Stock Review: HDFC Bank

While good operating performance is more or less priced in at the current valuation, the catalyst will be rising rates

Strong growth in core loan portfolio (excluding one-offs), rocksteady margins in the current and savings account (Casa) segment at 50 per cent, slightly weak fee growth and stable asset quality were the key features of HDFC Bank's results for the September quarter.

The loan growth was supported by a 33 per cent yearon-year (y-o-y) rise in retail as well as wholesale segments. Non-retail advances grew at a faster pace due to the low base effect. Retail loans saw strong traction across auto, mortgages and commercial vehicle segments.

While the bottom line was partially driven by the lower-than-anticipated provisioning, the robust growth has been in line with the balanced business growth the bank has witnessed during the first half of the current financial year. On the operational front, expenses rose 19 per cent due to a 28 per cent surge in employee costs. Total provisions declined 24 per cent y-o-y to `450 crore despite higher floating provision. Growth in core fee income (up 16 per cent y-oy) was sluggish due to lower third-party distribution and is likely to remain under pressure in 2010-11.

Net interest income grew 29.2 per cent y-o-y driven by robust growth in advances and stable net interest margins (NIMs). Analysts at Motilal Oswal expect NIMs to remain stable at 4.2 per cent on the back of strong Casa ratio and improved asset yields in arising interest rate scenario.

Loan growth is expected to remain robust at 30 per cent in 2010-11 and 2011-12 from both corporate and retail books, supported by lower drag from the rundown of the erstwhile Centurion Bank loan book. Earnings growth for the bank is pegged at 33 per cent this year and 25 per cent over 2011-13.

While analysts believe good operating performance is more or less priced in, the catalyst is rising rates. The stock closed 1.2 per cent lower at `2,337 on Wednesday and trades at 28x2010-11E and 21.2x201112E earnings per share, according to analysts estimates.