RBS:: HDFC– Increase in floating interest rates

Visit http://indiaer.blogspot.com/ for complete details �� ��


HDFC Ltd (HDFC IN, Rs695.30, Sell) – Increase in floating interest rates

HDFC Limited has increased the retail prime lending rate by 75bps. The revision in floating
interest rates is for both existing and new customers. We believe, given the recent increase
in whole-sale borrowing rates, such a move by HDFC is not surprising. We maintain Sell




HDFC Limited has increased the retail prime lending rate by 75bps to 15% w.e.f. 1
December 2010. According to the company, the new adjustable rate home loans (ARHL)
will now be priced 9.5% pa for loans up to Rs3mn, 9.75% pa for loans up to Rs7.5mn and
10% pa for loan above Rs7.5mn. The revision in floating interest rates is for both existing
and new customers.

We believe, given the recent increase in whole-sale borrowing rates, such a move by
HDFC Limited is not surprising. The three-month certificate of deposits (CD) rate has
increased to 8.7% (+110bp mom, +180bp in last three months). Further, the 12-month
CD rate is now 150-175bp higher than the comparable one-year term deposit rates being
offered by banks.

In general, we expect the rising cost of funds combined with pricing pressure from
competition to keep spreads under pressure at HDFC Limited. Our estimates factor a
largely flat net interest margin of 3.3% over FY11-13F.

We value HDFC Limited on a SOTP basis and have a Sell rating with a target price of
Rs562. At the current market price, the core mortgage business of HDFC Limited trades
at 4.9x FY12F adjusted book value when factoring in its conversion of warrants and 5.9x
FY12F adjusted book value without considering the warrant conversion.