HDFC Bank - Superior Asset Quality, But Fully Priced-in; Reiterate "HOLD" - Karvy

Asset Quality at Peak; Credit Cost to Inch Higher: HDFC Bank's asset quality has shown tremendous resilience in last 3 years, while its slippages declined to 0.9% in FY12, which is even better than reasonable expectations of its Management. Its Gross NPA remains stable at 1% with no major restructured assets. We believe that it would be very difficult for the Bank to further improve on this front, given its composition of its loan book. Though retail portfolio of overall industry - in terms of delinquencies - has so far done well, it also means that portfolio is unseasoned. Hence, we have factored higher credit cost going ahead, assuming it doesn't heavily utilize its floating provision.

Sustaining Business Momentum: HDFC Bank's credit growth remains strong and it continues to grow 4-5% above the industry. However, the growth has off late come more from the retail segment, whereas corporate segment has relatively slowed down. The Bank's CASA - which used to be >50% - has declined to ~45% in Q2FY14.

Best-in-Class NIMs: Despite difficult conditions, backed by its strong deposit franchise, the Bank has been able to maintain the NIMs (calculated) of 4.5%, which is best in the industry. The Bank's cost of funds is one of the lowest at 5.7%. Despite decline in CASA, the Bank has been able to maintain its NIMs on the back of shift in portfolio mix from corporate to retail. Its Management has guided to maintain its NIMs at current levels.

PAT Growth Streak of 30% for 55 Quarter Breaks: The Bank has eventually acknowledged that with CAGR operating profit growth of 22%, it can no longer continue its 30% profit.

Outlook & Valuation

We reiterate our "HOLD" recommendation on HDFC Bank with unrevised target price of Rs. 725 per share valuing it at 3.4x P/ABV FY15E.

Source : Equity Bulls

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