HDFC Bank’s NII for Q1FY20 has improved by 22.9% yoy to Rs13,294.3cr against Rs10,813.6 in the correspoding quarter last year. The bank’s net profit was in line with consensus estimates, which has improved by 21% yoy to Rs5,586cr against Rs4,601.4cr yoy. Its GNPA for Q1FY20 came at 1.4%, up by 4bps qoq. NNPA for the quarter came at 0.43% against 0.39% qoq, which is up by 4bps.
Margin expanded 10bps yoy due to the re-pricing benefit on MCLR-linked loans leading to a 20bps yoy increase (calculated) in yield on advances vs. a lower 12bps yoy increase in cost of funds. NII growth was strong despite a slowdown in loan growth driven by margin expansion.
Non-interest income growth was strong aided by trading gains of Rs210cr in the quarter as against a loss of Rs280cr in 1QFY19. Core fee income growth however was muted at 12.5% and was impacted by lower MF distribution income due to changes in regulation and lower fees due to slowdown in retail asset origination while there was an increase in payment volumes and life insurance volumes. Core fee income growth would have been 15% yoy excluding the impact of lower MF income.
Specific loan loss provisions increased 69% yoy to Rs2,410cr (as against Rs1,430cr in 4QFY19) on account of (i) higher provisions in the agriculture segment, (ii) stepped-up provisions in unsecured retail loans and (iii) an additional contingent provision of Rs165cr. Excluding these impacts, specific provisions grew 36% yoy. General provisions increased 9% yoy to Rs200cr and included an additional provision of Rs86cr for standard advances to the NBFC/HFC sector. Despite such high provisions, PCR declined sequentially by ~170bps (69.7%).
Loan growth moderated due to a slowdown in both retail loans (+16% yoy) and corporate loans (+18% yoy). Retail loan growth witnessed a slowdown in the vehicle loan, personal loan, and housing loan segments, while credit card growth held up at 29% yoy.
Deposit growth exceeded loan growth yoy, leading to a decrease in LDR. CASA ratio had a sharp sequential decline of ~270bps to 39.7% as CASA deposits grew 13% yoy, behind TDs which grew 23% yoy.
Asset quality was broadly stable on a qoq basis in 1QFY20, however was aided by higher write-offs of Rs2,115cr (19% of opening GNPLs). GNPL ratio ex-agriculture stood at 1.17%, up 8bps yoy and flat qoq. Slippages in 1QFY20 increased to Rs4,225cr from Rs3,580cr in 4QFY19. Of the total slippages, ~31% was contributed by the agriculture segment. Slippage ratio increased to 2.4% of opening loans (2.2% in 4QFY19).
The Bank's total Capital Adequacy Ratio (CAR) as per Basel Ill guidelines was at 16.9% as on June 30, 2019 (14.6% as on June 30, 2018).
Total advances as of June 30, 2019 were ~8.3 lakh cr, an increase of 17.1% yoy.
Total deposits as of June 30, 2019 were ~9.5 lakh cr, an increase of 18.5% yoy. CASA deposits grew by 12.8% with savings account deposits at ~2.5 lakh cr and current account deposits at ~1.26 lakh cr.
The Board of Directors has declared a special interim dividend of Rs5 per equity share.
Key takeaways from the earnings call
Retail loan growth slowed to 16% yoy in 1QFY20 from 19% yoy in 4QFY19. Excluding the sharp slowdown in vehicle loans on account of underlying industry growth, other retail loans grew 20% yoy in 1QFY20, while vehicle finance loans grew 8% yoy.
In unsecured retail loans, HDFC Bank will look to add newer markets and geographies in tier-2 and tier-3 cities where there is lesser competition in order to sustain a higher rate of growth.
In vehicle loans, the resale prices have decreased sharply leading to losses on the sale of the repossessed vehicles.
Corporate loan growth also witnessed a sharp slowdown with a growth of 18% yoy in 1QFY20 down from 31% yoy in 4QFY19 driven by maturities in short term loans including those extended to MFs in 4QFY19 and repayments in certain government accounts.
Corporate loans linked to external benchmarks account for 5-6% of the corporate book.
Management stated that it would like to lower the LDRs from current levels of 86-87%. However, the bank has been utilizing long term institutional financing such as subordinated debt and infrastructure bonds over a period of time; adjusting for these, LDR is ~75%.
Management reiterated its guidance of a reduction in cost to income ratio to 35% by FY24 (40% in FY19) driven by (i) increased digitization of front-end and back-end processes and (ii) enhanced digital marketing initiatives to drive a higher share of unassisted digital origination. Provisions included an MTM gain of Rs81cr of losses recouped from prior quarters.
Management has not sized up the impact of zero MDR (Merchant Discount Rate) as is awaiting final rules from the RBI/Government of India to assess the impact.
Management has stepped up provisions for unsecured retail loans which have slipped in GNPLs. This is on account of a consumption slowdown and the external environment in which there has been an increase in (i) customer leverage, (ii) frequency of borrowing and i(ii) average ticket sizes. Effectively the entire amount is now provided for between 90-150 days, as against between 90-180 days earlier.
Additional provisions in 1QFY20 included Rs1.65bn of contingent provisions in specific loan loss provisions made toward a pool of accounts in certain sectors and Rs0.86bn in general provisions for standard advances to the NBFC/HFC sector.
Movement of NPLs in 1QFY20: Slippages at Rs4,225cr (~31% from agriculture), Recoveries at Rs1,002cr and Write-offs at Rs2,115cr.
HDFC Bank Ltd ended at Rs. 2,377.30, down by 26.6 points or 1.11% from its previous closing of Rs. 2,403.90 on the BSE.
The scrip opened at Rs. 2,424 and touched a high and low of Rs. 2,424.40 and Rs. 2,368.10 respectively. A total of 21,14,813 (NSE+BSE) shares were traded on the counter. The stock traded above its 50 DMA.
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