While we do not doubt HDFC Bank’s strong fundamentals – best-in-class net interest margins (NIM), CASA ratio of 44%, low current NPLs.
The evolution of the integration with Centurion Bank of Punjab (CBoP), is likely to increase in NPLs arising out of the CBoP book, expected stable levels for CASA and deposit efficiency of the acquired branch network. At the current implied P/BV of 2.2x our FY10E BV for a 17% ROE level, we believe the stock is fully priced.
We expect a loan book growth of 17% for FY10 driven by 20% growth in its corporate and SME book. We believe HDFC bank’s shift in focus toward corporate (AA+ and above) and SME lending would offset the slowdown in retail sectors like auto and commercial vehicles.
The retail book should expand at 14.5%, primarily led by personal loan and credit card segments. We expect the bank will show a marginal expansion of 40bp in its core NIMs (core NIM of 4.2% and a CASA ratio of 44%) by FY10 with relatively lower corporate loan yields and CBoP’s lower deposit efficiency offsetting the impact of recent rate cuts.
We will turn more positive if the gross NPL comes in less than our current expected 1.7% for FY09 and 1.8% for FY10; average CASA efficiency is higher than our expected Rs425 million per branch; opex cost reduces faster than expected (cost/income for FY09 to be at 54.8%) and rate of tier-1 capital consumption declines.
On the other hand, we will turn more negative if all the above factors turn out worse than our expectations; we see CBoP integration extending beyond 2QFY10 and further deterioration in the macroeconomic situation.
Our lower than consensus target price of Rs1,000 is based on a three-stage residual income model implying a multiple of 2.2x to our estimated FY10E book value.