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HDFC Bank (HDFCB)
Banks/Financial Institutions
Steady as ever; creating buffers for any unexpected surprise. HDFC Bank 3Q
earnings remained on track, with key highlights being: (1) Strong loan growth of 33%
yoy (retail loan growth at 36%), (2) reported margins stable qoq at 4.2%, (3) gross
NPLs decline; provision coverage rises, and (4) ad hoc provisions for MFI exposure and
higher floating provisions. Earnings and growth outlook remain strong in the current
environment given its strong liability franchisee. Stock trades at 3.3XFY2012E PBR. ADD
Consistent quarter driven by all-round performance
HDFC Bank continues to show strong performance on all counts. Loans grew by 33% yoy (28%
YTD). Retail growth at 36% yoy is strong despite reasonable size and high market share with all
segments driving growth, including unsecured loans. Reported margins remained stable at 4.2%
qoq, but our calculated margins shows a 20 bps increase despite the proportion of secured
products/mortgages increasing. With the retail NPLs now benefiting from a positive asset quality
cycle, we believe new NPL formation is likely to be negligible resulting in a lower provisions and
improving coverage ratios. Over the past few quarters, HDFC Bank has been making some counter
cyclical floating provisions (part of Tier II capital), thereby creating enough cushions in its earnings
momentum. Even fee income has grown 23% yoy, giving a proper balance to overall profits.
We believe that HDFC Bank has enough cushions on costs and provisions to maintain its
impeccable earnings momentum. Even as we find valuations at 3.3X FY2012E PBR expensive,
relative to other banking stocks, its superior liability profiles in current times and comfort on its
ability to maintain its consistent profit growth are big positives to own this stock. Retain ADD with
a TP of `2,400.
Loan growth slows down sequentially; retail grows 36% yoy and 10% qoq
HDFC Bank’s loan book grew 33% yoy (1% qoq) to `1.59 tn as of December 2010 mainly due to
higher growth in retail loans. Corporate loans grew by 32% yoy (decline of 8% qoq) while retail
loans grew by 36% yoy (10% qoq) and now is about 56% of loan book. Decline in corporate
loans was mainly due to repayment in telecom and select opportunistic short-term lending made
in 1HFY11. Retail loans were largely driven by housing loans (up 42% yoy at `110 bn), commercial
vehicles (up 49% yoy at `125 bn) and car loans (up 42% yoy at `246 bn). HDFC Bank has bought
`18 bn from HDFC Ltd in the current quarter. Unsecured loans (personal loans and credit cards) to
total loans declined by 50 bps to 16% in the current quarter.
CASA ratio maintained at 50% levels; savings deposit growth at 31% yoy
HDFC Bank continued to leverage its strong franchise with CASA ratio maintained in the
current quarter at 50% levels. Savings deposits grew impressively by 31% yoy (3% qoq)
while current account grew by 8% yoy (9% qoq decline). Deposits growth remains well
ahead of industry at 24% yoy (decline of 2% qoq). CASA ratio continues to grow
impressively, giving HDFC Bank a structural advantage compared to peers in a rising rate
environment.
Margins maintained at 4.2%; CD ratio increases to 83%
NIMs for the quarter was at 4.2% (maintained sequentially) with rise in asset yields being
compensated by rise in deposits. CD ratio expanded further to 83% from 80% in September
2010. On a calculated basis, investment yields (calc) has seen a sequential increase
(investment yields on SLR has improved and investments in liquid instruments like MF was
negligible). NII grew by 25% yoy in 3QFY11 to `27.7 bn, 6% ahead of our estimates.
Even as HDFC Bank is likely to be a natural beneficiary of the current high interest rate
regime, we conservatively build a 15 bps decline in margins in FY2012E, as deposit costs are
likely to reprise faster in FY2012E. It also has very limited headroom in CD ratio and select
portfolios in the retail portfolio are fixed in nature. The management indicated that lending
yields in retail continues to be weak but corporate yields have been increasing steadily.
