HDFC Bank - Business as usual but for a small hiccup - Centrum

HDFC Bank's Q3FY13 performance was in line with our expectations (PAT at Rs18.6bn). The bottom-line performance was primarily driven by healthy growth in NII and non-interest income. Asset quality experienced first hiccup with %GNPA inching up QoQ for the first time since FY2010 led by CE & CV segments though overall matrix remained robust. HDFC Bank continued to deliver ~30% bottom-line growth despite the environment and has displayed strong command over business segments it focuses on. That said, at current valuations the stock is fairly priced. We upgrade the stock to Neutral from Reduce earlier.

- Reported NIM contracts 10bps QoQ, Loan growth ~ 24%: NII grew by a healthy 22% YoY to Rs38bn led by healthy credit growth (24% YoY) while reported NIM contracted sequentially by 10bps to 4.1%. Despite continuing strong growth in unsecured/high yield products (credit cards up 55%, personal loans up 28% YoY), lending yields contracted by ~25bps QoQ. However, this was partly offset by decline in cost of funds which effectively contained NIM contraction to 10bps QoQ.

- Asset quality a small hiccup: Bank experienced a small hiccup on asset quality with %GNPA inching up QoQ for the first time since FY2010 led by slippages in CE & CV segments. The management views this as normalization of NPLs to acceptable levels and indicated that long term average GNPA stands at ~1.25% - something we have factored in for FY13. Notwithstanding the potential near term implications of weak economic activity, the overall asset quality matrix remains robust.

- Healthy credit growth, focus on unsecured products: The advances book grew by a healthy 24% YoY primarily driven by the retail segment (30% YoY with strong growth in unsecured/high yielding products). In response to the stress experienced in CV book (down 1% QoQ), the bank has turned cautious. For FY13, the share of retail segment may come off a bit due to intensifying competition and weaker demand in key segments (auto & housing) though anticipated improvement in corporate segment should help maintain a healthy growth of ~21% YoY.

- Core C-I improves further: Operating expenses were up 19% YoY led by other opex (up 22% YoY) due to aggressive branch and ATM additions in recent quarters. However, the core cost-income ratio improved further to 47% from ~50% in Q4FY12. Importantly, the focus of incremental branch expansion is towards newer locations as indicated by the addition of 394 new cities to the branch presence during the last 12 months. The capacity build up in newer cities should help sustain balance-sheet growth.

- Maintain Neutral: HDFC Bank continues its streak of consistent performance and remains one of the safest bets in the banking sector. At current market price of Rs659, the stock trades at 18.6x FY2014E EPS and 3.8x FY2014E ABVPS and is fairly valued (vs our target price of Rs650). Given the recent correction (from 706 in Nov'12) in the stock we are turning Neutral towards the stock and suggest investors switch to banking stocks geared on the anticipated economic recovery (ICICI Bank, Axis Bank and Federal Bank).

Source : Equity Bulls

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