Buy HDFC Bank
INVESTMENT RATIONALE
HDFC reported net profit of Rs. 663.9 Crore during Q2FY10 above our expectation. During Q2FY10 bank reported a net profit of Rs. 663.9 Crore as compared to Rs.534.2 Crore in Q2FY10 a increase of 24.3% (y-o-y). Key triggers for banks are Net Interest Margins decline incrementally to 2.21% for FY09 from 2.20% for 9MFY10 on back of lower funding costs. CP rates, a proxy for wholesale funding costs in India, have been trending down on account of comfortable liquidity environment and decreasing risk aversion. HDFC has been incrementally shifting its borrowings to the wholesale markets from deposits to benefit from the declining rates. HDFC strategy continues to be to hold onto margins as it has not followed SBI’s aggressive pricing strategy in home loans.
Key Developments
• The bank has recorded 19 straight quarters of continuous decline in the Gross
NPA.
• Total unrealized gains on listed subsidiaries are worth Rs. 13,331 crores. This
excludes the gains in the unlisted subsidiaries of HDFC.
• On a six months past due basis the total amount of non-performing loans stood at 0.6% of total portfolio as on 30 September, 2009 viv-a-vis 0.62% as on 30 September, 2008.
• HDFC raised Rs. 2,600 crores in the form of NCD’s and Warrants. The NCD’s
were rated “AAA” by HDFC.
• The capital adequacy ratio stood at 14.9% of the total risk weighted assets and a tier-1 capital ratio of 13.4%.
• HDFC has 271 outlets in addition to 2400 locations covered by outreach program.
• To cater to customers outside India HDFC has opened offices in various locations in Middle East, London and Singapore.
• The total loans drawn from commercial banks and financial institutions amounted to Rs. 18,149 crores.
Healthy Business Growth
The total business has grown by 17% to Rs. 1,04,544 crore in Q2FY10 as compared to Rs.89,670 Crore during Q2FY09. Advances have grown by 10% to Rs.89,519 crore in Q2FY10 as compared to Rs.81,192 Crore during Q2FY09 and deposits grew by 17% to Rs.89,903 Crore in Q2FY10 as compared to Rs.76,753 Crore during Q2FY09. Advances grew on the back of strong retail loan book which now constitute 64% of the banks advances while deposits grew on the back of huge demand for Term Deposits which stood at Rs.26,867 Crore in Q2FY10 as compared to Rs. 21,411 Crore in Q2FY09.
Valuations
At current price of Rs 2651 the stock is trading at 4.86x FY10E BV of Rs. 541 and 29.22x FY10E EPS of Rs. 90. We believe that housing demand will improve in H210 due to better affordability, leading to a 18 – 20% y-o-y pickup in disbursements (high loan approvals and the strong growth in loan book, excellent asset quality and stable NIM’s combined with the embedded value of the subsidiaries makes HDFC an interesting play. We recommend a “Buy” on the stock with a 6 month target price of Rs. 2885 giving an upside potential of 10% from current level.
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