Maintain HOLD on HDFC Bank - Superior Asset Quality, Earning Consistency - Karvy

HDFC Bank is currently trading at 15% premium to its five year average valuation, while the stock has outperformed the Bankex by 3% over last one year on account of its superior asset quality and earning consistency.

Asset Quality at its best; Credit Cost Expected to be Higher: HDFC Bank's asset quality has shown tremendous resilience in last 2-3 years, while the Bank's slippages have declined to 1% for FY12, which is even better than the reasonable expectations of its Management. The Bank's Gross NPA remains stable at 1% with no major restructured asset. We believe that it would be very difficult for the Bank to further improve on this front, given its composition of its loan book. Hence, we factor higher credit cost going ahead, assuming it does not heavily utilizes its floating provision.

Sustaining Business Momentum: HDFC Bank's credit growth remains strong and it continues to grow 4-5% above the industry. However, the growth has off late come more from the retail segment, whereas corporate segment has relatively slowed down. The Bank's CASA - which used to be over 50% - has declined to ~46% in Q2FY13.

Best-in-Class NIMs: Despite difficult conditions, backed by its strong deposit franchise, the Bank has been able to maintain the NIMs (calculated) of 4.5%, which is best in the industry. Its cost of funds is one of the lowest at 5.4%. The Bank's Management has guided to maintain its NIMs at current levels. Despite decline in CASA, the Bank has been able to maintain its NIMs on the back of shift in portfolio mix from corporate to retail.

Outlook & Valuation

At the CMP, the stock trades at 21.0x & 18.2x FY14E & FY15E earnings, and at 3.8x & 3.3x P/ABV FY14E & FY15E, respectively. Based on its historical mean valuation implying 3.4x P/ABV FY15E, we reiterate our "HOLD" recommendation on HDFC Bank with upwardly revised target price of Rs. 690 per share (from Rs. 630 earlier).

Source : Equity Bulls

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