HDFC Bank Hallmarks of leadership: Indiabulls research

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HDFC Bank
Hallmarks of leadership




HDFC has yet again demonstrated its leadership in core profitability on the back of very strong operational performance and higher floating provisions for loan losses to create a buffer. The bank reported 33% YoY PAT growth aided by higher-than-expected growth in advances, NIMs in line with our expectations, 140 bps QoQ improvement in CASA, and an improving asset quality. We expect core profitability of HDFC Bank to be better than peer group, though we downgrade HDFC Bank from Outperform to Neutral primarily on account of valuation concerns with our revised target price of `2,390.
Higher growth in advances
High advances growth of 38% YoY (adjusted for short-term funding including 3G; overall advances growth was 32% YoY) was aided by both retail advances (31% YoY) and wholesale advances (32% YoY adjusted for short-term funding).
Margins in line with our expectations
NIMs at 4.3% was marginally higher by 10bps than our expectations despite a very high advances growth of 38% aided by an impressive 31% YoY growth in CASA deposits (38% YoY growth in SB deposits and 20% in demand deposits). CASA at 50.6% improved by 140 bps QoQ. With less dependence on bulk deposits (15% of total deposits) vs peer group, we expect NIM pressures to be minimal going forward
Asset quality improvement in line with our expectations
GNPAs declined sequentially during 2QFY11. Loan-loss provisions declined from 2.2% of average loans in 2QFY10 to 1.2% in 2QFY11, largely on account of the running-down of CBoP advances and improving economic conditions. `1.5bn of loan losses are floating provisions provided by the bank as cushion against future losses.
Downgrade to Neutral
We are downgrading HDFC Bank to Neutral from Outperform rating with a TP of `2,390, valuing the bank at 3.8xFY12E P/ABV primarily on valuation concerns as the bank now trades at 2.2x standard deviation. We are upgrading out TP for the bank from `2,297 earlier to `2,390 as we have revised our earnings upwards for FY11-12 on the back of strong operational performance.