Sell HDFC Bank: Elara Securities

30% YoY PAT growth from strong non-interest income and lower provisions

HDFC Bank’s net income of INR 14,174 mn reported a 30.2% YoY growth, aided by a 37% YoY growth in non-interest income, and a muted 9% YoY increase in provision expenses. Non-interest income grew from healthy rises in fee (up 24% YoY) and forex & derivative streams (up 37% YoY), coupled with a trading income of INR 665 mn – after reporting trading losses in the last four quarters.

Provision expenses as a share of PPOP was down from 21.4% in 1QFY12 to 19.4% – but up from 12% in the previous quarter. Despite this, provision coverage remains a healthy 81% and Gross NPL of 0.97% shows continued improvement.

Retail business driving growth and margin improvement

Retail loans grew by 33% YoY and 4.4% QoQ with increased contributions from the high yielding CV and unsecured loan segments. PL and credit cards now account for 10.5% of the overall loan book, up from 9.3% in 1QFY12, with the overall retail share also moving up from 48% to 52% in the same time period – with no material increase in credit costs.

The increase in retail exposure has also enabled HDFC Bank to expand (calculated) asset yields by 115 bps YoY and 37bps QoQ to offset increases in cost of funds from declining CASA share. This, along with higher investment yields (up 17bps YoY and 23bps QoQ), have taken NIMs up by 10bps to 4.3%.

Rich valuations capture positives

We like HDFC Bank for its highly profitable operating model – that efficiently prices in retail credit risk – and makes it work. We expect HDFC BankHDFC Bank to continue reporting stable earnings growth and asset quality. However we find valuations at 4.02x FY13E P/Adj BV to have captured all potential upside. We downgrade to “Sell” on the back of recent stock performance, and maintain our PT of INR 536, based on a residual income model.