We met HDFC Bank recently to get a sense on how the best banking franchise is likely to perform amid deteriorating macro. Not surprisingly the discourse enhanced our conviction that profitability is unlikely to be hit despite some moderation in growth. The fact that bank remains comfortable about growing at an absolute growth premium of 4-6ppt to the slowing system implies that pace of market share gain has accelerated. Retail segment will continue to drive overall loan growth with products such as auto loans, business banking, home loans, gold loans, personal loans and credit cards witnessing healthy traction.
While recent RBI measures are expected to dent NIM in the near term, full-year margin delivery is likely to be stable over FY13. Fee growth hit by adverse regulations is likely to trail balance sheet growth in the medium term. Aided by improving productivity of the newly added branches, the core cost/income is expected to improve notwithstanding a moderated growth environment. Delinquencies except in CV/CE financing remain materially lower than expected loss (priced-in) level in the retail segment. But some normalization here along with sporadic stress in the corporate segment could drive gross NPA level to 1.2-1.3% by FY15. Credit charge therefore may continue to be elevated (as seen in Q1 FY14) but is unlikely to cross 90bps for the year.
With steady PPOP growth of 20-21% and higher credit cost, earnings growth of the bank is likely to converge towards revenue growth over FY13-15. However, underlying profitability of the business as manifested in the RoA would be sustained at industry-best 1.8-1.9%. The key tailwinds will be increasing retail asset mix and network efficiency improvements. We believe high inherent profitability and performance predictability of the bank would support its premium valuation. If macro continues to deteriorate, the relative premium would only expand. Absolute valuation does not appear demanding if one superimposes historical 1-yr fwd P/BV multiple on RoA delivery. Retain BUY recommendation with 9-12 month target of Rs730.
|Y/e 31 Mar (Rs m)||FY12||FY13||FY14E||FY15E|
|Total operating income||186,682||226,637||269,244||323,118|
|Yoy growth (%)||25.5||21.4||18.8||20.0|
|Operating profit (pre-provisions)||93,906||114,276||136,658||167,064|
|yoy growth (%)||31.6||30.2||17.1||24.0|
|Adj. BVPS (Rs)||126.0||150.2||172.3||202.8|
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