Strong operating performance
Event
􀂃 HDFC's strong operating numbers continue in 4Q FY3/08. There were some distortions caused by large asset sales and tax rates, but underlying performance remained robust.
Impact
􀂃 Loan growth strong, margins up. HDFC's mortgage business continues its strong growth, with loan growth at 29% and the share of individual mortgages stable at 66%. For quite a few quarters, HDFC has been bucking the trend of slower growth being experienced in the rest of the mortgage industry – its market share has been rising at the expense of banks. This is partly because banks' competitiveness is being eroded by rising CRR and they are increasingly concentrating on the wholesale lending markets, where fee opportunities are strong.
􀂃 Margins remain robust. Margins have been trending up through the year and finished the year with a 26bp improvement in spreads to 3.23%. The 75bp CRR hike announced by the Reserve Bank should help drive up HDFC's lending spreads further, as competing banks' intermediation costs go up.
􀂃 Tax rate a negative surprise. The tax rate provided a negative surprise in the year, pushing the full-year tax rate to 28% versus our estimates of 24%. This is due to the higher tax rate of 22% applied on the gains from sale of unlisted assets which provided the bulk of capital gains in this year versus the lower tax applied to sale of listed assets which constituted the majority of capital gains in previous years.
􀂃 Building on existing strength. HDFC's key strengths in cost efficiency and asset quality improved further this quarter with cost/income falling to single digits at 9% for FY3/08, down from 12% in FY3/07, while gross NPAs fell to an all-time low of 0.84%, down from 1.12% in 3Q FY3/08.
Earnings revision
􀂃 No change.
Price catalyst
􀂃 12-month price target: Rs3,573.00 based on a Sum of Parts methodology.
􀂃 Catalyst: NIM improvement in 2Q FY3/09E, as CRR impact flows through.
Action and recommendation
􀂃 HDFC's lending business is in better shape than ever before. The increasing importance of its insurance business does make its profile riskier than it has been historically, as does its semi-holdco structure. Its standalone valuation of 6.5x PBV masks the fact that significant value comes from its subsidiaries. We reckon that the parent bank is available at 4.0x PBV (one-year forward), which is very attractive, given its high and improving ROEs. We retain our Outperform rating with a target price of Rs3,573, 24% above current levels.
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