>HDFC BANK (INDIABULLS)

Limited upside potential

HDFC Bank’s Q1’10 Net profit at Rs. 6.06 bn, was down marginally by 3.9% qoq, while it increased 30.5% yoy. During the quarter, importantly, the loan-book has grown; the NIM has remained stable, and cost-income ratio has trended down. The only down-side are the NPLs, which we do not foresee as abating in the near-medium term. We are presently amid a low credit-demand scenario, wherein balance-sheet expansion, especially for a Bank focused on margins, is going to be difficult for the next one or two quarters. Accordingly, we have tempered our estimates for the same; as well as for our cost estimates. This yields a fair value estimate of Rs. 1,446. The stock currently trades at a P/B multiple of ~3.8x, which is relatively higher than its peers. We perceive the stock to be fairly valued, and downgrade our rating to Hold.

Advances growth likely to remain moderate: The Bank’s advances increased 4.8% qoq. The resumption in lending, we believe, was a result of the availability of lesser-yielding alternatives, improvement in corporate-earnings, and the resultant declining credit-risk aversion. Moreover, given a low-demand environment, banks are competing to cater to the prime, credit-worthy borrowers. HDFC Bank has signalled its intent of growing its loan-book by further reducing its PLR. Estimating a growth of 19-20% in its advances for FY10, we expect it to record a 4-5%
increase in Q2’10.

NIM likely to come under pressure: The Bank’s NIM at 4.1% for the quarter, declined marginally by 6bps sequentially. If adjusted for the taxfree interest income earned on the Bank’s surplus liquidity parkedwith short-term money market funds, the Bank’s NIM would have been 4.2%. We expect some pressure on the NIM as the bank is competing to acquire prime borrowers at lower rates of interest. Therefore, we expect the NIM to range between 4.0% and 4.1% for Q2’10.

NPAs likely to continue trending upwards: At the close of Q1’10, the Bank’s Gross NPA ratio increase by 6bps to 2.05%. Gross NPAs increased by 8.8% sequentially to Rs. 21.6 bn.

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