Buy HDFC Bank with the target price of 740+

IDFC Securities recommends to Buy HDFC bank with the target price of 740+


Q2FY14 result highlights 

•  HDFC Bank’s Q2FY14 profit growth was +27%, and not its usual 30%. This was partly inevitable as growth slows down – for the bank, as for the economy and partly precipitated due to the volatile interest rate environment. While the quarter was probably soft, its operating fundamentals - asset quality, deposit mix and core profitability (PPOP ex-trading gains +28%) are still strong.  
• Loan growth was relatively slow at 16% yoy, 4% qoq. Corporate loans were up 5% qoq, but below trends for 2Q (+7-10% qoq). Retail loans grew steadily (+3% qoq, +17% yoy) but were driven more by unsecured loans as mortgage loans were not on-boarded in Q2FY14 – should normalize ahead.
• NIMs were down 30bp qoq (to 430bp) largely due to the higher cost of funding.We expect NIMs to stabilize at current levels.  
• Fee income growth was strong (+28% yoy), partly due to one-off gains on derivatives (Rs 0.6bn). Excluding this fee growth was still healthy at 23% yoy.  
• Cost control was a big focus in Q2 and reflected in sharply lower cost ratios. 
• Asset quality remained quite steady, with no increase in stress across product segments. Gross stressed assets remain low at 1.3% of loans.  

Key positives: Healthy fee income growth, stable asset quality, control on costs.
Key negatives: Relatively sharp decline in NIMs, slower loan growth.
Valuations & view

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