Business as usual but for a small hiccup HDFC Bank:: Centrum

Business as usual but for a small hiccup
HDFC Bank’s Q3FY13 performance was in line with our expectations (PAT at
Rs18.6bn). The bottom-line performance was primarily driven by healthy
growth in NII and non-interest income. Asset quality experienced first hiccup
with %GNPA inching up QoQ for the first time since FY2010 led by CE & CV
segments though overall matrix remained robust. HDFC Bank continued to
deliver ~30% bottom-line growth despite the environment and has displayed
strong command over business segments it focuses on. That said, at current
valuations the stock is fairly priced. We upgrade the stock to Neutral from
Reduce earlier.
Reported NIM contracts 10bps QoQ, Loan growth ~ 24%: NII grew by a
healthy 22% YoY to Rs38bn led by healthy credit growth (24% YoY) while
reported NIM contracted sequentially by 10bps to 4.1%. Despite continuing
strong growth in unsecured/high yield products (credit cards up 55%,
personal loans up 28% YoY), lending yields contracted by ~25bps QoQ.
However, this was partly offset by decline in cost of funds which effectively
contained NIM contraction to 10bps QoQ.
Asset quality a small hiccup: Bank experienced a small hiccup on asset
quality with %GNPA inching up QoQ for the first time since FY2010 led by
slippages in CE & CV segments. The management views this as normalization
of NPLs to acceptable levels and indicated that long term average GNPA
stands at ~1.25% - something we have factored in for FY13. Notwithstanding
the potential near term implications of weak economic activity, the overall
asset quality matrix remains robust.
Healthy credit growth, focus on unsecured products: The advances book
grew by a healthy 24% YoY primarily driven by the retail segment (30% YoY
with strong growth in unsecured/high yielding products). In response to the
stress experienced in CV book (down 1% QoQ), the bank has turned cautious.
For FY13, the share of retail segment may come off a bit due to intensifying
competition and weaker demand in key segments (auto & housing) though
anticipated improvement in corporate segment should help maintain a
healthy growth of ~21% YoY.

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Core C-I improves further: Operating expenses were up 19% YoY led by
other opex (up 22% YoY) due to aggressive branch and ATM additions in
recent quarters. However, the core cost-income ratio improved further to 47%
from ~50% in Q4FY12. Importantly, the focus of incremental branch expansion
is towards newer locations as indicated by the addition of 394 new cities to
the branch presence during the last 12 months. The capacity build up in
newer cities should help sustain balance-sheet growth.
Maintain Neutral: HDFC Bank continues its streak of consistent performance
and remains one of the safest bets in the banking sector. At current market
price of Rs659, the stock trades at 18.6x FY2014E EPS and 3.8x FY2014E ABVPS
and is fairly valued (vs our target price of Rs650). Given the recent correction
(from 706 in Nov’12) in the stock we are turning Neutral towards the stock and
suggest investors switch to banking stocks geared on the anticipated
economic recovery (ICICI Bank, Axis Bank and Federal Bank).