Stock Review: HDFC Bank

In times when most corporate are battling margin pressure, HDFC Bank seems to be in a sweet spot. In the third quarter, HDFC Bank reported 33 per cent year-on-year growth in profit to `1,090 crore, which is in line with the street's estimates.

Even as loan growth has moderated to 33 per cent due to repayment of short-term loans, the bank is likely to see healthy credit growth, led by strong demand for working capital and retail loans.

The bank's credit growth is expected to be higher than the sector's growth. The risk to margins from fall in current account savings account (CASA) ratio, rise in cost of deposits and competition in retail segment may get offset by a balanced asset liability profile and re-pricing of loans. The bank's asset quality has substantially improved. Over FY10 and calendar year 2013, CLSA expects 29 per cent cumulative aggregate growth rate in earnings.

The 33 per cent y-o-y moderation in loan growth compared to 38 per cent in September 2010 is largely due to repayment of short term working capital loans disbursed in the second quarter. However, in the coming quarter, HDFC Bank is likely to see a healthy credit growth primarily driven by focus on working capital-linked credit demand and faster than sector growth in retail loans (36 per cent as against 12 per cent for the sector), says CLSA.

What makes HDFC's credit portfolio rather attractive is its retail segment, as the share of secured loans is rising and this will cushion against potential asset quality risks. However, their lower yields and greater competitive pressures can cap margins.

Rising share of secured loans in the retail loan portfolio will cushion the bank against potential asset quality risks