HDFC Bank continued its trend of delivering consistent earnings performances. For 3QFY2016, it registered a net profit growth of 20.1% yoy, which is in line with our expectation. Advances grow strongly; Asset quality top-notch During 3QFY2016, the loan book grew at a rapid pace, ie by 25.7% yoy. Retail growth picked further traction; the growth in the retail book was at 30.4% yoy, which took the total contribution of retail as a proportion of total advances book to 49%. Corporate credit growth rate, at 20.7% yoy, stood well above that of the industry.

Current and Savings account deposits continued with their momentum, registering a spurt of 29.7% yoy and 20.6% yoy respectively leading to a qoq push in the CASA ratio to 40.0%. Fixed deposits grew at 28.5% yoy, faster than the growth in the total CASA deposits (at 23.7% yoy).

The bank’s non-interest income (excluding treasury) grew by 12.1% yoy, while fee income grew at 11.0% yoy. The NIM came in as a surprise at 4.29%.

The asset quality continued to remain healthy with the Gross NPA rate at 0.97%, increasing marginally by 6bp qoq in a challenging macro environment. The Net NPA ratio stood at 0.29% as against 0.25% in 2QFY2016. The Provision Coverage Ratio (PCR) stood at 70.4% vs 72.9% in the sequential previous quarter.

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 3.1x FY2017E ABV. We recommend a Buy rating on the stock, with a target price of Rs1,262.

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