HDFC Bank - Slows down for good... - ICICIdirect

The trend of 30% YoY rise in profitability for more than a decade was broken as estimated. PAT at Rs. 1982 crore was up 27% YoY & in-line with our estimate (Rs. 1977 crore). However, as the bank recognised entire Rs. 135 crore of MTM losses on AFS/HFT portfolios in Q2FY14 itself rather than spreading it over remaining quarters, PAT came lower by ~Rs. 77 crore. NII growth was below expectation at 15.3% YoY & 1.3% QoQ owing to 25 bps dip in NIMs to 4.3% and lower credit growth of 16% YoY. Absolute GNPA increased by Rs. 223 crore vs. Rs. 384 crore rise in Q1FY14 mainly due to stress in CV/CE segment. Maintain HOLD with revised TP of Rs. 600 (Rs. 570 earlier).

Lower business growth intentional; Healthy other income traction...

Business growth at 15% YoY was lower vs. ~20% YoY earlier. Total loans increased at 16% YoY to Rs. 268617 crore with wholesale loans (47% of the total) rising 15% YoY. As per the management, owing to lower marginal spreads during the quarter, the bank was not aggressive on wholesale lending despite opportunities in place. NIMs fell ~25 bps QoQ largely owing to RBI's liquidity tightening measures and NII reversals. Around 12 bps impact in NIMs was due to a rise in MSF rate and daily CRR requirement to 99%. Other income rose 25% YoY to Rs. 1844 crore despite MTM losses of Rs. 135 crore as forex revenue doubled YoY to Rs. 501 crore.

Enhancing rural presence to be key growth driver in future...

The management maintains a strategy of growing credit by ~4% higher than industry with margin range also being maintained at 4.1-4.5%. The bank continues to have an edge in terms of liability profile with CASA of 45% and bulk deposits of ~20% only. Further, owing to a diversified asset book, though stress has risen a bit in last two years, it has remained under control with PCR of ~75%. We believe enhancing its rural presence at brisk pace (88% of 518 new branches opened in FY13) would further help in gaining market share as these markets are largely under penetrated.

Return ratios splendid but rich valuations to cap upside in stock...

The operating performance remains healthy as investments made earlier are aiding profitability owing to improved productivity. Return ratios remain better than peers with RoA above 1.8% & RoE above 21%. Though PAT traction has declined, the inherent structural strength of the bank remains intact and may continue to find investor interest in the current environment. However, we believe at 3.4x FY15E ABV, most positives have been factored in. We maintain HOLD with a revised TP of Rs. 600 (3.1x FY15E ABV).

Source : Equity Bulls

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