HDFC Bank - ROAs; Set to maintain the heights - Prabhudas Lilladher

HDFC Bank (HDFCB) continues to deliver consistent +30% PAT growth, with robust asset quality trend. Strong ROA improvement has aided HDFCB to deliver +30% PAT growth despite ~25% b/s growth over FY10-12. Though growth could remain <22- 23% in FY13, HDFCB could potentially deliver +30% PAT growth with possible margin improvement and credit costs levers. We have increased our earnings by 2-3% and PT to Rs510/share and maintain our "Accumulate" rating. We prefer HDFCB over Kotak Bank among defensives as we expect relatively better ROA resilience for HDFCB in a normalised credit cost scenario.

Growth and margins stable: Retail segment aided ~22% YoY growth, with HDFCB paring down growth (2% sequential contraction) in the bulk corporate book due to low spreads. Repricing and high proportion of retail-lending aided yields. With the rate cycle likely to reverse, we expect marginal improvement in margins, though management expects limited margin impact.

Robust asset quality trend continues: Slippages have remained stable sequentially and management is not seeing any significant stress points even now. Given low NPA accretion over the last 7-8 qtrs, management expects lower recoveries/write-offs, going forward, which could lead to marginally higher net accretion to NPAs; however they do not see any material negative surprises in the near term. HDFCB added ~Rs0.7bn to their floating provision book (~Rs11bn currently) which will provide a huge cushion when the cycle turns.

Room for further ROA improvement: With loan growth expected to remain <22-23% in FY13, delivering +30% PAT growth would be contingent on further ROA improvement (already at 1.9% in Q3FY12). Though we factor in ~25% PAT growth in FY13, we believe margin improvement due to falling rates and potential credit costs levers (floating provisions of Rs10.7bn) could aid +30% PAT growth even in FY13.

Source : Equity Bulls

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