HDFC Bank’s Q1FY09 results were largely in line with our expectations. On a reported basis, the numbers are not exactly comparable as Q1FY09 results are for the merged entity.
However, on a like-to-like basis, the NII growth remained robust. Growth in non-interest income was muted as a certain area of business of the erstwhile CBoP was discontinued resulting in lower fee income growth.
The merger related issues — improvement in CASA deposits and asset quality and rationalization of cost/income ratio - would take at least 2-3 quarters to be addressed and following that, the full impact of the merger would be visible.
We have revised our estimates to include the impact of the merger and have changed our target price for the stock. We now value HDFC Bank at Rs1,331 using the DDM model.
We have also changed the assumption of the risk-free rate from 8.7% to 9.1%. At this price, the stock would trade at a P/ABV of 3.1x. We reiterate our BUY recommendation on the stock.