We reiterate HDFC Bank as our top defensive pick among Indian banks.
The bank’s resilience to a weak economy is the primary reason, and we
think that will manifest itself in NIMs and credit costs in FY14. The focus
on quality should not crimp growth, and we expect HDFC Bank to
continue above-market growth (22-24%) over the next two to three years.
We think valuations are demanding, but rising ROAs and a possible
issuance next year support that.
Resilient business model. We expect asset quality to be an issue for the
sector in FY14, and most banks are likely to face rising credit costs
and/or restructured assets. We believe HDFCB is in a strong position
because of: a) robust underwriting and a distributed asset book and b)
significant buffers, via floating provisions, built in previous years which
will contain potential spikes in credit costs. We also expect NIMs to
hold up, despite deposit pricing pressures, due to a reorganization of the
asset portfolio and the benefits of the CRR cut.
Growth engine strong. Despite the significant growth in recent years
and being one of the largest banks in India, we think HDFCB can still
sustain growth at 22-24% for the next two to three years. Deposit market
share gains in smaller towns and rural areas are still a significant
opportunity and should be the main driver. HDFCB has one of the
lowest deposit costs in the industry, so asset growth is unlikely to be a
challenge even in a slow economy.
Demanding valuations supported by fundamentals. HDFCB trades at
3.5x P/B and our valuation target pegs it near the top of its valuation
range. We think this is supported by: a) structurally improving ROAs,
driven by credit costs and cost-income, b) the possibility of an issuance
next year that could bring valuations down. In P/E terms, HDFCB trades
at <1sd historical="" improved="" mean="" nbsp="" of="" over="" p="" reflecting="" roas="" the="">last two to three years.
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