HDFC Bank continued its trend of delivering consistent earnings performance
quarter after quarter. For 2QFY2016, it registered a net profit growth of 20.5%
yoy which is in line with our expectation.
Advances grow strongly; Asset quality top-notch:
During 2QFY2016, the loan book grew at a rapid pace, ie by 27.9% yoy. Retail
growth picked further traction; the growth in the retail book was at 29.3% yoy,
which took the total contribution of retail as a proportion of total advances book
to 49%. Corporate credit growth rate, at 23.4% yoy, stood well above that of the
Current and Savings account deposits also saw fairly healthy growth, ie of 20.8%
yoy and 18.7% yoy, respectively. Time deposits saw further stronger momentum,
growing at 37.8% yoy, which continued to outshine the CASA deposits growth.
Because of the spurt in fixed deposits and in-turn total deposits, the CASA ratio
came in at 40%.
The NIM came off by 14bp qoq to 4.20%; the decline was on account of cuts in
base rates to pass on policy rate reductions by the central bank and owing to
higher fixed deposits growth. The bank’s non-interest income (excluding treasury)
grew by 22% yoy, with fee income growing by 21.6% yoy.
Asset quality continued to remain healthy with the Gross NPA rate at 0.91%,
declining by 4bp qoq, in a challenging macro environment. The Net NPA ratio
stood at 0.25% for the quarter, as against 0.27% in 1QFY2016. The Provision
Coverage Ratio (PCR) stood at 72.9%.
Outlook and valuation: Credit and deposit growth beat the industry growth rate,
driven by strong retail business, healthy CASA and continued network expansion.
This provides strong visibility for a robust 20% earnings trajectory, coupled with
high quality of earnings. This in our view justifies a premium valuation multiple. At
the current market price, the bank is trading at 3.3x FY2017E ABV. We
recommend a Buy rating on the stock, with a target price of Rs1,265.

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