Buy HDFC Bank - Target Price Rs 610 - Safe Heaven - Emkay

Buy, Target Price Rs 610 Safe heaven

Limited slippages, least stressed asset portfolio and healthy PCR provides comfort: Expect least of the negative surprise in terms of slippages and provision costs. Stressed assets (NNPAs + restructured assets) at 0.4% remains lowest in the banking space. Additionally, provision coverage ratio at 80%+ provides comfort.

RoA performance driven by lower cost of funds and provision cost: Strong CASA ratio (48%), stable NIM (4%+), lowest cost of funds (4.8%) and limited provision costs (50bps) will drive RoA performance over FY12-14E. We expect RoA/RoE to inch towards 1.8%/21%+ over FY13-14E.

Valuation premium is justified: Premium valuation seems justified given a) superior operating matrix b) stable asset quality c) adequate capital and d) superior return ratios. 28% branch addition in FY12 will enable steady CASA deposit (despite SB interest rate deregulation) and improved retail loan mix.

Valuations : The stock trades at 3.9x / 2.3x FY13/FY14 ABV. We have valued the bank at 3.5x FY14ABV and arrive at a target price of Rs610.

Near term catalyst and earnings performance: We expect bank to report 24% CAGR in NII / customer assets over FY12-14E. Healthy non-interest income and lower credit cost requirement would aid to higher 30% CAGR in APAT. Intense competition in savings deposit space remain key catalyst. Maintain positive bias.

Source : Equity Bulls

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