The brokerage, however, has advised clients to buy on declines

HDFC Bank has been downgraded to 'accumulate' from 'buy, by brokerage firm Kotak Securities. It believes that HDFC Bank has outperformed the Sensex during last one month by giving 12.6% return vis-à-vis 6.5% return given by the Sensex during the same period, and therefore has limited upside from current levels (Rs548). It has given a target price of Rs590, based on four times its estimate of the bank's 2013 adjusted book value of Rs146.7 per share.

According to the report, one of the characteristics of HDFC Bank, which keeps it way above its peers, is its liability franchise. It said, "It has consistently delivered one of the highest Current Account-Savings Account (CASA) mix in the industry (48.4% as of 4th quarter of the 2011-12 fiscal). Its healthy liability franchise has been aiding in delivering one of the best net interest margins (NIM) in the industry." Its NIM stood at 4.2% during the most recent quarter on back of improvement in lending yields.

CASA ratio is the proportion of current accounts to savings account. A higher CASA is better for the bank as it keeps down the costs of funds, as current account costs nothing, whereas savings account attracts deposit fees towards customers. While, NIM is the key profitability yardstick by which various banks are compared.

 Most banks depend on the retail segment to attract deposits. In HDFC Bank's case, according to the report, the retail segment has driven the loan growth during last three to four quarters. "They (HDFC Bank) have the ability to gain market share in advances by leveraging its distribution networks. Over the years, they have grown their loan book 4%-5% faster than the system growth. We believe future loan growth is likely to track its deposit mobilization," said the report. The share of retail book has grown to 54.8% at the end of Q4FY12 as compared to 49.9% at the end of Q4FY11.

In times of difficulty, much of the bank's future profitability hinges on its ability to manage bad loans, or non-performing assets (NPA) in banking parlance. The report said, "HDFC Bank's asset quality is comfortable with gross and net NPAs coming at 1% and 0.2% respectively at the end of FY12. Slippage was also contained at around 1% during FY12, well below the industry average." In HDFC Bank's case, it seems to be controlling its NPAs while its peers are not doing so well.

The higher the provision coverage ratio, the better, as it provides some breathing room in case the economy gets worse. According to the report, it said, "Its provision coverage ratio is also healthy at 82.4% at the end of Q4FY12, which provides a cushion to its earnings with any unforeseen deterioration in its asset quality in the future. Lower restructured book (0.4% at the end of FY12) further reduces the risk of any big negative surprise in the future."