>HDFC BANK (CITI)

■ Profits in line (up 32%) but fundamentals keep getting better — 3Q10 was another strong quarter: profits grew 32% YoY (largely in line with estimates), and operationally strong too (pre-provisioning profits ex-trading gains up 35% YoY). Margins have expanded yet again (over 4.3%), loan growth appears immune from the industry slowdown (+20% YoY) and is broad-based, and asset quality trends appear to be improving decisively. In sum, HDBK is threatening to set a healthiergrowth, highly-profitable path and pull further away from the rest of the pack.

■ P&L: margins expand more, fee growth remains moderate, costs under control — HDBK's NIMs have expanded further to above 4.3% as its deposit franchise kicked in strongly (52% CASA, declining cost of funds) and the mid-quarter capital infusion provided support. Fee growth remains at a moderate 12% YoY (for the third successive quarter), hit by slower retail distribution fees – and could remain slow for another 1-2 quarters as the base adjusts down. Costs remain in check (flat YoY), but there are signs of acceleration as inflation likely catches up.

■ Balance sheet: strong, broad-based growth, lower asset risks, well capitalized — HDBK's loan growth was healthy (+5% QoQ) and broad-based (across retail, corporate). Management appears more comfortable with a high growth trajectory as asset risks appear to have peaked - delinquencies are declining across all product lines, NPLs/restructured assets are starting to reduce (NPLs down 3% QoQ) and coverage levels remain quite comfortable. Recent capital infusion (conversion of promoter's warrants) have improved HDBK's capital adequacy even further and should sustain a stronger growth path for longer.

■ Best placed for rising interest rates, but valuations likely cap, maintain Hold (2L) — HDBK remains looking best placed to negotiate challenges from higher policy/interest rates due to its strong deposit base, low duration bond book and l east asset risk.

To read the full report: HDFC BANK