HDFC - Concerns on NIM may be exaggerated; upgrade to Buy - Avendus

The c219-bp increase in short-term rates since Jun13 has raised concerns on HDFC's ability to protect NIMs. We have attempted to quantify the impact of a rise in wholesale rates (assuming rates were to stay at elevated levels for the rest of the fiscal) along with an increase in the banks' base rates on the net profit for HDFC. We assume the higher-yielding wholesale loans to be funded by shortterm wholesale liabilities; there is a three-month lag in passing on the higher cost to borrowers. We estimate a 1% impact on the FY14f NP, if NIMs on wholesale loans decline c75-bp. The impact of a 100-bp fall in NIMs on retail loans is estimated at 6% on the FY14f NP. However, the weakness in the stock price assumes a c22% cut in NP estimates over FY14f-FY16f, which may be excessive. Past precedence has demonstrated HDFC's ability to protect NIMs across rate cycles. Upgrade to Buy with a revised Jun14 TP of INR925.

1% impact on FY14f NP if wholesale rates stay at current levels

We assume the short-term wholesale loans to be funded by short-term wholesale liabilities. Therefore, a c217-bp rise in the one-year AAA bond yields since Jun13 may impact spreads. However, due to the short term nature of the assets, a pass-through of higher costs may require a maximum of three months. We estimate a 1% impact on NP forecasts for FY14f if spreads on wholesale loans drop c75-bp, assuming short-term rates continue to stay at elevated levels for the rest of the fiscal.

Retail loan spreads' compression may impact FY14f NP at worst by 6%

We assume the long-term retail assets for HDFC to be funded largely by bank loans. Thus, spreads on retail loans may be impacted, if banks were to raise their base rates. Assuming a decline of 100-bp on retail loans, we estimate a 6% impact on NP forecasts for FY14f.

Current price assumes 22% cut in NP forecasts; may be excessive

The stock has underperformed the Bankex by 5% over the past week, on concerns of lower spreads upon a rise in wholesale rates. However, the current price assumes a c22% cut in NP forecasts over FY14f-FY16f, which may be excessive. HDFC may be able to pass on the rise in funding costs in the case of short-term wholesale loans almost immediately and with a small lag at worst in the case of retail loans. The cumulative impact of the decline in spreads on wholesale and retail loans is at worst 7% on the FY14f NP.

Past precedence demonstrates ability to protect NIMs; upgrade to Buy

Past precedence amply demonstrates HDFC's ability to protect NIMs even during high interest rate cycles. Thus, the current weakness in the stock price on NIM concerns may be excessive. We forecast NIMs to stay stable at a threeyear mean of 3.7% over FY14f-FY16f. An 18% CAGR in the NII is likely to drive a CAGR of 16% in FY14f-FY16f earnings. We revise our Jun14 TP to INR925 upon revision in the SOTP-based value and the P/B and P/E multiples. A slowdown in loan growth and deterioration in asset quality are the key risk factors.

Source : Equity Bulls

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