1. HDFC Bank to command premium valuation over its peers

HDFC Bank to command premium valuation over its peers

HDFC Bank will continue command valuation premoum over its peers over the near to medium term given its stable performance and asset quality, says Geojit BNP Paribas.

By: | New Delhi | Published: August 29, 2016 4:11 PM
It has pointed out that the bank has proven track record of higher than industry growth rate with high-profit margins in the last five years. (Reuters) It has pointed out that the bank has proven track record of higher than industry growth rate with high-profit margins in the last five years. (Reuters)

HDFC Bank will continue command valuation premium over its peers over the near to medium term given its stable performance and asset quality, says Geojit BNP Paribas.

“HDFC Bank is is the best placed among peers given its higher than system credit growth (19% CAGR over FY16-18E), best-in-class asset quality (Gross NPA of 0.9 per cent by FY18E) and superior return ratios (RoE of 19 per cent and RoA of 2.0 per cent),” Geojit BNP Paribas has said in a report.

It has pointed out that the bank has proven track record of higher than industry growth rate with high-profit margins in the last five years.

At current market price (CMP) of Rs 1,258, the stock is trading at P/ABV of 3.9x and 3.4x for FY17E and FY18E, respectively. Geojit BNP Paribas has place a ‘Buy’ rating on the stock with target price of Rs 1,387 based on 3.7x FY18E P/ABV.

HDFC Bank, the second largest private sector bank in the country, has a distribution network of 4,541 branches and 12,013 ATM’s in 2,587 cities/towns.

Here are 5 reasons why Geojit BNP Paribas feels HDFC Bank will continue to outperform:
Consistent performance: HDFC Bank has consistently maintained healthy performance across all the parameters despite a slowdown in the economy.

Stable asset quality: with Gross non-performing asset (GNPA) of 1.0 per cent and Net NPA (NNPA) of 0.3 per cent. Additionally, provision coverage ratio (PCR) was also at 69 per cent as of Q1FY17 despite challenging macro environment. The bank has been able to maintain robust asset quality given the higher share of working capital and retail financing in total loan book.

Strong credit growth: HDFC Bank’s advances increased at a healthy pace of 23 per cent YoY in Q1FY17 driven by both corporate and retail segment.

Good retail segment performance: All retail segments delivered high double digit growth except business banking. Retail segment accounts for 53 per cent of domestic loan book as of Q1FY17. The bank is expected to continue to outpace industry credit growth rate (11-13 per cent) and factor 19 per cent CAGR in advances over FY16-18E mainly led by higher growth in retail loans.

Earnings growth momentum to continue: In Q1FY17, HDFC Bank’s NII grew 22 per cent on the back of stable net interest margin (NIM) of 4.4 per cent. Both operating and net profit increased 20 per cent YoY which was largely in line with our estimates. Geojit BNP expects NII and net profit to grow at a healthy CAGR of 20 per cent and 19 per cent respectively over FY16-18E supported by 19 per cent CAGR growth in advances and stable NIM of 4.8 per cent over the same period.

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