Tuesday, March 24, 2009


We discussed a few key issues with HDFC management and we are also revising our estimates. We are reducing TP to INR1,600 from INR2,250. We expect HDFC to continue to enjoy a premium over its banking sector peers with its sticky customer base, better asset quality, a sector leading opex ratio and stable spreads. Reiterate BUY.

Loan growth – The company guided towards loan growth in the range of 18-20% for FY10. We are factoring for a loan growth of 16% for FY10 and we believe this growth will be more back end loaded in FY10.

Competition from state owned banks – Some state owned banks have announced a limited period mortgage loans at an interest rate of 8% for the first one year. While there has been wide spread speculation around the possible loss of market share for HDFC due to these competitive offers, we believe these concerns are misplaced for the following reasons –

1) We do not see a meaningful increase in property purchases as yet, an interest rate of 8% notwithstanding.

2) Given this is a limited period offer and the slow processing times of state owned banks, we do not anticipate a significant volume pick up through these offers.

Funding strategy – Management intends to use a flexible funding strategy depending on the prevailing liquidity situation. When liquidity is tight and term borrowing becomes expensive, HDFC has mobilized incrementally greater amounts of retail deposits as seen during October
2008 and vice versa. In easier liquidity conditions, the company enjoys a 50bps advantage for term borrowing vis-à-vis retail deposits. The current blended loan yield is 11% while the blended funding cost is approximately 8.6%.

Valuation - We are revising our TP for HDFC to INR1,600 from INR2,250– core mortgage TP revised to INR1,200 from INR1,700 and embedded value of subsidiaries revised to INR400 from INR550 after factoring in our recent TP reduction for HDFC Bank. At our revised TP, core HDFC trades at 2.3x our FY10E BV.

To see full report: HDFC BANK