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HDFC Bank (HDFCB)
Banks/Financial Institutions
Earnings driven by lower provisions. HDFC Bank’s 31% earnings growth continues
to be driven by lower provisions as revenue growth remained under pressure, albeit
better than 2QFY12 levels, at 16% yoy. Strong performance in fee income is positive
but this is unlikely to grow rapidly. We believe that lower provisions will continue to
cushion near-term growth as the bank reduces fresh floating provisions. We find
valuations expensive as compared to peers. Maintain ADD with TP of `560(unchanged).
Premium valuations to continue though we see opportunities elsewhere; maintain ADD
We expect HDFC Bank to deliver 27% earnings CAGR and RoEs in the range of 19% levels for
FY2012-14E. HDFC Bank is relatively well-placed in the asset-quality cycle and we see relatively
lower risks as compared to peers. However, we find valuations expensive at 2.8X book and 14X
FY2013E EPS. Declining interest rates and ability to address policy headwinds are likely to reduce
the valuation premiums that currently exist between HDFC Bank and ICICI Bank/Axis Bank.
Decline in provisions are key earnings driver for the bank even as loan growth has been lower at
22%. We believe that a combination of factors, viz. (1) inability of revenue growth to grow faster
than balance sheet growth, limited scope for margin expansion from current levels and relatively
weak fee income growth and (2) increase in specific provisions as slippages increases from current
levels, pose medium-term risks to superior earnings growth. However, we do believe that the nearterm
risk to earnings remains limited as the bank is likely to reduce floating provisions while the
higher base would enable the bank to deliver strong earnings growth.
Declining provisioning costs offset revenue pressure; asset quality stable
HDFC Bank declared another consistent quarter with healthy earnings growth of 31% yoy driven
primarily by lower provisions (29% decline yoy). Revenue growth remains subdued at 16% yoy –
NII grew 12% yoy while non-interest income grew by 16% yoy. Margins have been stable at 4.1%
qoq driven by change in composition of loans and better investment yields.
The quarter saw strong performance in the non-interest income with core fee income growing by
20% yoy and income from forex increasing by about 70%. Asset quality trends are broadly stable
as most products continued to exhibit low delinquencies. The bank has made an additional
floating provision for the quarter though the quantum of provisions has been lower compared to
previous quarters
Asset quality trends stable; high coverage gives comfort to earnings growth
HDFC Bank reported another strong quarter with asset quality trends showing little signs of
deterioration. Slippages for the quarter continued to be well below estimated levels
indicating limited stress across product portfolios. Consequently, provisions declined 30%
yoy (10% qoq) giving strong support to earnings. We do note that fresh floating provisions
have been consistently declining while general provisions have started to increase in line
with loan growth.
Gross NPLs increased by 7% qoq to `20.2 bn (1% of loans) as compared to `18.9 bn (1.0%
of loans) in September 2011. On the other hand, net NPLs increased 12% qoq to `4 bn
(0.2% of loans) as compared to `3.6 bn (0.2% of loans) in September 2011. Provision
coverage ratio declined marginally to 80% as compared to 81% in September 2011. The
bank has a very strong coverage ratio which should enable it to tide any sharp deterioration
in loans, especially corporate that are lumpy in nature.
The management has indicated that slippages across retail products are not a cause of
serious concern (early warning signals are stable currently). We are building loan-loss
provisions at 1.1% levels for FY2012-13E and slippages to increase to 1.7% of loans from
1.1% in FY2011.
Retail segment continues to drive loan growth; YTD loan growth at 22%
HDFC Bank’s loan book grew 22% yoy (3% qoq) to `2tn as of December 2011 mainly due
to higher growth in retail loans while the bank shed some low-yielding corporate loans
during the quarter. Overall retail loans grew by 30% yoy while corporate loan growth was
subdued at 15% yoy. HDFC Bank has grown the overall loan book by 22% YTD, well above
the industry growth rate; we expect the bank to slow down current pace of loan growth in
4QFY12E.
Retail loan growth was fairly robust in almost all sub-segments. Housing loans grew by 30%
yoy, unsecured loans—personal loans grew by 33% yoy while credit cards grew by 42% yoy,
commercial loans by 44% yoy and business banking grew by 30% yoy. Unsecured loans to
total retail loans is about 20% compared to 19% in September 2011. The bank is steadily
leveraging its expanding franchise outside the tier-1 and 2 cities to expand the loan book.
