HDFC Bank Q2 above expectation; retain a buy: Experts

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The country’s second largest bank HDFC Bank reported second quarter numbers there were in line with expectations. The September quarter profit rose 20.5 percent to Rs 2,869.5 crore compared to year-ago period. Profit growth was driven by other income, NII and operating profit despite higher provisions and tax expenses.Reacting to the number Vaibhav Agrawal of Angel Broking said the bank reported steady set of numbers in terms of asset quality and net interest income although the margins came in a bit below their expectations. The bank has always been rock solid in terms of asset quality and the improving trend will continue going forward too, said Agarwal adding the house retains a buy on the bank with a target price of Rs 1265.However, for Deepak Shenoy, founder, Capitalmind.in although the numbers were above his expectations, he does not have a buy or sell on the stock, says the stocks price needs to go a bit higher before it becomes attractive..In the same interview Hemindra Hazari, independent market expert also spoke on the bank's Q2 performance.Below is the verbatim transcript of Vaibhav Agarwal, Deepak Shenoy and Hemindra Hazari’s interview with Ekta Batra on CNBC-TV18.Ekta: What is your sense in terms of the asset quality? The fact that the gross non-performing loans (NPL) have improved by four basis points on at least a ration basis?Agrawal: Clearly, HDFC Bank has more or less been pretty rock solid on asset quality throughout these quarters. In fact the slight improving trend is continuing and they have more than enough profitability to continue providing for whatever slippages they are seeing and this is the reason why even the net non-performing assets (NPA) number is well in check. On those parameters more or less they remain quite rock solid.Ekta: Why do you think that the stock might be in fact giving up its gains at this point? Any particular reason? Maybe the net interest margin (NIM) disappointment on the fact that the stock is one of the key outperformers?Agrawal: I do not think the results have any reason to see any mild correction as well. Probably the markets are also just correcting right now, so a little bit of rub-off of that as well could be there, but otherwise, as far as the numbers are concerned, we think it is a good set of numbers and would not take any negative view on the stock as far as the results are concerned.Ekta: What would you like to hear from the management?Agrawal: For HDFC Bank of course, they have been able to navigate the whole environment quite well. But at the end of the day, it is sort of a highly valued stock growing at 20 percent earnings in a market which is decelerating to just 10 percent credit growth. So, some management commentary on how they see growth continuing to pan out. Even that deposit growth like you mentioned is very high at 30 percent. Whether they see that kind of growth sustaining and also from a slightly medium term perspective with the competition that is coming into the sector, do they see themselves sustaining these kind of high growths that is the key denominator for HDFC Bank.Ekta: Wanted your thoughts in terms of the NIMs, the fact that it is now declined 20 basis points from levels that we saw in Q4 of FY15 of March this year, is that a niggling worry for you?Agarwal: I think this is more of a quarterly phenomenon and they should be able to stay in that broader range of 4.2 to 4.5. The other thing that has been happening like I mentioned, their fixed deposits (FD) growth has been really very high in the last two quarters and the current and savings accounts (CASA) ration has come down because of that. So, that is also seasonally impacting their margins probably to an extent. But once the FD repricing continues to happen, their margins should once again revert back a little bit and as the base rate impact is already behind us, but FD cost can still come down in the coming quarters. So, that should help probably maintain and slightly improve the margins in the coming quarters.Ekta: Good numbers then from HDFC Bank?Agrawal: Absolutely, I think it is a good set of numbers and for a quality bank like HDFC Bank, it would remain a buy for us. We have a target of Rs 1,265 and we would retain that after these results as well.Ekta: What is your sense?Shenoy: The numbers look a bit higher than my expectations.Ekta: On what parameter was it higher?Shenoy: Net profit. I was expecting this at around 30 percent, it is a little bit more than that, I have not done the exact calculations. I have not seen the CASA as well in terms of the ratios having dropped substantially. With a 4.2 percent margin, it is very good in comparison with the rest of the banking system. I believe the digital initiatives of the recent times should help. In fact, we do not know the specific numbers, I have to also get the press release, but they have opened up a wallet where they are going to allow transactions in urban areas where they are trying to push into those material goods. I want to see the growth of that to see if it will offset the potential loss ion CASA growth that they will see in respect of the new banks that are coming in. That is the primary focus, but otherwise the numbers are on par, a little bit higher than I thought in terms of net profits.Ekta: Good numbers from HDFC Bank?Shenoy: I do not have a buy or a sell on it. Specifically, the stock needs to go a little bit higher before it becomes attractive.Ekta : It is the 20 percent growth in profits this quarter, 21 percent growth in net interest income (NII) this time around as well. Rs 6,681 is where the NII is and the profits it Rs 2,869 your take?Hazari: This is inline with the analyst expectation because analysts were expecting anywhere between 20 to say 22 percent growth. HDFC Bank very rarely disappoints on analysts. Initial numbers that I have been reported seems to be well within that expectation by the analyst.Reema: What about the net interest margin (NIM) front? It has declined for the second consecutive quarter. It stands at 4.2 percent. I know it is expected because of the base rate cut which was affected by the bank, but how would you rate it?Hazari: That is to be expected as you very rightly pointed out that they have reduced their base rate, so it is bound to have some impact. Even at 4.1 or 4.2, that is a very handsome margin and probably the highest margin in the Indian banking sector. So, yes, there is a decline, that is to be expected because of the base rate cut.Ekta: Any reason why you would think that the stock is selling off? It is just down around 0.5 percent odd but would that just be attributed to routine profit taking considering that the expectations were met?Hazari: That would be the case, probably also the market just may be slightly disappointed with the reduction in the net interest margin. However, combination of profit taking and this slight reduction in the net interest margin may be causing this some weakness in this stock.