Neutral on HDFC Bank - Motilal Oswal

HDFC Bank's (HDFCB IN, Mkt Cap US$20.6b, CMP Rs2050, Neutral)

3QFY11 PAT grew ~33% YoY to Rs10.9b Despite rise in funding costs, NIMs remained stable QoQ at 4.2% as CASA ratio remains strong at ~51% (stable QoQ) and high yielding retail loans were a key driver of loan growth;

CASA deposits grew 21% YoY led by 31% YoY growth in SA deposits. Loans grew ~1.3% QoQ and ~33% YoY for 3QFY11 to ~Rs1.6t. Credit declined to 0.74% vs 1.17% a quarter ago and 1.5% a year ago. Other income grew 17% QoQ and 25% YoY to Rs11.3b on account strong growth in fee income and higher forex income.

Asset quality remained impeccable and improved further with GNPA declining 3% QoQ, PCR (ex write offs) improved to 81% vs 78% QoQ and restructured loans remaining stable QoQ at 30bp of standard loans.

HDFC Bank is best placed in the current environment with (1) CASA ratio of ~50% (a boon in a rising interest rate scenario), (2) strong growth outlook of 25-30%, (3) improving operating efficiency, and (4) lower credit costs, led by best in class asset quality. In our view, EPS growth will be ~29% CAGR over FY10-13 against 25% delivered over FY05-10.

While we remain positive on the bank's business, we believe valuations are rich. Over FY05-10, peak PBV one year forward was 5x and average multiple was 3.3x. We maintain Neutral rating and would review this once valuations correct from current levels.

Source : Equity Bulls

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