The merger of CBoP added 15-20% to Balance sheet, around 30% to customer base and around 55% to branch network of HDFC bank. The rationale behind the merger was to fast expand geographical reach and gain economies of scale.
With the addition of 394 branches of erstwhile CBoP, HDFC Bank is likely to get more businesses by leveraging them.
Both HDFC Bank and CBoP had one thing common - focus on retail book (HDFC bank’s retail book constituted around 50% of total advances whereas CBoP had around 60%). The integration is already complete with all the erstwhile CBoP moving to a common core-banking platform by end of January 09.
For HDFC Bank, loan growth is likely to slow down, given the uncertain macro environment. The credit growth for the system as a whole has come down to 17.3% (as on March 27, 2009) as against 22.1% in FY08.
The bank is likely to grow 3-4% faster than the systemic growth. However, in 4QFY09, bank is likely to witness moderate Balance Sheet (B/S) growth in order to have lower priority sector obligations, going forward.
Although there is some pressure from falling asset yields, both from competitive pricing in the system and its conscious decision to focus more on less risky assets (lower risk comes with lower return), the recent cut in policy rates is likely to partly offset these factors.
In our view, its margins are likely to stabilize around 4.0%, going forward.
We are maintaining the earning estimates for FY09E and FY10E and expect earnings to grow at 26.1% and balance sheet size at 18.7% CAGR over FY08-10. We expect RoA to remain high around 1.3% and RoE in the range of 16-17% in FY10.
We expect net profit for FY09E and FY10E to be Rs.22.53 bn and Rs.27.04 bn, respectively. This will result in an EPS of Rs.53.0 and Rs.63.6 for FY09E and FY10E, respectively.
The adjusted book value for FY09E and FY10E are forecast at Rs.327.6 and Rs.378.8, respectively.
We are maintaining the target price of Rs1,035 for HDFC Bank based on P/ABV of 2.75 its FY10E adjusted book value and P/E of 16.5x its FY10E earnings.
However, we are downgrading the stock to ACCUMULATE from Buy earlier noting the recent sharp increase in its prices.
The stock has rallied 31% in less than a month since our last update (BUY recommended on March 12, 2009).
At Rs1,044 levels, stock is fairly valued and therefore, we advice our clients to look at this at better entry points.