HDFC Bank - ADD:: 2QFY11 results – a tad lower :: IIFL

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2QFY11 results – a tad lower
HDFC Bank’s (HDFCB) 2QFY11 net profit increased 33% to Rs9.1bn,
in-line with consensus, but below our estimates. While the balancesheet
growth remained strong, NIM was a tad lower than our
expectation; MTM loss of Rs520m was not factored into our
expectation. We believe none of the above present significant
downside risk to our current expectation. NIM would likely trend up
in 2HFY11 with increase in lending rates. MTM losses could recur, but
the impact would likely remain muted. HDFCB is well-positioned to
deliver strong earnings growth and superior profitability, in our view.
2QFY11 results – in-line with consensus: Net profits increased 33%,
in-line with consensus, but below our estimates. NIM was a tad lower,
while MTM losses were not factored into our estimates. NIMs declined
10bps QoQ, due to higher funding cost. Expectedly, non-interest income
growth remained sluggish. Provisioning charges declined 18% QoQ,
signaling improvement in asset quality trends sequentially; however, the
bank continues to make counter-cyclical provisions. Profitability metrics
remain strong with an annualised ROA of 1.6% in 2QFY11 as well.
Underlying momentum remains strong: Even though reported
performance was a tad lower than our expectation, we do not see a
structural downside which would require us to revisit our forecasts, and
hence, our key investment arguments. We expect a reversal in NIM trend
in 2HFY11, as higher lending rates would likely offset higher funding.
Strong loan growth, higher NIM on QoQ basis and declining credit costs
would continue to drive earnings growth strongly in 2HFY11.
We retain ADD, target price of Rs2860: Strong earnings growth,
rising profitability and unmatched performance on key profitability
metrics would drive valuation higher. A growth rate approaching that of
peers, and superior profitability and risk profile of assets vis-à-vis peers,
will sustain HDFCB’s premium valuation, in our view.