Tuesday, April 19, 2011

HDFC Bank - RU4QFY2011 - Accumulate

Result Update on HDFC Bank for 4QFY2011 with an Accumulate recommendation and a Target Price of `2655(12 months)


For 4QFY2011, HDFC Bank reported healthy 33.2% yoy growth in net profit to `1,115cr, in line with our estimate of `1,110cr. The bank continued to maintain healthy operating performance with strong profitability growth. We maintain our Accumulate recommendation on the stock.

Consistently healthy performance on all parameters: Overall business growth of the bank was healthy for 4QFY2011 despite a typical fourth quarter slowdown in advances. The bank was able to maintain its reported NIM at 4.2% despite the rising cost of funds for the system as a whole. Over the past few quarters, the bank has been witnessing a slowdown in saving account deposit growth, which came down to 27.2% in 4QFY2011 from 42.8% in 4QFY2010. Despite this, the bank's CASA ratio remained the best in the industry at 52.7% (51% after adjusting for one-offs). The asset quality continued to improve substantially with slippages halving from 2.6% in FY2010 to 1.1% in FY2011 and provisioning expenses to average assets declining to 0.8% in FY2011 from 1.1% in FY2010. NPA coverage improved further to 82.5%, even without considering the strong floating  provisions (accounting for over 53.4% of provisioning expenses during the quarter). The bank currently has an outstanding floating provision pool of ~`730cr, building a cushion against future asset-quality pressures.

Outlook and valuation: At the CMP, the stock is trading at 3.2x FY2013E P/ABV, which is below our target multiple of 3.6x (benchmarked at ~25% premium to our Sensex target multiple). We believe HDFC Bank is well positioned for high qualitative growth, with CASA and cost-to-income ratio returning to pre-CBoP levels. In our view, with strong capital adequacy and healthy branch expansion, the bank is set to further gain credit and CASA market share accompanied by reduction in NPA provision costs. We maintain our Accumulate recommendation on the stock with a target price of `2,671.

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