Bullish on private banks, neutral on HDFC: Angel Broking

HDFC Bank posted a 30 percent year-on-year jump in its third quarter net profit at Rs 1,859 crore, driven by robust growth in other income and loan expansions. However, the bank was under some pressure after Net Interest Income (NII) came in lower than estimates at 3800 crore, 22 percent growth versus expectation of a 25 percent growth. In an interview to CNBC-TV18, Vaibhav Agrawal, banking analyst, Angel Broking said that the net profit of 30 percent y-o-y is in line with the expectation.

Further Agrawal is neutral on HDFC Bank as the stock already rules at a very premium valuation, almost four times price-to-book. He is bullish on other private sector banks, a number of them which are still trading at reasonable valuations. Below is an edited transcript of Vaibhav Agrawal's interview on CNBC-TV18 Q: How would you react to HDFC Bank’s Q3 numbers?
A: The net profit is exactly in line with our estimates, the company has been delivering 30 percent kind of growth. We are interested in knowing how they would continue to manage growth of 30 percent with a much lower loan growth of around 20 percent in the systems and also what are they doing. But for QoQ they are managing with good asset quality and even on the other income that is a bit surprising. This quarter it has come in at a high number, which has enabled them in this quarter to continue to chalk up 30 percent kind of profit growth. Q: What is your recommendation on the stock? With respect to asset quality will the gross non-performing asset (NPA) figure coming in at 1 percent worry you?
A: The management has been quite clear that there will be some impact on increasing slippages even for them, but it is miniscule. The important number to look at is whether the net NPA is going up or not which is not. They have been able to provide for whatever little slippage was there in this quarter. So I do not think it is a worry. Q: The NII figure has come in at Rs 3,799 crore, lower than our expectations. It is a growth of about 22 percent that we are seeing on the top-line on the NII versus our expectations of about 25 percent growth. Would you worry about some of these banks starting to show some sluggishness in terms of NII, in terms of loan growth?
A: It is a little bit lower than our estimate as well and with this kind of loan growth in the system and already their net interest margins (NIMs) and return on assets (ROA) at all-time high levels. It has to be seen from where they would continue getting a much higher bottom-line growth.

NII especially given the retail assets the competition is also picking up in a big way in the sector overall, it is difficult to imagine that this would continue growing at 25 percent plus kind of levels as well. At least in this quarter they have managed it with other income, but it remains to be seen how long they can sustain the 30 percent earnings growth through an expansion in ROA. Q: One of the analyst earlier pointed out that many of these private sector banks continue to report robust numbers but the run up that the stocks have seen make it difficult to justify higher valuations in stock movements from hereon. Given the small wrinkles that we are seeing in terms of NII, would you give any of these private banks more of an upside in terms of a stock market performance or do you think there is not too much room?
A: Coming to valuations, HDFC Bank stands out as being at a very premium valuation, almost four times price-to-book. So from these levels for HDFC Bank, it is indeed difficult to visualise a higher rerating, so even we are neutral. But for the other private sector banks, a number of them are still trading at reasonable valuations, so there are buys in the private space as such, but HDFC Bank is a little difficult to justify a higher multiple than what it is already trading at. Q: What you are expecting to see in terms of loan growth? Is HDFC bank growth shown today sustainable?
A: We were going with around 21-22 percent loan growth and looking at where the NII number has come in. They would have been a bit lower at maybe 20 percent. So that is what we would expect on the loan growth fund. The management has proved that they can sustain 30 percent earnings growth, but now we have to see from where this will come, because margins and ROA are at all-time highs for them already. It would be interesting to know from where they would stick to continue growing at about 30 percent kind of growth that they have been delivering.