Q4FY14 earnings came in at R23.3 bn (23% year-on-year) aided by higher margins, lower credit cost while lower-than-expected fee income took the net profits to 4% below our estimate. The stock was up 1.3% over the previous close.
Operational review: Loan growth was robust at 26% y-o-y, mainly driven by the corporate segment (48% y-o-y). Retail book slowed down, growing only 10% y-o-y as the bank continued to shed its CV (commercial vehicle) book while business banking growth was subdued at 2% due to the movement of loans to Corporate book (due to change in classification). Margins expanded 20 bp q-o-q aided by the uptick in CASA (44.8% vs 43.7% q-o-q)?some of which could be considered seasonal.
Core non-interest income growth was moderate at 10% y-o-y–partly due to lower retail disbursements and lower commissions on insurance sales. Cost- income ratio was contained at 46%. Asset quality remained healthy with GNPLs (gross non-performing loans) remaining stable at 1% and restructured book flat at 0.2%. Further, credit costs came off about 10bp sequentially to 34bp, resulting in net profit growth of 23% y-o-y pulled down by a higher tax rate y-o-y even as pre-tax profits grew a healthy 31%. Tier 1 ratio remained healthy at 11.8% while ROA was at 2%.
Earnings outlook: We are broadly retaining our current estimates implying net profits will grow at a healthy three-year CAGR (compound annual growth rate) of 27% up to FY16e. We expect ROA to improve further to 2.1% by then, and ROE (return on equity) to 24%.
Valuations: HDFC Bank trades at 3.3x P/AB (price-to adjusted book value) 12-month forward versus its five-year average of 3.4x P/AB. We continue to value the stock at 3.6x FY15e while rolling forward to FY16e adjusted book based on a single stage Gordon growth model, resulting in a revised target price of R931, implying a potential return of 29.3%. Retain OW (overweight). Key risks: (i) Slower than expected loan growth, (ii) worsening asset quality, (iii) exclusion from MSCI index.
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