HDFC Bank’s 4Q earnings were 6% above expectations, driven by margin surprise and significantly lower provisions vs. expectations. Margins surprised at 4.4% (although guided down for this year), there was a pick-up in wholesale loans (particularly retail vehicle loans), with stable cost ratios and improving asset quality.
It is entering a new credit cycle with significant competitive advantages. New NPL formation has decreased to the lowest level in years and it has no legacy NPL book – implying it can potentially run with lower than normalized credit costs.
Besides some margin accretion and reasonable balance sheet growth, we see the biggest driver being robust fee growth on the back of HDFC Bank’s substantial distribution strength of 1,725 branches, just 1% less than the largest private bank. In addition, lower provision ratios as the credit cycle picks up would help the bank to improve ROA and ROE as a result of our estimate of 30% earnings CAGR upto FY12E.
HDFC Banks Earnings and Price Targets:
HSBC – Rs 86 and Rs 110 for FY 11 and FY 12 with target of Rs 2,350
Morgan – Rs 77 and Rs 100 for FY 11 and FY 12 with target of Rs 2,400
Goldman – Rs 84 and Rs 108 for FY 11 and FY 12 with target of Rs 2,200