HDFC Bank – Raising its own bar:: RBS

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HDFC Bank continues to perform strongly. Adjusted for floating provisions, annualised ROA in 1Q
was 20-30bp higher than the reported 160bp. We believe floating provisions provide comfort that
ROAs will remain high over the mid term. We raise our earnings estimates, increase our TP to
Rs566 and reiterate Buy


1QFY12: strong underlying profitability
Net interest income rose 19% yoy in 1QFY12 (flat qoq) on the back of 20% yoy loan growth
(+9.7% qoq). The reported core net interest margins (calculated on a daily average basis)
remained flat yoy and qoq at 4.2%. Core fee income was up 16% yoy. Post the 18% yoy growth
in operating expenses, pre-provision operating profit was up 16% yoy. The provision charge for
bad loans (excluding floating provisions) was about 10bp of loans, vs 20bp for the same quarter
last year. The bank made Rs2.5bn of floating provisions in the quarter (about 10bp of assets,
annualised 40bp), up from Rs1bn in 1QFY11. Adjusted for these, pre-tax profit grew 42% yoy.
However, there was a marginal increase in gross NPLs on a qoq basis, partly due to slippages
from the purchased microfinance (MFI) portfolio. The bank’s total outstanding MFI exposure
(largely loans) at the quarter-end was about Rs6bn (0.3% of the loan book).


Raising its own bar: adjusted for floating provisions, ROA is higher than reported
For 1QFY12, the bank reported an ROA of 160bp (annualised); this is after making floating
provisions of Rs2.5bn. Adjusted for these provisions, we estimate annualised ROA would be 20-
30bp higher. Given the underlying delinquency rates, we lower our specific provision for bad
loans to 88bp of loans vs our earlier estimate of 106bp. As of June 2011, floating provisions
carried on the bank’s books is around Rs9.8bn and the bank considers these as part of tier-II
capital. We believe the creation of such floating provisions provides comfort and visibility that
ROAs will remain high over the medium term. From FY01 to FY11, reported ROAs have
averaged about 1.5%, which we forecast will rise to 1.7% over FY12-FY13.
We increase our earnings estimates and maintain our Buy rating
We increase our FY12-FY14 earnings estimates by about 5%, reflecting our expectation of lower
provisions for NPLs. On the back of these earnings increases and our rolling forward our forecast
horizon, our EVA-based target price rise to Rs566 (from Rs524). At our target price, the stock
would trade at 4.5x FY12F book value and 25.5x FY12F earnings. We maintain our Buy
recommendation.