Asset quality trend healthy; coverage ratio healthy at 81%
Broad trends on asset quality continue to show improvement with gross and net NPL
declining in 3QFY11. Gross NPL declined by 3% qoq to `17.8 bn while net NPL declined by
19% qoq to 0.2%. Despite lower NPL formation, loan loss provisioning for the quarter
continued to remain high at 70 bps for the quarter with nearly a third used for floating
provisions (part of tier-2 capital and not coverage ratio) and the balance to improve
coverage ratio. Provision coverage ratio improved by about 350 bps qoq to 81%, well ahead
of 70% as mandated by RBI. We are building in provisions of 120 bps for HDFC Bank in
FY2011-12E. The total restructured continued to be low at 0.3% of loans.
Fee income shows increase 23% yoy; exchange income impressive
Non-interest income increased by 25% yoy to `11.3 bn, with strong contribution from fee
and forex income. Treasury income reported a loss of `307 mn compared to `265 mn in
3QFY10. Core fees grew at 23% yoy in 3QFY11 at `9.4 bn mainly driven by seasonal impact
from bullion sales and other retail fees. The management expect about 17-20% yoy growth
from next quarter onwards. The bank has revised its fee income for the previous year
adjusting ATM expenses in non staff expenses as against netting off from other income.
Exchange income was showed a sharp improvement yoy at 41% to `2.2 bn. We are
factoring 19%CAGR for FY2011-13E.
Other key highlights
Operating costs have increased by 22% yoy mainly due to sharp increase in staff expenses
(25% yoy). Even other operating costs have gone up due to higher IPO float during the
quarter. Cost-income ratio for the quarter declined marginally to 47% from 48% in
September 2010.
Nearly two-thirds of other provisions (about `1.2 bn) were towards MFI. This is a general
provision (all loans are standard in nature) with exposure to MFI being about 0.6% of
loans.
The bank opened 15 branches and 400 ATMs in 3QFY11 taking the total branch network
to 1,780 branches and 5,121 ATMs, respectively. The management indicated that 4Q
would see a rise in the number of branches as most of them are nearing completion.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDFCB)
Banks/Financial Institutions
Steady as ever; creating buffers for any unexpected surprise. HDFC Bank 3Q
earnings remained on track, with key highlights being: (1) Strong loan growth of 33%
yoy (retail loan growth at 36%), (2) reported margins stable qoq at 4.2%, (3) gross
NPLs decline; provision coverage rises, and (4) ad hoc provisions for MFI exposure and
higher floating provisions. Earnings and growth outlook remain strong in the current
environment given its strong liability franchisee. Stock trades at 3.3XFY2012E PBR. ADD
Consistent quarter driven by all-round performance
HDFC Bank continues to show strong performance on all counts. Loans grew by 33% yoy (28%
YTD). Retail growth at 36% yoy is strong despite reasonable size and high market share with all
segments driving growth, including unsecured loans. Reported margins remained stable at 4.2%
qoq, but our calculated margins shows a 20 bps increase despite the proportion of secured
products/mortgages increasing. With the retail NPLs now benefiting from a positive asset quality
cycle, we believe new NPL formation is likely to be negligible resulting in a lower provisions and
improving coverage ratios. Over the past few quarters, HDFC Bank has been making some counter
cyclical floating provisions (part of Tier II capital), thereby creating enough cushions in its earnings
momentum. Even fee income has grown 23% yoy, giving a proper balance to overall profits.
We believe that HDFC Bank has enough cushions on costs and provisions to maintain its
impeccable earnings momentum. Even as we find valuations at 3.3X FY2012E PBR expensive,
relative to other banking stocks, its superior liability profiles in current times and comfort on its
ability to maintain its consistent profit growth are big positives to own this stock. Retain ADD with
a TP of `2,400.
