>HDFC BANK (ANTIQUE)

Investment thesis

■ Best banking franchise
HDFC bank continues to remain the best banking franchise among Indian financials with an unparalleled liability franchise and sound risk management systems resulting in strong earnings growth trajectory. The bank has significantly underperformed the broader indices due to concerns on growth and asset quality, especially related to problem portfolio of CBOP. However, with NPL accretion for the bank likely to peak in the next two quarters, we believe that bank is well poised to leverage the revival in credit growth in 2H FY10, given smooth integration of CBOP into its fold. We assume coverage with a Buy rating and target price of INR1,850 per share.

■ Concerns on CBOP problem portfolio slowly abating
NPL accretion for the bank is likely to peak in the next two quarters, as the run down of the two-wheeler portfolio of CBOP is almost complete and CBOP's personal loan portfolio is likely to mature in the next 18 to 24 months. Approximately 40% of the incremental GNPL accretion in the past one year has been contributed by CBOP. Adjusting for the acquisition of CBOP, increased GNPL ratio in standalone HDFC Bank has been negligible at ~10bps

■ Earnings to remain resilient despite dilution
We expect earnings trajectory growth for the bank to remain strong at 24.3% CAGR over FY09-11E, driven by strong asset growth and stable NIMs. While ROE for the bank is likely to remain muted for the next two years due to the excessive dilution, we expect it to improve in FY12E as the bank utilizes the excess capital. The stock currently trades at 2.6 FY11E P/B, which is well below its 10-year average P/BV of 3.5x P/B, we assume coverage with a Buy rating and target price of INR1, 850 per share (3.5x FY11E BV), implying 15% upside potential.

To see full report: HDFC BANK