HDFC Bank - Soft at the 'margin', strong at the 'core' - IDFC

Q2FY14 result highlights

- HDFC Bank's Q2FY14 profit growth was +27%, and not its usual 30%. This was partly inevitable as growth slows down - for the bank, as for the economy and partly precipitated due to the volatile interest rate environment. While the quarter was probably soft, its operating fundamentals - asset quality, deposit mix and core profitability (PPOP ex-trading gains +28%) are still strong.

- Loan growth was relatively slow at 16% yoy, 4% qoq. Corporate loans were up 5% qoq, but below trends for 2Q (+7-10% qoq). Retail loans grew steadily (+3% qoq, +17% yoy) but were driven more by unsecured loans as mortgage loans were not on-boarded in Q2FY14 - should normalize ahead.

- NIMs were down 30bp qoq (to 430bp) largely due to the higher cost of funding. We expect NIMs to stabilize at current levels.

- Fee income growth was strong (+28% yoy), partly due to one-off gains on derivatives (Rs 0.6bn). Excluding this fee growth was still healthy at 23% yoy.

- Cost control was a big focus in Q2 and reflected in sharply lower cost ratios.

- Asset quality remained quite steady, with no increase in stress across product segments. Gross stressed assets remain low at 1.3% of loans.

Key positives: Healthy fee income growth, stable asset quality, control on costs.

Key negatives: Relatively sharp decline in NIMs, slower loan growth.

Valuations & view

We believe HDFC bank remains uniquely positioned amongst Indian banks - its strong asset quality and profitability make it a relatively safer stock; however, it also remains amongst the best positioned to benefit from a pick-up in economic growth due to its strong deposit franchise, expanding distribution network, especially rural. We remain positive on the stock, maintain Outperformer.

Source : Equity Bulls

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