CASA franchise attractive at 48% levels; reported CASA higher
Despite the sharp rise in interest rates, CASA ratio has held steady for the quarter at 48%
levels (core CASA). Reported CASA ratio was marginally higher at 49% on the back of oneoff
high current deposits included in the current quarter (primarily from the recent public
debt offerings). Savings deposits grew by 15% yoy while overall current account (core) grew
by 13% yoy.
Margins maintained at 4.1%; better asset yields and high CD ratio cushion rise
in cost of funds
NIM was at 4.1% (flat qoq) as the rise in cost of funds was offset by improvement in asset
yields and CD ratio. Loan yields (KS calc) improved by 30 bps as the underlying composition
of assets was skewed towards higher retail loans and the bank shed low-yielding corporate
loans; investment yields improved by 30 bps to 8.5% (KS calc) while the CD ratio improved
further to 84%. Cost of funds increased by about 20 bps (KS calc) to 6.4%. NII grew by
12% yoy (6% qoq) to `31 bn.
We expect margins to remain stable (a decline is unlikely) over the next few quarters as the
bank reduces the underlying CD ratio and focus shifts back to relatively low-yield corporate
loans. We are building margins to decline by about 10 bps in FY2012-13E.
Strong performance in fee income; better spreads result in strong forex income
Non-interest income grew by 20% yoy to `14.2 bn with strong contribution from forex
income and core fee income. Core fee income, despite weak economic environment, grew
by 20% yoy (seasonal impact from bullion sales and credit card fees) while growth in foreign
exchange income was impressive at 69% yoy (higher share of proprietary income; we
believe that the bank benefitted from the volatile exchange rate environment). Treasury
income (including revaluation) reported a marginal loss of ` 818 mn compared to `307 mn
loss in 3QFY11. We are factoring overall non-interest income to grow by 22% yoy but
expect core fee income to grow by 19% yoy.
Other key highlights
Cost-income ratio for the quarter was flat qoq at 48%. Overall operating costs have
increased by 18% yoy with staff costs having increased by 20% yoy.
The bank has opened 51 branches and 590 ATMs in 3QFY12 taking the total branch
network to 2,201 branches and 7,110 ATMs, respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDFCB)
Banks/Financial Institutions
Earnings driven by lower provisions. HDFC Bank’s 31% earnings growth continues
to be driven by lower provisions as revenue growth remained under pressure, albeit
better than 2QFY12 levels, at 16% yoy. Strong performance in fee income is positive
but this is unlikely to grow rapidly. We believe that lower provisions will continue to
cushion near-term growth as the bank reduces fresh floating provisions. We find
valuations expensive as compared to peers. Maintain ADD with TP of `560(unchanged).
Premium valuations to continue though we see opportunities elsewhere; maintain ADD
We expect HDFC Bank to deliver 27% earnings CAGR and RoEs in the range of 19% levels for
FY2012-14E. HDFC Bank is relatively well-placed in the asset-quality cycle and we see relatively
lower risks as compared to peers. However, we find valuations expensive at 2.8X book and 14X
FY2013E EPS. Declining interest rates and ability to address policy headwinds are likely to reduce
the valuation premiums that currently exist between HDFC Bank and ICICI Bank/Axis Bank.
Decline in provisions are key earnings driver for the bank even as loan growth has been lower at
22%. We believe that a combination of factors, viz. (1) inability of revenue growth to grow faster
than balance sheet growth, limited scope for margin expansion from current levels and relatively
weak fee income growth and (2) increase in specific provisions as slippages increases from current
levels, pose medium-term risks to superior earnings growth. However, we do believe that the nearterm
risk to earnings remains limited as the bank is likely to reduce floating provisions while the
higher base would enable the bank to deliver strong earnings growth.
Declining provisioning costs offset revenue pressure; asset quality stable
HDFC Bank declared another consistent quarter with healthy earnings growth of 31% yoy driven
primarily by lower provisions (29% decline yoy). Revenue growth remains subdued at 16% yoy –
NII grew 12% yoy while non-interest income grew by 16% yoy. Margins have been stable at 4.1%
qoq driven by change in composition of loans and better investment yields.
