HDFC Bank -Some things rarely change ::Macquarie Research,

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HDFC Bank
Some things rarely change
Event
 1Q12 results +30% (for the umpteenth time), increase TP by 20%: HDFC
Bank’s net profit numbers rarely surprise as they continue to report ~30% YoY
growth. The key surprise this quarter was their ability to maintain NIMs at
4.2% despite the savings rate increase during the period. We maintain our
Outperform and increase our TP by 20% to Rs615 on account of rolling
forward to an FY13E-based valuation.
Impact
 Loan growth slows down, but due to higher base, margins maintained:
HDFC Bank funded close to Rs100bn for the telecom sector for 3G financing
and other short-term loans in 1QFY11, which was absent this quarter. Hence
loan growth on a reported basis was 20% YoY; however, adjusted for the
short-term one-off loans for last year and this quarter, loan growth was
healthy at 24% YoY. Despite the savings rate increase in 1QFY12, HDFC
Bank maintained margins at 4Q levels of 4.2%.
 Asset quality worsens a bit, coverage ratio is very healthy: Gross NPLs
rose 8% QoQ – an increase after consistently reporting a decline on an
absolute basis for most of the past 7 quarters. The bank continues to make
prudential counter-cyclical provisioning and has beefed up its coverage ratio
to 83% (excluding floating provisions); including floating provisions this is
125%+. The increase in NPLs this quarter was partially attributable to MFI
portfolio buyouts which were not allowed to be restructured. Management
itself expressed surprise about asset quality holding up well. The annualised
slippage ratio was 80-90bps for the quarter compared to the 110bps for FY11.
 Floating provisions created only to build buffer but not smooth
earnings: HDFC Bank provided close to Rs2.5bn of floating provisions this
quarter and has now close to Rs10bn of outstanding floating provisions
included in Tier-II capital. Management doesn’t intend to write back these
provisions and smooth earnings. The contingent provisions created in earlier
quarters have been used for providing for the MFI delinquencies.
Earnings and target price revision
 No change to earnings. However we increase our TP by 20% to Rs615 on
account of moving forward to an FY13E-based valuation.
Price catalyst
 12-month price target: Rs615.00 based on a Gordon growth methodology.
 Catalyst: Continued strong earnings growth and asset quality improvements
Action and recommendation
 HDFC Bank is one of our top picks among Indian banks: We don’t think
the expensive multiple that the market awards the stock is likely to change.
Irrespective of the interest rate cycle, asset quality cycle or economic cycle,
HDFC Bank maintains its robust liabilities franchise and consistently reports
strong earnings growth. Maintain Outperform with a TP of Rs615.