Strong loan growth of 40% YoY (year-on-year): Loans grew 40% YoY against our estimate of 30% and 16% QoQ (quarter-on-quarter), largely driven by 30% YoY growth in corporate loans. One-off opportunities from 3G auctions and increased demand for working capital financing drove the strong growth in corporate loans. Excluding one-off short-tem loans, core loan growth was 9% QoQ. Retail loans grew 3% QoQ and 24% YoY.
Auto loans (up 33% YoY and 9% QoQ), commercial vehicle and construction equipment loans (up 30% YoY and 6% QoQ) and home loans (up 53% YoY and 9% QoQ) continue to drive the retail loan growth. The bank is confident of achieving 30% loan growth in FY11. We model 25%+ CAGR (compound annual growth rate) in loans over FY10-12, as the QoQ growth in corporate loans is largely short-term in nature and will run off during the course of the year.
Robust performance on CASA (current and savings account) deposits: Deposits grew 26% YoY and 9% QoQ to Rs 1.83 trillion. CASA deposits grew 3% QoQ and 37% YoY, driven by healthy savings growth of 40% YoY. Core CASA ratio has improved to 49% against 45% a year ago (stable QoQ). We expect the bank to report 23%+ CAGR in deposits over FY10-12 and strong CASA growth at 20% CAGR over FY10-12. Reported CASA ratio should remain above 47% during this period.
Strong core operating profit growth: Fee income growth went up to 17% YoY against 15% reported in FY10. Trading profits during the quarter were Rs 215 million, significantly lower than Rs 2.6 bn reported in Q1FY10. As a result, other income fell 10% YoY to Rs 9.4 bn. From H1FY10, HDFC Bank has not opened any branches; thus, other operating expenses grew just 13% YoY. Due to the benefit of cost savings from CBoP (Centurion Bank of Punjab) merger, the cost income ratio has, however, improved from 52.2% in Q1FY10 to 48% in Q1FY11.
Margins will remain superior at 4.2%+: NIM (net interest margin) fell of just 10 bp QoQ to 4.3%?despite the impact of savings deposit repricing on an average daily basis (18 bp), higher share of priority sector loans and the full impact of CRR (cash reserve ratio)?is impressive. The management expects margins to sustain at 4.2%+ in FY11. We expect margins to remain superior at 4.2%+ on account of: (i) strong CASA ratio, a boon in a rising interest rate scenario, and (ii) improved asset yields in a rising interest rate scenario. Ancrease in the savings deposit cost is already accounted for during the quarter.
Comfort on quality of balance sheet remains highest in the sector: Gross NPAs (nonperforming assets) remained flat QoQ at 17.9 bn (1.21% against 1.43% in FY10 and 2.05% in 1QFY10). NNPAs (net NPAs) also remained stable QoQ at Rs 4.13 billion (0.3% against 0.6% in Q1FY10). From Q1FY11, the bank has started to recognise floating provisions as a part of Tier-II capital rather than netting up from NNPA.
Valuation and view: Our comfort on HDFC Bank?s core operating parameters remains one of the highest in the industry, given: (i) expectation of strong loan CAGR of 25%+ over FY10-12; (ii) NIM of 4.2%+; (iii) improving fee income growth; and (iv) realisation of operating efficiency from CBoP branches. CASA ratio of 50% remains one of the biggest advantages in a scenario of rising interest rates. Asset quality remains one of the best in the industry with the total stress assets of just 1.5%.
We have upgraded our estimates by 2% for FY11-12. We expect EPS CAGR of 32% over FY10-12 on ~21% CAGR in assets as against 25% EPS (earnings per share) CAGR over FY08-10. We estimate EPS at Rs 86 for FY11 and Rs 112 for FY12. We expect ROE (return on equity) to be 17% in FY11 and 19% in FY12. We estimate BV (book value) of Rs 538 for FY11 and Rs 627 for FY12. The stock trades at 3.8x FY11E and 3.3x FY12E BV, and 23.6x FY11E and 18.3x FY12E EPS. Given our comfort on asset quality, core operating parameters and earnings growth outlook, we believe premium valuations will sustain. We maintain Buy with a target price of Rs 2,200 (3.5x FY12 BV).