The quarter saw strong performance in the non-interest income with core fee income growing by
20% yoy and income from forex increasing by about 70%. Asset quality trends are broadly stable
as most products continued to exhibit low delinquencies. The bank has made an additional
floating provision for the quarter though the quantum of provisions has been lower compared to
previous quarters
Asset quality trends stable; high coverage gives comfort to earnings growth
HDFC Bank reported another strong quarter with asset quality trends showing little signs of
deterioration. Slippages for the quarter continued to be well below estimated levels
indicating limited stress across product portfolios. Consequently, provisions declined 30%
yoy (10% qoq) giving strong support to earnings. We do note that fresh floating provisions
have been consistently declining while general provisions have started to increase in line
with loan growth.
Gross NPLs increased by 7% qoq to `20.2 bn (1% of loans) as compared to `18.9 bn (1.0%
of loans) in September 2011. On the other hand, net NPLs increased 12% qoq to `4 bn
(0.2% of loans) as compared to `3.6 bn (0.2% of loans) in September 2011. Provision
coverage ratio declined marginally to 80% as compared to 81% in September 2011. The
bank has a very strong coverage ratio which should enable it to tide any sharp deterioration
in loans, especially corporate that are lumpy in nature.
The management has indicated that slippages across retail products are not a cause of
serious concern (early warning signals are stable currently). We are building loan-loss
provisions at 1.1% levels for FY2012-13E and slippages to increase to 1.7% of loans from
1.1% in FY2011.
Retail segment continues to drive loan growth; YTD loan growth at 22%
HDFC Bank’s loan book grew 22% yoy (3% qoq) to `2tn as of December 2011 mainly due
to higher growth in retail loans while the bank shed some low-yielding corporate loans
during the quarter. Overall retail loans grew by 30% yoy while corporate loan growth was
subdued at 15% yoy. HDFC Bank has grown the overall loan book by 22% YTD, well above
the industry growth rate; we expect the bank to slow down current pace of loan growth in
4QFY12E.
Retail loan growth was fairly robust in almost all sub-segments. Housing loans grew by 30%
yoy, unsecured loans—personal loans grew by 33% yoy while credit cards grew by 42% yoy,
commercial loans by 44% yoy and business banking grew by 30% yoy. Unsecured loans to
total retail loans is about 20% compared to 19% in September 2011. The bank is steadily
leveraging its expanding franchise outside the tier-1 and 2 cities to expand the loan book.
CASA franchise attractive at 48% levels; reported CASA higher
Despite the sharp rise in interest rates, CASA ratio has held steady for the quarter at 48%
levels (core CASA). Reported CASA ratio was marginally higher at 49% on the back of oneoff
high current deposits included in the current quarter (primarily from the recent public
debt offerings). Savings deposits grew by 15% yoy while overall current account (core) grew
by 13% yoy.
Margins maintained at 4.1%; better asset yields and high CD ratio cushion rise
in cost of funds
NIM was at 4.1% (flat qoq) as the rise in cost of funds was offset by improvement in asset
yields and CD ratio. Loan yields (KS calc) improved by 30 bps as the underlying composition
of assets was skewed towards higher retail loans and the bank shed low-yielding corporate
loans; investment yields improved by 30 bps to 8.5% (KS calc) while the CD ratio improved
further to 84%. Cost of funds increased by about 20 bps (KS calc) to 6.4%. NII grew by
12% yoy (6% qoq) to `31 bn.
We expect margins to remain stable (a decline is unlikely) over the next few quarters as the
bank reduces the underlying CD ratio and focus shifts back to relatively low-yield corporate
loans. We are building margins to decline by about 10 bps in FY2012-13E.
Strong performance in fee income; better spreads result in strong forex income
Non-interest income grew by 20% yoy to `14.2 bn with strong contribution from forex
income and core fee income. Core fee income, despite weak economic environment, grew
by 20% yoy (seasonal impact from bullion sales and credit card fees) while growth in foreign
exchange income was impressive at 69% yoy (higher share of proprietary income; we
believe that the bank benefitted from the volatile exchange rate environment). Treasury
income (including revaluation) reported a marginal loss of ` 818 mn compared to `307 mn
loss in 3QFY11. We are factoring overall non-interest income to grow by 22% yoy but
expect core fee income to grow by 19% yoy.
Other key highlights
Cost-income ratio for the quarter was flat qoq at 48%. Overall operating costs have
increased by 18% yoy with staff costs having increased by 20% yoy.
The bank has opened 51 branches and 590 ATMs in 3QFY12 taking the total branch
network to 2,201 branches and 7,110 ATMs, respectively.
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