HDFC Bank,In line; growth momentum remains strong:: Kotak Sec,

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In line; growth momentum remains strong. HDFC Bank 2Q earnings remained on
track, with key highlights being: (1) Strong loan growth of 38% yoy (YTD growth of
26%), (2) margins decline by 10 bps qoq to 4.2%, (3) gross NPLs ratio flat qoq;
provisioning coverage healthy at 78%, (4) CASA ratio at 51%, and (5) provisions higher
due to creation of floating provisions. Growth and earnings outlook remains strong for
HDFC Bank, but expensive valuations at 3.8XFY2012E PBR leave little room for upside.
Maintain REDUCE with TP of `2,500.


In-line performance for the quarter; outlook strong but valuations pricing current performance
HDFC Bank continues to show strong performance on all counts. Loans grew by 38% yoy (26%
YTD). Retail is witnessing a steady turnaround, with all segments driving growth, including the
unsecured loans as well. Margins declined 10 bps qoq, but remain healthy at 4.2%. We expect a
marginal decline going forward as the proportion of mortgages/corporate assets increases.
Declining pace of new NPL formation will result in lower loan loss provisions cushioning any
pressure on margins or fee income. Fee income growth will remain weak as pricing of wealth
management products remains under pressure.
We believe that HDFC Bank has enough cushions on costs and provisions to maintain its
impeccable earnings momentum. We have maintained our earnings and TP at `2,500. We find
valuations expensive at 3.8X FY2012 PBR leaving very little upside (6%) from current levels.
Maintain REDUCE.
Sequential growth in loan book impressive at 8%; retail grows 31% yoy and 8% qoq
HDFC Bank’s loan book grew 38% yoy (8% qoq) to `1.59 tn as of September 2010 mainly due to
higher growth in corporate loans. Over the past 6 months, loan growth for HDFC Bank has been
at 26%, one of the highest in the industry. We are revising our loan growth assumptions to 28%
CAGR for FY2010-12E given the strong 1HFY11 performance.
Corporate loans grew by 46% yoy (9% qoq) while retail loans grew by 31% yoy (8% qoq) and
now is about 52% of loan book. Corporate loans saw one large short-term lending during the
quarter. Retail loans were largely driven by auto loans (up 36% yoy at Rs232 bn), and commercial
vehicles (up 42% yoy at Rs112 bn). HDFC Bank has not bought any loans (housing loans declined
4% qoq) from HDFC Ltd in the current quarter. Unsecured loans (personal loans and credit cards)
to total loans were flat qoq at 17% in the current quarter but growth is visible with the run-off
from CBoP largely completed.