HDFC Bank - Strong performance except for core fees - Prabhudas Lilladher

HDFC Bank reported a strong quarter on most metrics, except core fees, as ~20bps organic NIM improvement made up for slower-than-expected core fee growth. Asset quality continues to remain robust despite muted guidance on CVs. Though growth is likely to slow down, HDFCB has created significant buffers on Opex (1075 branches in FY11-13) and credit costs (floating provisions of Rs18bn) that can be used as levers for profit growth in FY14. However, valuations at 3.9x FY14 book is demanding to warrant a BUY. Hence, we continue to maintain 'Accumulate' with PT of Rs725/share).

- NII growth surprises: Adjusted for reclassification, core NIMs improved ~20bps QoQ, higher than our expectations and this made up for the miss on core fees. With a large fixed rate book and falling rate cycle, we expect NIMs to remain stable for HDFCB v/s a moderating trend for the sector.

- Asset quality stable: Both Gross and Net NPAs were lower QoQ and even in CVs, management indicated that asset quality performance has been manageable v/s their muted guidance. Credit costs at ~50bps included ~Rs0.5bn of floating provisions. Credit costs is likely to inch up in FY14; however, large stock of floating provisions provides comfort on our ~80bps assumption for FY14.

- Marked slowdown in fees; Opex + credit cost levers to aid PAT growth in the current slowdown: The only negative was a slowdown in core fees (down to 10% YoY growth from +20% in 9MFY13). With a slowdown in B/S growth and bottoming-out of credit costs, we expect large stock of floating provisions (Rs18bn) + opex buffer created (1075 branches over the last two years) to aid FY14 PAT growth.

- Large P&L reclassification - PAT Neutral: Two regulatory reclassifications in Q4FY13 are (1) Agent commissions and OEM subventions earlier netted off under NII and now agent commissions recognised as Opex and OEM subventions as other income (2) Write-offs earlier netted off under NPA provisions and now recorded separately as other income - These reporting changes are PAT neutral.

Source : Equity Bulls

Keywords