We have adjusted forecasts for HDFC Bank after a meeting with management and an environment scan.
The integration with Centurion Bank of Punjab (CBOP) is complete, with the erstwhile CBOP branches moving to a common core-banking platform on 26 January.
The bank expects the ex-CBOP branches to steadily improve productivity in the next four to six quarters, which we believe will deliver results on deposit quality, retail loan growth and fees.
We are revising our loan growth estimates downward on management’s reaffirmation that growth will slow on market share gains given the uncertainty in the environment.
The growth is likely to be balanced between retail and wholesale, although the large corporate sub-segment is growing the fastest. The focus for the bank remains loan categories with low credit risk.
Management sees no change in the margin outlook and expects it to remain stable in the medium term.
There are pressures from falling asset yields, both from generic repricing and a shift toward less risky assets.
On the other hand, CRR cuts and sharply falling deposit costs are offsetting these factors – and savings deposits have started to grow.
There are no shocks in asset quality – incremental delinquency and credit losses are likely to remain reasonably stable from here on.
Incrementally, the portfolio that is showing stress is the SME book, both in the HDFC Bank–originated book and the erstwhile CBOP book. In the medium term, we believe that credit quality should improve given the current focus on large corporate loans.
Outlook and valuation
We are raising our FY3/09 and FY3/10 estimates 1.0% to Rs54.0 and 5.7% to Rs67.6, respectively, and cutting our FY3/11 estimate 3.4% to Rs85.
We have lowered our loan growth and fee assumptions while increasing our SLR expectation, and we have reduced our terminal growth rate projection on lower visibility of growth.
We maintain our OUTPERFORM rating on HDFC Bank. The business remains stable, and the strong deposit base gives the bank the flexibility to move across product lines while keeping profitability intact.
The valuation, at 2.2x PBV, is at the lower end of the stock’s historical ranges.