Consistency comes at a price… •HDFC :: ICICI Securities, PDF link

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Consistency comes at a price…
• Consistent profit growth was reported at 20% YoY to | 2381 crore in
line with estimate with a marginal improvement in asset quality
• Credit grew strongly at 21.8% YoY, 4% QoQ to | 327272 crore vs. our
estimate of 18.9% YoY (largely led by corporate loans) while deposits
grew 24.8% YoY to | 390681 crore. Hence, NII grew 23% YoY to
| 5510 crore vs. 16.9% growth expected. NIM also improved to 4.5%
vs. 4.4% QoQ
• Other income grew ~11% both YoY and QoQ to | 2047 crore mainly
led by strong fee income of | 1536 crore (up 13% YoY)
• Asset quality remained stable at 1% GNPA and 0.3% NNPA. Also, the
restructured book improved to 0.1% of advances vs. 0.2% earlier
Play not on scale but core earnings-strategy to stay with strong retail book
HDFC Bank, India’s second largest private bank, has grown its balance
sheet at 23% CAGR to | 400000 crore over FY07-13 maintaining its profit
growth of 30% CAGR to | 6726 crore. However, in FY14, PAT growth has
moderated to 26% at | 8478 crore and future expectations toned down to
22%. The bank rarely chased business size but enjoys best margin and
asset quality in the business segment it operates i.e. retail loans in CV/CE,
credit cards, etc. It has 48.3% retail (| 158126 crore) and 51.7% wholesale
corporate loan book (| 169146 crore) totalling | 327272 crore as on
September 2014. Within retail, it is diversified with 24% in auto, 9% in
CV/CE, 15% personal loans and 14% in business banking. It enjoys largest
market share in credit cards in industry at | 14005 crore book, which
generally fetches higher margins and returns for a bank. The bank’s
acquisition of Centurion Bank in FY08 also helped strengthen its retail
book. We expect it to continue slightly higher credit and deposit growth of
18% in FY15E. However, profit growth is likely to maintain consistency.
Rural expansion drive to go long way, operating leverage to be seen…
We observe HDFC Bank has strategised to dig deep in the rural belt to
expand markets with >900 branches opened in last two years and >600 in
rural areas of Punjab, Gujarat and other states. Total 230 branches are in
unbanked areas in FY14. The bank has objective to bring one crore families
(four crore Indians) into banking fold. This should go a long way for growth
with high margins. The bank has been shielded by its strong & stable
liability franchise with CASA ratio of 43% (since FY05 till now) & retail term
deposit comprising ~85% of total deposit of | 390681 crore. This has led
to cost of funds remaining less volatile, thereby enabling it to earn
lucrative NIM of >4% consistently. We expect NIM to range at 4-4.2% in
FY15E and FY16E. CASA and fee based income (cross selling), higher retail
loans will continue to grow on rising presence in remote locations.
Asset quality contained with GNPA at 1% due to seasoned credit book
GNPA and NNPA ratio are stable around 1-1.5% for the last 25 quarters.
Retail NPA had risen just once in the FY08 crisis to 2% but being seasoned
portfolio, we factor GNPA and NNPA to be stable around 1% (| 3765 crore)
and 0.3% (| 1171 crore), respectively, by FY16E.
Price for consistency to continue, recommend HOLD
Considering the superior quality of balance sheet and stable management,
we factor in 13% CAGR in NII, 22% in PAT over FY14-16E. It carries healthy
floating provision providing comfort. Trading at 3.4x for one year forward
P/ABV, it is at a premium and justified over the long term. The bank
remains a portfolio stock. We have a HOLD rating from a medium term
view with a target price of | 956 (3.9x FY16E ABV).

link
http://content.icicidirect.com/mailimages/IDirect_HDFCBank_Q2FY15.pdf