HDFC Bank – Core Banking Operation Slowsdown

HDFC Bank’s 1Q10 profits were slightly lower than our estimates, but it was a tough quarter and on the face of it reflects in lower core operating profitability (+14% yoy) and loan growth (+7% yoy). However, HDBK’s underlying operating parameters are as strong as ever with strong NIMs, few quality concerns, healthy deposit mix, reasonable growth and robust profitability.

Core operating profits grew slower and fee growth moderated. However, NIMs remained above 4% (HDBK has been a model of consistency), costs were in check, and the cushion from high trading gains was used to provide aggressively for loan loss charges.

The key negative surprise was from higher loan loss provisions (annualized loan loss rate of 2.6%). It appears to us that the high loan loss ratio will likely be sustained given slower loan growth and the effect of loan book aging.

HDFC Bank is expected to report an EPS between Rs 64 to Rs 70 according to various analysts. Hold and BUY on Dips [around Rs 1,100]