enviable at 1%, we expect this to inch up in FY13 to 1.3% led by 1) higher share of unsecured/high yield products and 2) impact of general deterioration in credit quality due to moderation.

m  Healthy credit growth, focus on unsecured: The advances book grew by a healthy 21.5% yoy to Rs2,133bn primarily driven by the retail segment (33.4% YoY with strong growth in unsecured/high yielding products). For FY13, share of retail segment may come off a bit due to weaker demand in key segments (auto & housing) though anticipated improvement in corporate segment should help maintain a healthy growth of 20.6% YoY. Meanwhile, deposits grew by 22% yoy and 4.4% QoQ to Rs2,575bn with CASA contracting sequentially to 46%.  

m  C-I normalizes to 48.5%: Operating expenses surprised negatively with a 25.7% YoY jump led by aggressive branch and ATM additions in recent quarters. However, the cost-income ratio improved to 48.5% from 50.6% in the previous quarter. Given the aggressive branch and ATM additions in FY12, incremental expansion of retail franchisee is likely to revert to normal level in FY13 and hence expect C-I to stabilize at 48.6%.

m  Neutral: HDFC Bank continues its streak of consistent performance and remains one of the safest bets in the banking sector. However, we believe its 30-33% bottom-line growth may come under threat led by uptick in slippages and credit costs. Moreover, at current market price of Rs587, the stock trades at 16.4x FY2014E EPS and 3.4x FY2014E ABVPS and is fairly valued (our target price is Rs580 based on 3.3x FY14E ABVPS). In line, we assign Neutral rating to the stock. Investors can consider re-entering the stock at lower levels (Rs500-525).

Thanks & Regards, 

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