>HDFC Bank (CITI)

Buy: 4Q Results – Cannot Pick a Hole in the Quarter

■ Profits up 34% yoy; qualitative reinforcement — Qualitatively, the quarter was ahead, while quantitatively (i.e. net profit), it was just a little behind. The key takeaway is that HDBK continues to stand out in the troubled crowd with its asset book holding comfortably, profitability remaining stable and outlook good enough for it to maintain 20%+ loan growth. We believe HDBK is making significant franchise (and market share) gains in these relatively uncertain times – and doing so profitably.

■ Asset quality: Continues to defy and widens the gap — The pace of deterioration remains stable (comfortably covered by operating profitability). The restructuring phenomenon appears to have passed it by (0.1% of loans), and 20-25% loan growth looks achievable. Mgmt has a cautiously optimistic growth and quality outlook (consistent through Oct-Nov 2008 lows), and its track record for working through the cycle builds. The risks are the economy and the now-rising expectation that HDBK is immune to asset quality issues.

■ P&L: Fees and costs impress, while trading one-offs provide provisioning cushion — The P&L is fundamentally the upside surprise – fees have accelerated (bolstered by a strong bounce-back in derivative revs), costs are showing signs of moderating (almost a first among peers), and margins continue to hold at 4%+ levels – significant stability in varying interest rate environments. A surprise trading gain (second quarter running now, though) provides the cushion for a provisioning boost, which is otherwise too high for a normal earnings cycle.

■ Maintain Buy (1L) — While HDBK becomes even more expensive, we find that we cannot pick a hole in its quarter or business strategy, and until that happens, valuations will likely remain high

To see full report: HDFC BANK