Loan growth slows down sequentially; retail grows 36% yoy and 10% qoq
HDFC Bank’s loan book grew 33% yoy (1% qoq) to `1.59 tn as of December 2010 mainly due to
higher growth in retail loans. Corporate loans grew by 32% yoy (decline of 8% qoq) while retail
loans grew by 36% yoy (10% qoq) and now is about 56% of loan book. Decline in corporate
loans was mainly due to repayment in telecom and select opportunistic short-term lending made
in 1HFY11. Retail loans were largely driven by housing loans (up 42% yoy at `110 bn), commercial
vehicles (up 49% yoy at `125 bn) and car loans (up 42% yoy at `246 bn). HDFC Bank has bought
`18 bn from HDFC Ltd in the current quarter. Unsecured loans (personal loans and credit cards) to
total loans declined by 50 bps to 16% in the current quarter.
CASA ratio maintained at 50% levels; savings deposit growth at 31% yoy
HDFC Bank continued to leverage its strong franchise with CASA ratio maintained in the
current quarter at 50% levels. Savings deposits grew impressively by 31% yoy (3% qoq)
while current account grew by 8% yoy (9% qoq decline). Deposits growth remains well
ahead of industry at 24% yoy (decline of 2% qoq). CASA ratio continues to grow
impressively, giving HDFC Bank a structural advantage compared to peers in a rising rate
environment.
Margins maintained at 4.2%; CD ratio increases to 83%
NIMs for the quarter was at 4.2% (maintained sequentially) with rise in asset yields being
compensated by rise in deposits. CD ratio expanded further to 83% from 80% in September
2010. On a calculated basis, investment yields (calc) has seen a sequential increase
(investment yields on SLR has improved and investments in liquid instruments like MF was
negligible). NII grew by 25% yoy in 3QFY11 to `27.7 bn, 6% ahead of our estimates.
Even as HDFC Bank is likely to be a natural beneficiary of the current high interest rate
regime, we conservatively build a 15 bps decline in margins in FY2012E, as deposit costs are
likely to reprise faster in FY2012E. It also has very limited headroom in CD ratio and select
portfolios in the retail portfolio are fixed in nature. The management indicated that lending
yields in retail continues to be weak but corporate yields have been increasing steadily.
Asset quality trend healthy; coverage ratio healthy at 81%
Broad trends on asset quality continue to show improvement with gross and net NPL
declining in 3QFY11. Gross NPL declined by 3% qoq to `17.8 bn while net NPL declined by
19% qoq to 0.2%. Despite lower NPL formation, loan loss provisioning for the quarter
continued to remain high at 70 bps for the quarter with nearly a third used for floating
provisions (part of tier-2 capital and not coverage ratio) and the balance to improve
coverage ratio. Provision coverage ratio improved by about 350 bps qoq to 81%, well ahead
of 70% as mandated by RBI. We are building in provisions of 120 bps for HDFC Bank in
FY2011-12E. The total restructured continued to be low at 0.3% of loans.
Fee income shows increase 23% yoy; exchange income impressive
Non-interest income increased by 25% yoy to `11.3 bn, with strong contribution from fee
and forex income. Treasury income reported a loss of `307 mn compared to `265 mn in
3QFY10. Core fees grew at 23% yoy in 3QFY11 at `9.4 bn mainly driven by seasonal impact
from bullion sales and other retail fees. The management expect about 17-20% yoy growth
from next quarter onwards. The bank has revised its fee income for the previous year
adjusting ATM expenses in non staff expenses as against netting off from other income.
Exchange income was showed a sharp improvement yoy at 41% to `2.2 bn. We are
factoring 19%CAGR for FY2011-13E.
Other key highlights
Operating costs have increased by 22% yoy mainly due to sharp increase in staff expenses
(25% yoy). Even other operating costs have gone up due to higher IPO float during the
quarter. Cost-income ratio for the quarter declined marginally to 47% from 48% in
September 2010.
Nearly two-thirds of other provisions (about `1.2 bn) were towards MFI. This is a general
provision (all loans are standard in nature) with exposure to MFI being about 0.6% of
loans.
The bank opened 15 branches and 400 ATMs in 3QFY11 taking the total branch network
to 1,780 branches and 5,121 ATMs, respectively. The management indicated that 4Q
would see a rise in the number of branches as most of them are nearing completion.
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