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HDFC Bank - Q2FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


31 Oct 2013





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HDFC Bank’s Q2FY14 result continued to reflect superior retail and wholesale franchise with steady core performance in the volatile quarter. The bank reported PAT of Rs1982 crore growing 27.1% & 7.5% in line with our estimate. NII growth slowed down to 15.3% y/y & 1.3% q/q due to slowing loan book growth 16.0% y-o-y and 20bps NIM contraction Q-o-Q. Fee income grew modestly 11.0% y-o-y & 5.4% primarily attributable dip in third party commission income, lower debit card fees and weak transaction based fee income. Forex income shot up 59.5% Q-o-Q & 112.5% Y-o-Y largely attributable to higher customer flows, increasing corporate hedging in FX market and prop gains. Treasury reported loss of Rs173 crore on provision for MTM losses on AFS book and rising bond yields. Provisions went down 26.8% Q-o-Q to Rs386 crore on relatively lower contingent provision. Overall asset quality remained fairly stable as gross NPAs and net NPAs stood at 1.1% and 0.30% respectively with 73.9% PCR in the challenging macro environment. Loan book growth and deposit growth were 16.0% Y-o-Y and 14.2% Y-o-Y, in line with sector. CASA ratio increased 30bps Q-o-Q to 45% owing to healthy growth in saving and current deposits. Saving deposit continued to growing steadily 16.6% Y-o-Y. Slowing loan book growth and margin contraction led to 15.3% Y-o-Y growth in NII: NII grew 15.3% Y-o-Y & 1.3% Q-o-Q led by loan growth 15.3% Y-o-Y & 20bps NIM contraction Q-o-Q. On sequential basis, Net interest margin decreased 20bps mainly on account of higher incremental deposit cost, cost of LAF borrowing increasing, maintaining higher CRR (at 105-107% vs. 99% requirement) and slower corporate asset re-pricing. Asset yield came down 9bps Q-o-Q compared to 22bps Q-o-Q rise in cost of funds leading to 20bps margin contraction. We believe re-pricing of wholesale loans, decline in short term rates due to withdrawal of liquidity tightening measures would stabilize margins in 2HFY14. Fairly stable credit quality – Broadly asset quality continued to be fairly stable as gross NPA and net NPA stood at 1.1% and 0.3% respectively. Provision coverage ratio fell 74bps Q-o-Q due to lower to floating provision. Retail loan portfolio has contributed incremental slippages during the quarter. Within the retail book, stress in commercial vehicle and construction equipment book led to higher NPAs while rest of retail products asset quality remain stable. Valuation & Recommendation: HDFC bank has performed reasonably well in tough operating environment. Post the withdrawal of liquidity tightening measures; we also believe short term rates and deposits to come down in Q3FY14 which in turn support margins. We believe best in class risk adjusted NIM, superior CASA ratio, improving cost to income; well matched asset liability book and strong capital adequacy ratio are key value drivers for the stock in medium term. We expect HDFC Bank to deliver 21.3% CAGR in net earnings over FY13-15e. At Rs 666 the stock is trading at 3.2x FY15e adjusted book and 16.0x FY15e earnings. We maintain our “ACCUMULATE” rating on the stock with target price of Rs700.

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