Buy HDFC Bank; target Rs 635

“HDFC Bank, net Profit after tax for the current quarter increased 30.4% YoY (1.6% QoQ) to Rs 14530.8 mn from Rs 11147.1 mn for Q4 FY11. The growth in PAT on YoY basis, despite higher operating expenses (driven by aggressive branch addition), was mainly driven by 19.3% YoY (32.0% QoQ) increase in the NII at Rs 33883.1 mn (led by robust growth in advances 22.2% YoY and 0.6% QoQ) and 18.8% YoY (5.1% QoQ) increase in other income. The main contributor to other income for the quarter was fees & commissions of Rs 12373 mn, which was up by 23.7% YoY. Besides this lower provisioning (decline of 30.8% YoY and 9.4% QoQ) during the quarter led by lower slippage further aided growth in net profit. Cost / Income ratio during the quarter increased by 175 bps YoY (298 bps QoQ) to 50.6% driven by aggressive branch and ATM expansions during the quarter.

Net Interest Margins during the quarter registered an increase of 10 bps sequentially to 4.2% on the back of higher average CASA balance during the quarter (the bank was the collecting banker for issuance of tax-free bonds for some of the issuers in Q4 FY12). Added to this the bank’s continued focus on retail lending due to attractive yields and run down of low yielding corporate loans has further aided in margin expansion.

Total business of the bank registered a robust growth of ~20.0% YoY (3.6% QoQ) as at Q4FY12. Deposits grew by 18.3% YoY (6.1% QoQ), whereas Net Advances grew by 22.2% YoY (0.6% QoQ). The advance book grew on the back of healthy 34% YoY (7% QoQ) growth in the retail book, while corporate advances book grew 11% YoY (decline of 6% QoQ). The share of retail book in the total advances improved to 54.8% against 50.1% YoY. Going forward, management expects corporate loan book to pick up pace and has guided for a credit growth of 19-22% for FY13.

Asset quality continued to remain stable with gross NPA at 1.01% (1.05% YoY, 1.03% QoQ) and net NPA at 0.18% (0.19% YoY, 0.20% QoQ). The bank’s slippage ratio for FY2012 was low at 0.98% (1.13% in FY11 and 2.66% in FY10). Restructured assets were also stable at 0.4% of gross advances in Q4FY12. Provision coverage based on specific provisions was at 82.4% higher by 207 bps sequentially despite lower provisioning during the quarter mainly led by lower slippages. Going forward, the management expects credit costs to rise from the current levels. The bank had opened 343 new branches in this quarter taking the total number of branches to 2544. The bank plans to add ~250 branches each year going forward.

The banks consistent strong performance despite challenging times reflects its strong and dynamic business model. We estimate HDFC Bank to report an EPS CAGR of 28.5% over FY11-FY14E. ABV is estimated to grow at 19.3% CAGR during the same period. The bank’s strong asset quality, superior return ratios, strong asset growth and adequate capitalization bodes well for its future growth. HDFC Bank has always commanded a premium valuations visà- vis its peers due to its track record of consistent growth in earnings and assets. The stock currently trades at 3.7x FY13E ABV and 3.0x FY14E ABV. Over the last five years, the bank has traded at a mean multiple of 3.5x its one year forward ABV. We believe the bank to continue to command premium valuations going forward. We retain our BUY rating with a March 13 target price of Rs 635.9 implying an upside of 15.4% from current levels,” says Aditya Birla Money research report.