CMP = Rs 1,148 (as of Tuesday)
Price target: Rs 1,355
Result highlights
- HDFC Bank's results have been in line with expectations with the profit after tax (PAT) reporting a growth of 34.2% to Rs321.2 crore compared with our estimate of Rs313.5 crore. Even though the numbers are in line with estimates, the core income growth is below expectations. The non-interest income has, however, compensated for the lower than expected core income growth.
- The net interest income (NII) grew by 27.5% year on year (yoy) but declined by 4% quarter on quarter (qoq) to Rs1,042.2 crore, below our expectations of Rs1,153 crore. The growth in the NII was primarily driven by the asset growth, as our calculations suggest that the net interest margin (NIM) declined by three basis points yoy and by 56 basis points qoq to 4.2%.
- The bank had witnessed a significant improvement of 35 basis points in its NIM during Q4FY2007 mainly due to a higher current and savings account (CASA) balance at 57.7% compared with an average of 50% during FY2007 and of 51.5% during Q1FY2008. Some decline in the NIM on a sequential basis was expected as such high CASA is unsustainable and was only an aberration.
- The bank had almost stopped expanding its business during Q4FY2007; very high deposit rates had prompted HDFC Bank to go slow on mobilisation of deposits, especially term deposits, which had resulted in the significant increase in the CASA balance in Q4FY2007. However, we feel that with the deposit rates moderating, the bank has again grown its deposit book.
- Since, the deposit growth is higher in the current quarter and the credit offtake is generally lower during the first quarter, we feel the bank may have parked the excess in short-term investments (only to utilise the same when the credit growth picks up in the second and the third quarter) and this could have lowered the overall investments yield. However, going forward we expect the core income to improve as the credit growth improves leading to better yields.
- The non-interest income growth was much higher at 77.3% yoy and 56% qoq mainly due to lower treasury losses during the current quarter and a higher fee income from the foreign exchange (forex) and derivatives segment.
- The operating profit grew by 41% yoy and 7% qoq to Rs783.7 crore while the core operating profit (operating profit excluding treasury) was up only 27.5% yoy and down by 8% qoq to Rs787.8 crore.
- Provisions & contingencies were up 50.5% yoy and 15% qoq to Rs307 crore mainly due to higher provisioning requirements on certain categories of standard assets as personal loans grew by 46% yoy and 23% qoq.
- The sequential decline in the NIM was expected but the lower growth in the NII is mainly due to higher deposit costs and lower investment income. We expect the NIM to stabilise at the current 4.2% levels and the core income growth to pick up going forward. At the current market price of Rs 1,148 the stock is quoting at 21.1x FY2009E earnings per share (EPS), 8.1x FY2009E pre-provision profits (PPP) and 3.1x FY2009E book value (BV).
- I maintain Buy recommendation on the stock with a price target of Rs 1,355.
