>HDFC Bank (KARVY)

We recently met HDFC Bank's management to discuss and clarify some of the financial issues; key takeaways of meeting are:

Moderation in banking system and the bank credit offtake: The bank's management is of view that the system's credit growth would be in range of 17-18% and the bank's credit book is expected to expand by 21-24% in FY10. During the third quarter FY09, some of the corporates' advances were not renewed but in fourth quarter the bank expects reasonable amount of growth in credit book. On eCBoP's credit front, downsizing of credit book would continue in coming quarter; the management expects delinquency to continue in some of retail and SME accounts. I believe the bank is planning to grow its credit book cautiously in the present turbulent times. We reduce our credit estimates to Rs1,277 bn (23.4% growth Y/Y) from our earlier estimates of Rs1,316 bn (27.3% growth Y/Y) in FY10.

Deposit franchise; centre of strength: The bank's management expects domestic banking system and HDBK to record 15-16% and 20% (Y/Y) growth respectively in FY10. The bank would expand its footprint by opening 200 branches and 350 ATMs; accumulation of CASA deposits holds prominence. Moderation in credit growth would also have positive impact on the bank's CASA deposits ratio. Anticipated decrease in banks' retail term deposit rates would be create reasonable level of difficulties in mobilizing deposits, though continued turbulence in equity and debt markets would not be able to attract much of incremental savings. We are reducing our deposit estimates for FY10 to Rs1,862 bn (20.9% growth Y/Y) from our earlier estimates of Rs1,913 bn (24.1% growth Y/Y).

Margin maintenance; a difficult target: HDBK's management indicated that the bank is hopeful of maintaining net interest margin in a range of 3.9-4.3% in FY10. Delayed re-pricing of entire deposits at lower rates, pressure on CASA deposits on liability-side and faster re-pricing of advances at lower interest rates and declining incremental credit-deposit ratio would put pressure on the bank's margin; we estimate almost 20bps decline in margin to 4.57% in FY10 from 4.75% in FY09 and 4.88%.

To see full report: HDFC BANK