Stock Pick From Banking Industry

Here is why:

• Strong Financial performance over last 5 years
• Proposal to merge with its parent company HDFC
• Company has good value proposition with healthy growth and good asset quality

The public sector banks as well as private sector banks are struggling with low credit growth and bad asset quality for last couple of years. Now, the government has already started its public spending to give boost to Indian economy, we expect the financial sectors and specifically banks will show good momentum. Here is the fundamentally strong bank with stable asset quality.

HDFC Bank is the country's second largest private sector lender and well positioned across India’s consumption story. The bank has healthy proportion of CASA (current & savings) deposits. Bank has healthy margins which has remained stable across interest rate and economic cycles. The non funded revenue (other income) of the bank is also very strong almost 29 per cent of its net revenue in FY15. The HDFC Bank has healthy asset quality including specific provision cover at 74 per cent of NPAs and total coverage ratio over 150 per cent. Bank's NPA ratio is lower than its last 10 year average even in current challenging environment.

During FY15, HDFC Bank posted very strong financial numbers. Bank's Net Interest Income rose by 21.2 per cent to Rs 22396 crore against 184826 in FY14. Net Revenues increased by 19 per cent in FY15 compared to FY14, and the profit after tax stood at Rs 10216 crore on standalone basis compared to 8478 crore in FY14. Over last five years, the ROA of Bank has improved considerably from 1.6 per cent in FY11 to 2 per cent in FY15. The Earning Per Share (EPS) of the bank increased by 19.89 per cent CAGR from FY11 to FY15. The consolidated net profit of the bank rose by 21.64 per cent CAGR, to Rs 10700 crore in FY15 against Rs 4018 crore in FY11. 

In recent quarter (Q1FY16), HDFC Bank reported Net interest income growth of 23.5 per cent on yearly basis, from Rs 5,172 crore to Rs 6389 crore. The gross non-performing assets increased marginal to 0.95 per cent vs 0.93 per cent and net NPA rose to 0.27 per cent as against 0.25 per cent in the previous quarter. Asset quality remains stable, strong retail segment growth, 25 per cent Y-o-Y, shored up both overall loans and fee income by 22 per cent on yearly basis. 

Considering good quality assets, the HDFC Bank’s stock is traded at slightly higher PE ratio of 25.81x times its trailing twelve months EPS of Rs 42.56 per equity share compared to its peers such as Axis Bank, ICICI Bank and Yes Bank are trading at PE multiple of 18.66x, 14.76x and 16.91x times their respective EPS. The HDFC and HDFC Bank are planning to merge both the entities in a single entity. This merger makes sense in long-run, such a transaction can create the country’s second largest financial sector institution after state-run State Bank of India. Hence we recommend our readers to buy this stock.