HDFC Bank : HOLD

Margins Maintained

HDFC Bank registered net profit of Rs 1,115 cr (up 33% YoY) in Q4FY11, marginally above our estimate, driven by 21% YoY growth in net interest income and lower provisioning. Though advances grew 27% YoY (vs. 33% YoY in Q3FY11), they witnessed muted sequential growth at 1%. Despite a 20 bps YoY decline, margins remained healthy at 4.2% supported by its strong CASA franchise. Core fee income impressed with a 23% YoY increase. HDFC bank reported treasury gains of Rs 8.6 cr in Q4 (vs. Rs 30.7 cr loss in Q3FY11). Provisioning expenses were under control and coverage ratio improved to 83%. Asset quality remained sound and continued to improve; Gross NPA ratio improved sequentially by 6 bps while Net NPA ratio remained unchanged at 0.2%. Restructured assets were at 0.4% of the loan book.

Key highlights

ü  CASA ratio remained impressive at ~51% with savings deposits rising 4% QoQ; while, current a/c deposits declined by 29% QoQ.

ü  The Bank is carrying counter cyclical provision of Rs 750 cr as of FY11, which can be used for any asset quality related provisions going forward thereby reducing the volatility in earnings.

ü  HDFC Bank has announced sub-division (split) of one equity share having nominal value of Rs 10, into five equity shares having nominal value of Rs 2 each which will be subject to approval.

Maintain Hold, with revised TP of Rs 2,300 (2% downside)

Despite slower advances growth, HDFC Bank has been able to maintain margins (~4.2%) QoQ and record improved profitability. Asset quality remained extremely healthy. Hence, we have revised our EPS estimates upwards by 6% and BV estimates by 3% for FY12E to factor in improved performance. At CMP of Rs 2,355, the stock is trading at 24x FY12E EPS of Rs 99.2 and 3.8x FY12E ABV of Rs 621.