HDFC Bank has been our preferred stock in India (and the region) despite the problems plaguing the Indian banking industry (on which we have a Cautious view). Q4 F12 results supported our thesis ? earnings continued to be solid, growing 30% yoy, and balance sheet variables remained strong.
While reported earnings were in line with estimates, the quality of earnings and balance sheet was very good, in our view. NIM and Casa ratio rose; tier 1 ratio stayed high (at 11.6%, implying no capital likely needed for close to two years); significant distribution expansion (343 branches, up 16% qoq, and 1800 ATM?s, up 25% qoq); continued coverage buildup (156%, helped by strong asset quality). This should help HDFC Bank keep winning market share as other banks grapple with asset quality (NPL/restructuring) issues.
ROE is now almost 20% (last touched this level in Q1FY08, just before capital raise). Volume growth moderated from 22% yoy / 3% qoq in the previous quarter mainly as the bank continues to shed less profitable corporate assets. The bank is well placed for FY13. Retail loans remain the key growth driver (up 34% yoy vs industry at ~11-12%) ? these loans are likely to be relatively immune from NPL issues, given lack of industry growth. This should help the bank achieve 22-24% loan growth in FY13-FY14 and coupled with its strong balance sheet, should help it deliver 30% EPS growth for next two years. The EPS compounding implies that the stock would need to de-rate by 40% over two years for investors to lose money on an absolute basis. Potential risk factors are RBI regulations on priority sector and dynamic provisioning. We are increasing earnings estimates modestly, given quality of numbers. This, coupled with rolling forward of estimates, leads us to raise our fair value on the stock by 20%. Our new target price implies 12% upside but meaningful performance relative to other Indian banks.