HDFC Bank announced its 1QFY2010 results yesterday, reporting a Net Profit growth of 31% y-o-y to Rs606 crore, in line with our estimates.
The bank’s balance sheet growth decelerated further, with advances growing 7% y-o-y and deposits growing 11% y-o-y, slower than the industry growth rates. Consequently, even though NIMs were largely stable at 4.1%, growth in the Net Interest Income (NII), at 8% y-o-y was lower than expected.
While growth in the CASA balances remained moderate at 12% y-o-y, the CASA ratio improved from 44% (4QFY2009) to 45%, since growth in the term deposits was even lower.
The Fee income grew at a reasonably strong 27% y-o-y to Rs649 crore; it also booked large treasury gains of Rs256 crore. The Forex and Derivative linked income, at Rs138cr, was down about 12% both sequentially and on a y-o-y basis.
HDFC Bank continued its focus on cost control, with operating expenses down 1% sequentially, and the cost-to-income ratio declining to 48% from a peak of 56% in 1QFY2009.
The Bank continued to go slow on branch expansion, adding 4 branches (the branch network increased to 1,416, as against the 2QFY2009 level of 1,412), although it did add 87 more ATMs.
Total restructured assets, including applications received for loan restructuring which were yet to be approved or implemented, were 0.55% of the bank’s gross advances at the end of 1QFY2010. Of this, amounts categorised as standard assets were 0.19% of the bank’s gross advances.
As compared to other private and PSU banks, the magnitude of restructuring has been lower for HDFC Bank to a large extent on account of its credit mix. The Bank’s total Capital Adequacy (as per Basel 2 guidelines) remained strong at 15.4%, with Tier-I CAR at 10.6%.
We believe HDFC Bank is among the most competitive banks in the sector and is poised to maintain its profitable growth over the long-term.
We believe that the bank’s competitive advantages, driving gains in its CASA market share and the traction in multiple-fee revenue streams can support up to 5% higher core sustainable RoEs vis-à-vis sectoral averages over the long term, creating a material margin of safety in our target valuation multiples.
At the CMP, the stock is trading at 16.7x FY2011E EPS of Rs81.7 and 2.7x FY2011E ABV of Rs505.3.
We maintain BUY on the stock, with a 12-month target price of Rs1,769, implying an upside of 30%.