Motilal maintains 'buy' on HDFC Bank

Motilal Oswal is bullish on HDFC Bank and has maintained a ‘buy’ rating on the stock after the bank posted 34% rise in net profit for the first quarter of 2007-08 (Apr-Mar).

The bank's net profit stood at Rs 321.23 crore in the quarter ended June 30, 2007 compared with Rs 239.3 crore in the same period previous year. Total income during the quarter rose to Rs 2,641.7 crore from Rs 1,855.08 crore a year ago.

"HDFC Bank's earnings grew by 34% on year-on-year basis in line with estimates. However, net interest income growth was merely 28% YoY in the first quarter of 2007-08 compared with an estimated 44% growth," the brokerage said.

The bank's margin was 4.2% in the June quarter versus 4.1% in the same period last year. HDFC Bank aggressively built up its term deposits during the June quarter, recording quarter growth of 37%.

According to Motilal Oswal, this faster deposit growth (putting pressure on margins) is a 'catch up' as the bank had not grown its term deposits for the past three quarters. Loan growth was 33% on year-on-year basis, above the industry growth of 25%. Asset quality has been maintained with gross non-performing assets at 1.3% and net at 0.4% of customer assets.

The bank had slowed down its bulk deposit intake during the second half of 2006-07 as rates were unattractive. This resulted in slower deposit growth of 22% for the full year 2006-07. The bank's total term deposits also remained almost flat. But in the first quarter of 2007-08, the bank has reversed the trend of slower growth and has built a strong retail term deposit base.

Term deposits grew by 37% on quarter-on-quarter basis. As a result, CASA reduced from 58% in the fourth quarter of 2006-07 to 52% in the April-June quarter. On a quarter-on-quarter basis, the bank has grown its deposits by 19% versus industry growth of 3%.

The bank has been able to sustain its credit growth during the June quarter while credit growth in the system has reduced to 25% from 28% year ago. Quarter on quarter, loans have grown by 15% versus industry de-growth of 1.5%, the brokerage observed.

According to the brokerage, retail has been the key growth driver for the bank, although the pace of growth continues to be slowing down. Corporate loan growth has been picking up for HDFC Bank, primarily from small and medium enterprises and working capital financing.

On year-on-year basis, other income grew 77% in the first quarter driven by robust fee income growth of 28% and strong foreign exchange and derivative income as well as higher treasury income. Forex and derivatives income grew by 263% year-on-year. The growth in derivatives and forex was on account of executing some big-ticket transactions for corporate clients in the quarter.

The bank has opened 69 new branches and 111 ATMs in the June quarter and now has 753 branches and 1,716 ATMs. Over the last nine months, the bank has added 218 branches. Motilal Oswal expects an additional 100 branches to be opened during the next three quarters.

The bank's capital adequacy currently is at 13.1%, with Tier-I at 9.2%. During the June quarter, it raised Rs 13.9 billion of equity by way of preferential allotment of 13.6 million shares at a price of Rs 1,013.50 to the parent HDFC Ltd.

The bank would be raising an additional Rs 28 billion in equity, probably in the second quarter of 2007-08 by way of an international issue as part of its announced equity raising of $1 billion. This capital build-up, apart from being significantly book accretive, would take care of above industry credit growth for the bank in next 3-4 years, said the brokerage.

Motilal Oswal expects the bank's balance sheet growth to be faster with margins in the range of 4.2-4.3%. Rapid branch expansion would ensure core deposit growth as well as sustainability of its relatively higher CASA ratio.

On a post diluted basis, the brokerage expects the bank to report earnings per share of Rs 42.8 in 2007-08 and Rs 58.6 in 2008-09. The return on equity in these two financial years is likely to be 17%. At current market price of Rs 1,210, the stock currently trades at 19.6 times EPS and 3 times book value of 2008-09 estimates.