HDFC Bank - Best bet in the current macro environment - Antique

Moderation in loan growth, to grow at 17-18% in FY14e

The management of HDFC Bank is guiding at some moderation in loan growth. Loan mix is expected to remain balanced between corporate and retail. Retail segment has begun to see pressure on growth, primarily due to slowdown in auto, CV/CE, personal loans, and credit cards. Further, demand from corporate segment continues to remain weak owing to weak macro-economic conditions. We expect loan growth to be at 17-18% for FY14e

Strong CASA franchise, margins to remain at 4.2-4.3%

Margins are likely to remain healthy in the 4.2-4.3% range, given the bank's strong CASA franchise. In 2QFY14, NIM declined ~20-25bps to 4.3% owing to increase in cost of funds, which flowed through higher cost of deposits, coupled with increase in cost of borrowings through MSF in the LAF window. Also, maintaining higher CRR level on a daily basis impacted margins negatively. Going forward, we expect NIM to improve marginally as the costs of borrowing from the LAF window through MSF has reduced by 125bps to 8.75%, which will help the bank in reducing its borrowing cost. Hence, NIM would improve for the remaining period of the year.

Asset quality continues to remain stable

Asset quality remained stable in 2QFY14 with absolute GNPA increasing 8% QoQ, while the gross NPA ratio increased 9bps QoQ to 1.1%. The management said overall asset quality continues to remain stable, except for CV/CE segments where NPAs are yet to peak out. Its net restructured advances were stable at 0.2% levels, thereby indicating limited stress in the corporate portfolio. Loan loss coverage ratio remained healthy at 74%. Despite stress levels across a few retail products, we do not foresee a sharp rise in credit costs for FY13-15e as the bank continues to hold floating provisions to the tune of INR18.5bn.

Valuation and outlook

HDFC Bank continues to remain the best banking franchise within Indian financials. It remains best positioned in maintaining above industry NIM over 4%, CASA at 45% levels, and higher RoA at 1.8%. We continue to remain positive on the stock and retain our target price of INR710 per share (based on 3.3x FY15e P/BV and 15.7x FY15e P/E) and maintain Buy on the stock.

Source : Equity Bulls

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