HDFC Bank - ICICIdirect

Standing tall in the midst of uncertain times...

HDFC Bank posted a strong core performance with NII growing above our estimate on the back of an uptick in NIM by 10 bps to 4.3%, both on a YoY and QoQ basis. However, with the bank undertaking a base rate cut of 20 bps to 9.8%, effective from July 1, we believe NIM will trace back to 4.2% in the subsequent quarter. The asset quality remained stable in Q1FY13, which we expect to be maintained as retail comprises a major chunk while exposure to stressed corporate portfolio is minimal. We expect the bank to maintain PAT growth of 30% YoY for the forthcoming quarters. However, accounting for rich valuations, we recommend a HOLD rating to the stock.

Core performance strong, asset quality remains stable in Q1FY13...

NII growth was strong as yield on advances remained high with no base rate cuts taken in Q1FY13. Higher provisioning than estimated was offset by robust growth of 36.6% YoY in non-interest income. Processing fees was the major contributor followed by forex charges. Asset quality remained stable with GNPA growing by Rs.86.5 crore sequentially to Rs.2086.3 crore. Even risk of slippage from restructured assets remains negligible as it constitutes meagre 0.3% of the credit book.

Business model remains intact, valuations rich...

So far, the bank has been delivering an astonishing performance on all counts. However, the initial sign of slowdown in the retail segment is seen with deceleration in auto sales, home sales, etc. Besides, the economic slowdown may spread to the retail segment via lower salary hikes and job cuts, thereby impacting HDFC Bank's performance. Even on the CASA front (dipped 2.4% QoQ to 46%), the saving deposits growth has moderated (from 27.2% in FY11 to 18.4% in Q1FY13) on account of high inflation, competition from other private banks offering higher rate and shifting of money to term deposits. This may impact NIM to a certain extent.

Rich valuations factoring most positives, upside to be capped...

HDFC Bank commands a huge premium for its consistent 30% YoY earnings growth. It delivers strong return ratios, which may witness a further uptick with RoA & RoE estimated at 1.9% & 22.7%, respectively, for FY14E. However, most of the positives are factored in the price. We believe that the risk of a slowdown spreading to the retail segment remains. On the other hand, if the economy recovers, then we may see outperformance from other high beta banks. Hence, we recommend that investors hold the stock and take the opportunity to book profits at higher levels.

Source : Equity Bulls

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