HDFC Bank-Buy HDFC Bank; target of Rs 530: KRChoksey

KRChoksey is bullish on HDFC Bank and has recommended buy rating on the stock with a target of Rs 530 in its September 23, 2011 research report.

“HDFC Bank has well diversified fee income stream generating from corporate and retail segments. Retail and corporate segment contribute 80% and 20% respectively to total fee income. Branch banking, commission on third party products and fee debit & credit cards continue to drive retail fee going forward. Lower commission on traditional insurance products and tepid volume growth will lead to subdued fee income distribution business going forward.”

“HDFC Bank has added ~ 700 branches in last two years. Newly open branches have started contributing to saving deposit mobilization. The management is confident to maintain ~ 45-46% CASA levels in medium term. In addition to this, the bank plans add 250-300 branches per year next 3-5 years which will support CASA mobilization strategy. HDFC bank’s asset quality trends continue to relatively stronger in challenging macro environment, largely attributable to stringent credit origination practices, a well diversified loan book. Normalized credit costs have been ~ 1.5% in the last four years, which will further trend down to 1.3% in medium term. The bank doesn’t have exposure in problematic sector such power, infrastructure and aviation which give immense confidence on better quality of the book.”

“We believe best asset quality trends are behind us and credit costs are likely to increase going forward, so we are factoring in 100bps and 125bps credit costs in FY12 & FY13 respectively against 53bps in FY11. HDFC bank continues to focus to fulfill their priority sector lending requirement through their tier III and Tier IV branches. The management is experiencing strong growth in rural branches due to rising rural wealth led by higher MSP and land prices. Loan to NBFC sector stands at 4% of loan book, so new stringent regulation on NBFC sector would not affect HDFC Bank meaningfully.”

“Loan book grew 27.1% in FY11 driven by strong growth in corporate and retail loans. The Management expects moderation in loan growth largely attributable to slowdown in the economy and higher interest rates impacting retail loans. We expect loan book to grow 24.5% CAGR over FY11-FY13. Short term industrial credit and working capital driven credit demand are key drivers for wholesale loan book growth. Well diversified loan book, superior liability franchise and well matched asset liability duration continue support better margins. However, we are building 11bps NIM compression in FY12 factoring higher cost of funds in the system,” says KRChoksey research report.