HDFC Bank - Q4FY13Result Update:: Centrum

Impressive performance but priced in
HDFC Bank’s Q4FY13 performance was in line with our expectations (PAT at Rs18.9bn). The bottom-line performance was primarily driven by healthy growth in NII and lower provisions. Asset quality was largely stable with a positive bias with %GNPA decreasing by 4% QoQ and PCR inching up by 30bps. HDFC Bank continues to deliver ~30% bottom-line growth despite the challenging environment and has displayed strong command over business segments it focuses on. The bank continues to invest in deepening its retail franchisee to support robust growth in future. That said, at current valuations the stock is fairly priced. We turn Neutral from Buy earlier.
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Reported NIM contracts 20bps QoQ: NII grew by a healthy 21% YoY to Rs43bn led by a healthy credit growth (23% YoY) while reported NIM expanded sequentially by 20bps to 4.5%. The NIM expansion is the result of higher blended yields led by better loan mix (strong growth in unsecured/high yield products) along with marginal easing in cost of funds.
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Asset quality matrix stable: Despite deceleration in economic activity at macro level and resulting challenges in certain product segments, asset quality matrix remained stable for the quarter. In fact, GNPA decreased by 4% QoQ to 0.97% while PCR improved further by 30bps to 80%. For FY13, the gross slippage rate was stable YoY at ~1% with credit costs at 84bps. Conservatively, we have factored in slippage rate of 1.4% and 1.5% for FY14 and FY15 leading to a credit cost of 74bps for both years.
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Healthy credit growth, focus on unsecured prooducts: The advances book grew by a healthy 23% YoY primarily driven by the retail segment (27% YoY with strong growth in unsecured/high yielding products). In response to the potential stress in CV book, the bank remains cautious (down 1.6% QoQ). For FY13, the share of the retail segment has inched up further to 57% from ~55% for FY12. Led by intensifying competition and weaker demand in key retail segments (auto & housing), share of retail loans may come off a bit in FY14 though anticipated improvement in corporate segment should help maintain a healthy growth of ~23% in FY14 and FY15.

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Weak fee income flow, higher C-I: Core fee income grew 12% YoY and showed significant moderation in 4QFY13 led by sluggish growth and change in product mix in retail assets. Forex related fee income too was weak due to low volatility in INR and interest rates. Meanwhile, operating expenses were up 18% YoY led by other opex (up 23% YoY) due to continued aggressive branch and ATM additions in recent quarters. The focus of incremental branch expansion is towards newer locations as indicated by addition of 277 new cities to the branch presence during the Q4FY13 itself. The capacity build up in newer cities should help sustain balance-sheet growth over the long term.
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Neutral: HDFC Bank continues its streak of consistent performance and remains one of the safest bets in the banking sector. At current market price, the stock trades at 19.6x FY2014E EPS and 3.9x FY2014E ABVPS – leaving limited upside to our target price of Rs725. We suggest investors switch to Axis Bank - geared to the anticipated economic recovery and offering better upside potential.