>HDFC (KR CHOKSEY)

Impressive Performance – HDFCs operating numbers and net profit numbers in Q4FY09 were impressive. Net Interest Income handily beat expectations coming in at Rs 870.9 crores during Q4FY09 on back of higher interest income from disbursements and better spreads. Unlike other private sector financial institutions, HDFC increased its disbursements in tough economic times. Loan approvals grew disbursement growth was reported at 16% yo- y and 3% q-o-q. Inspite of having no access to low cost deposits, HDFC interest expense growth in Q4FY09 was muted at 1% q-o-q. Non Interest Income growth was impressive at 125.7% q-o-q largely on account of dividends and fees from HDFC AMC.

Incremental Margins Improvement – Net Interest Margins improved incrementally to 2.21% for FY09 from 2.19% for 9MFY09 on back of lower funding costs. CP rates, a proxy for wholesale funding costs in India, have been trending down on account of comfortable liquidity environment and decreasing risk aversion. HDFC has been incrementally shifting its borrowings to the wholesale markets from deposits to benefit from the declining rates. HDFC strategy continues to be to hold onto margins as it has not followed SBI’s aggressive pricing strategy in home loans.

Asset Quality – Management focus on prudent underwriting standards during the upswing has helped withstand the pressures on asset quality. Gross NPLs amounted to Rs. 701.55 crores (0.81% of portfolio) as at March 31, 2009 down 3 bps from 0.84% as at March 31, 2008. Provisions for contingencies stood at Rs. 621.53 crores (0.72% of portfolio) as at March 31, 2009. Coverage ratio was high at ~89%, providing a buffer to future earnings.

Our View – At current price of Rs 2093 the stock is trading at ~3.86x FY10E P/BV. We maintain a buy on HDFC with a target price of Rs 2,475, giving an upside potential of 18% from the current levels, on account of:: 1) housing demand will improve in H209 due to better affordability, leading to a 18 – 20% y-o-y pickup in disbursements (high loan approvals and disbursements in Q4FY09 demonstrates HDFCs ability to withstand stiff competitions from public sector banks); 2) Net Interest Margins will improve as borrowing rates, especially in the wholesale markets, will remain low on account of benign liquidity conditions; 3) income from real estate fund management fees and asset management (HDFC MF) will remain an earnings driver in FY10; 4) strong asset quality will reduce earnings pressure; 5) RoE growth (~18% in FY09) on account of redeploying cash to support balance sheet growth will drive multiple expansion; 6) potential value unlocking in life insurance subsidiary.

To see full report: HDFC