CMP Rs537, Target Rs600, Upside 11.7%
Loan growth calibration in-line with expectation; loan mix continued to shift towards retail segment
HDFC Bank’s advances were sequentially flat but represented a higher-than-system growth of 22% in FY12. Calibration in loan growth towards the end of the year has been a typical feature of the bank. The underlying motive of this adjustment is to not take additional risks by growing substantially ahead of the system. Shift in loan mix towards the higher-yielding retail segment continued and was more pronounced in Q4 FY12 (320bps qoq; 480bps during the year). Two wheeler loans (5.5% qoq), personal loans (6% qoq), business banking (7.4% qoq), credit cards (7.8% qoq) and home loans (8.6% qoq) drove growth of the retail segment. Corporate loan book contracted materially by 6% qoq and the annual loan growth stood at modest 11% yoy. With wholesale funding cost increasing significantly during the quarter, the bank was averse to low-margin lending and therefore let some of the short-term corporate assets mature.
In FY13, HDFC Bank has guided to grow its advances 4-6ppts higher than the system. As per the bank, the growth would be uniform in both the retail and corporate segments and therefore loan mix is expected to remain stable. We estimate 25% loan CAGR for HDFC Bank over FY12-14; one of the best amongst larger banks.
Deposits growth was strong; ~200bps improvement in CASA on daily average basis
Sequential deposits growth was much stronger than advances at 6% qoq declining the C/D ratio to 79% from 84% in the previous quarter. The key positive was material improvement in CASA; ~200bps qoq on daily average basis (70bps improvement on quarter-end basis). Higher CASA balances during the quarter were driven by the bank being a banker in various tax-free bond issues. Had it not been for this, average CASA balance would have been stable; still commendable in a high TD rate environment. The savings balance improved by 5% qoq and 17% yoy implying no major impact from higher rates being offered by some peers. Robust traction in retail TDs continued (customers rushing to lock-in at higher rates) while the bank continued to run down its CD portfolio.
NIM improved marginally driven by both higher YoA and lower CoD; outlook remains robust
Against our expectation of stable margin, NIM improved by 10bps qoq to 4.2%. Blended loan yield is likely to have improved by material 20bps qoq driven by shift in loan mix towards more profitable retail segment, continued strong growth in unsecured portfolio (personal loans and credit cards) and relatively lagged impact of loan re-pricing for the bank. Cost of funds surprisingly contracted by 20-30bps qoq aided by higher average CASA share and shrinkage in high-cost CDs. Overall, bank’s reliance on wholesale funding remains one of the lowest in the industry at near 14-15% lending structural stability to spreads. We expect margin improvement in FY13 for the bank.
Robust traction in fee and forex income; but C/I ratio deteriorate on substantial opex growth
Driven by robust growth in the retail book during the year, core fee income (80%+ component from retail segment) grew by strong 10% qoq in Q4 FY12 implying a brisk 24% growth during the year. Higher volatility in currency drove significant increase in forex income of the quarter (22% qoq) and for the year (33% yoy). The bank recorded a loss of Rs715mn on revaluation/sale of its investment portfolio. Stepping up the paddle of network expansion, HDFC Bank added 343 branches and 1,803 ATMs during the quarter. During FY12, the bank has added more than 550 branches and more importantly near 500 cities (mainly Tier-3 to Tier-6) to its network. Opex grew by significant 14% qoq on account of substantial network addition and non-recurring costs (~Rs1-1.2bn) associated with processing of applications of various bond issues. The cost/income ratio deteriorated by 300bps qoq to 50.6%. It is likely to further increase in near term as opex is expected to substantially increase in H1 FY13.
Sanguine asset quality continues to drive lower provisioning
Reflecting robust asset quality, HDFC Bank’s absolute GNPLs declined marginally during the quarter. Slippage ratio for FY13 was at an impressive 0.9%; one of the lowest in bank’s history notwithstanding the challenging credit conditions. Restructured assets remained at negligible 0.4% of advances. Provisioning was benign with credit cost based on LLP at muted 23bps. As a counter-cyclical measure, the bank continued to make floating provisions (Rs1.8bn). HDFC Bank now has Rs14-15bn of floating provisions in the balance sheet which would safeguard the bank from higher provisioning in future if asset quality behaves adversely or if dynamic provisioning regulations are implemented. Asset quality continues to be resilient particularly in the retail segment where the actual losses have been materially lower than expected losses for many products. On the corporate side also, the bank is better-placed than peers in the absence of any perturbing exposures (no long-term exposures to infra/power, aviation, metals, textiles, etc). PCR stood at robust 82% excluding write-offs, technical or otherwise. The bank continues to expect its GNPL ratio to revert to normalized levels of 1.3-1.5% from current 1% in the longer term.
Capital adequacy robust; annualized RoA near 2%
HDFC Bank’s CAR and Tier-1 ratio stood robust at 16.5% and 11.6% respectively at the end of FY12. The bank is adequately capitalized for robust 25% loan growth over the next three years. The annualized RoA for the quarter stood near commendable 2%, one of the highest ever reported by the bank. Higher RoA was driven by NIM improvement, higher core fee income and modest provisioning. In the medium-term, RoA could likely revert to more sustainable 1.6-1.8%. RoE was stable at 19.4%; however, there is significant headroom for improvement through leverage enhancement.
‘Safest play’ in the sector; retain BUY and increase target to Rs600
With the best asset quality, cheapest liability franchise, superior profitability (high RoA) and robust capitalization, HDFC Bank is the safest play in a susceptible operating environment. Driven by consistent results outperformance, bank’s valuation is likely to re-rate towards 4x FY13E P/adj.BV. We retain BUY recommendation and increase our 9-month target to Rs600.