20 October, 2008

Stock: HDFC Bank

Price Target: Rs 1087

Brokerage: Motilal Oswal Securities

Motilal Oswal Securities has recommend 'buy' on HDFC Bank stock for a target price at Rs 1,087. Motilal expects earnings CAGR of 32 per cent over FY08-10 on 23 per cent CAGR in assets (combining HDFC Bank with CBoP from FY08 itself). The stock trades at 3.1 times FY09E and 2.3 times FY10E BV, and 20.7 times FY09E and 16.5 times FY10E EPS.

Motilal expects RoA to remain high at 1.3-1.4 per cent, with RoE at over 16 per cent in FY10 and 18 per cent in FY11. Motilal estimates BV at Rs 347 per share for FY09 and at Rs 465 per share for FY10. The brokerage expects EPS to be Rs 53 in FY09 and Rs 66 in FY10.

HDFC Bank's reported numbers for 2QFY09 have built in the merger of Centurion Bank. Hence, the reported numbers for 2QFY09 are not comparable with the reported numbers for 2QFY08. For comparison, Motilal has merged the numbers of Centurion Bank with HDFC Bank's for 2QFY08, as well.

Reported margins expanded to 4.2 per cent in 2QFY09 from 4.1 per cent in 1QFY09 (standalone margin in 2QFY08 was 4%). This is in line with the brokerage's expectation that in a rising interest rate scenario, banks like HDFC Bank, which hold higher CASA deposits, would witness margin expansion.

A sharp CRR cut of 250 basis points in 3QFY09 and no management intentions to lower lending rates in the near term imply that margins can expand further, going forward. However, the management sees margins to be under slight pressure due to increasing funding costs.

Reported deposits grew 47 per cent YoY. Adjusted for the merger, deposits grew 21 per cent YoY to Rs 1.4t. CASA ratio declined from 53 per cent in 2QFY08 and 45 per cent in 1QFY09 to 44 per cent.

Adjusted CASA deposit growth of 12 per cent YoY is disappointing. Growth in current accounts is muted for HDFC Bank while the growth in savings balances is strong at 30 per cent on an adjusted basis. For the last five consecutive quarters (despite merger of CBoP from 1QFY09), current account balances are flat for HDFC Bank, which is concerning. Capital markets downturn has impacted HDFC Bank's current accounts.

Loans grew by 64 per cent YoY. Adjusted loans increased by 34 per cent YoY to Rs 1t. Customer assets grew 64 per cent YoY to Rs 108 crore. Customer assets to deposits ratio has shot up to 81 per cent. C-D ratio has increased to 76 per cent, which implies that the bank would have to grow resources faster than loans, going forward. CRR cut in 3QFY09 (would release Rs 36b for HDFC Bank) and would help in partially resolving the resources problem.

Gross NPAs on merged basis increased to 1.6 per cent (1.5% a quarter ago) while net NPAs increased to 0.57 per cent (0.5% a quarter ago). In absolute terms, gross NPAs increased 12 per cent QoQ and net NPAs increased 18 per cent QoQ.

HDFC Bank management has said that there is some stress on asset quality in retail lending, especially on the unsecured portfolio. However, it reiterated that the higher NPA costs are factored in the bank's pricing and margins, and the risk-adjusted return remains stable. HDFC Bank's management has seen some deterioration in CBoPs retail and SME loans book post March 2008.

It expects NPA built-up to continue for next 12-18 months from CBoP book. Management sees its gross NPAs to remain in the range of 1.5-1.7% and net NPAs to remain in the range of 0.5-0.7 per cent during the period.