HDFC Bank (Q1 FY15)

India Infoline Research Team, India Infoline Research Team | Mumbai | July 24, 2014 15:31 IST

HDFC Bank delivered a lower-than-expected loan growth of ~17% yoy (~21% yoy in Q4 FY14) excluding the FCNR (B) deposits related lending.

CMP Rs827, Target Rs952, Upside 15.1% 
  • Overall loan growth was lower than expectation at 17%; growth deceleration in vehicle financing portfolio continued

  • Seasonal fall in CASA ratio to 43%; to structurally improve in longer term 

  • NIM was stable; outlook is encouraging

  • Fee growth remains sluggish; C/I ratio improves on muted opex growth 

  • Slippages were higher sequentially causing marginal uptick in Gross NPLs

  • Retain BUY with 9-12 month target price to Rs952

Result table
(Rs mn) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
Total Interest Income 112,200 107,886 4.0 96,630 16.1
Interest expended (60,484) (58,359) 3.6 (52,443) 15.3
Net Interest Income 51,716 49,526 4.4 44,187 17.0
Other income 18,505 20,014 (7.5) 19,256 (3.9)
Total Income 70,221 69,541 1.0 63,443 10.7
Operating expenses (31,784) (31,747) 0.1 (30,382) 4.6
Provisions (4,828) (2,861) 68.7 (5,271) (8.4)
PBT 33,609 34,932 (3.8) 27,790 20.9
Tax (11,280) (11,669) (3.3) (9,351) 20.6
Reported PAT 22,329 23,263 (4.0) 18,439 21.1
EPS 37.1 38.9 (4.5) 30.9 20.1

Key  Ratios Q1 FY15 Q4 FY14 chg qoq Q1 FY14 chg yoy
NIM (%) 4.4 4.4 - 4.6 (0.2)
Yield on advances (%)* 11.4 11.3 0.0 11.8 (0.4)
Yield on funds (%)* 9.7 9.5 0.1 10.1 (0.4)
Cost of funds (%)* 5.9 5.8 0.1 6.2 (0.3)
CASA (%) 43.0 44.8 (1.8) 44.7 (1.7)
C/D (x) 83.9 82.5 1.4 85.3 (1.4)
Non-interest income (%) 26.4 28.8 (2.4) 30.4 (4.0)
Cost to Income (%) 45.3 45.7 (0.4) 47.9 (2.6)
RoE (%) 19.4 21.4 (2.0) 19.2 0.2
RoA (%) 2.0 2.0 - 2.0 -
CAR (%) 15.1 16.1 (1.0) 16.0 (0.9)
Gross NPA (%) 1.1 1.0 0.1 1.0 0.1
Net NPA (%) 0.3 0.3 - 0.3 -
Source: Company, India Infoline Research

Overall loan growth came-off to 17%; growth deceleration in vehicle financing portfolio continued

HDFC Bank delivered a lower-than-expected loan growth of ~17% yoy (~21% yoy in Q4 FY14) excluding the FCNR (B) deposits related lending. Growth in Retail loans segment moderated to ~14% yoy adjusting for re-classification of Business Banking loans as corporate loans during the interim period. The growth slowdown continues to be driven by Vehicle Finance portfolio (CV/CE, Auto and 2W loans) which stood marginally lower yoy led by steep 21% contraction in the CV/CE book. The contribution of vehicle financing business within the Retail segment has come-off to 34% as compared 37% in Q1 FY14. The non-vehicle financing piece continued to do well driven by strong growth momentum in Business Banking (25-30% yoy), Credit Cards (26% yoy), Personal Loans (16% yoy) and Kisan Gold Cards (Agri). Growth in Corporate book adjusted for the re-classified Business Banking loans stood strong at ~19% yoy. Benign wholesale funding environment and deceleration in retail loans are likely to have encouraged HDFC Bank to drive incremental loan growth through Corporate segment. Reported loan mix continued to shift towards the Corporate segment.

Seasonal fall in CASA ratio to 43%; to structurally improve in longer term 

Excluding FCNR (B) deposits raised during Q3 FY14, deposits growth was 17-18% yoy, similar to the credit growth. Improved traction in savings deposits mobilization was sustained in Q1 FY15 with growth accelerating to 18% yoy. Current deposits de-grew by 11% qoq (year-end floats in Q4 FY14) driving a sequential 180bps decline in the CASA ratio. HDFC Bank added 85 branches during Q1 FY15 and plans to add 250-300 branches in the current year. Improving mobilization at young branches (opened in the previous 24-36 months), sustained brisk network expansion (largely in under banked areas) and cyclical softening of TD rates is likely to drive CASA ratio improvement in the longer term. 

NIM was stable; outlook is encouraging

Versus our expectation of 10bps decline, HDFC Bank’s NIM was stable at 4.4%. Based on our computations, both blended yield on advances and cost of funds was steady. As compared to Q1 FY14, the blended lending yield has come-off by ~30-40bps due to shift in overall segmental  mix and product mix movement within Corporate segment (increase in share of very low margin international book) and Retail segment (decline in contribution of Vehicle financing and increase in share of home loans). On the other side, though cost of funds has declined due to softening of wholesale rates, the fall has not been commensurate to insulate NIMs. However, longer term NIM outlook is strong as funding cost is expected to trend lower driven by CASA uptick and decline in TD/Bulk rates whereas the blended lending yield would receive support from growth revival in retail segment especially in vehicle loans.

Fee growth remains sluggish; C/I ratio improves on muted opex growth 

Sustained sluggishness was seen in fee income growth; has been in the modest band of 9-12% yoy over the past few quarters. While third party product distribution fees have been under stress, it seems that other fee streams (transactory in nature) also witnessed growth moderation. Forex income was substantially lower yoy on account of reduced volatility in the currency and lower proprietary gains. Opex growth remains muted at 4% yoy driven by efforts on cost rationalization/control and productivity improvements. This has been the third straight quarter of sub-5% yoy growth in opex. This has been achieved despite sustained network expansion as the bank has been largely adding low-cost branches. Cost/income ratio improved marginally qoq from 45.7% to 45.3%. While opex would normalize as bank incrementally focuses on growth; revival in loan growth, fee income and gradual expansion in NIM is expected to keep cost/income ratio in the range of 43.5-45% over the next couple of years.

Slippages were higher sequentially causing marginal uptick in Gross NPLs 

Annualized delinquencies stood at 1.5% which was higher than our expectation. However, as compared to Q1 FY14, the slippage ratio was much lower. During the quarter, the bank witnessed some stress in Agri, SME and CV/CE portfolios. Gross NPLs level inched-up to 1.1%. Credit cost was modest at annualized 68bps on total provisioning basis with PCR being sustained near 70%. Outstanding stock of restructured assets (including pipeline) continues to be negligible at 0.2% of loans. Notwithstanding marginal disappointment in higher Q1 FY15 Gross NPLs, we believe that bank's asset quality would remain steady in coming quarters aided by gradual improvement in economic environment. This view underpins our modest credit cost assumptions for FY15/16. Quarterly annualized RoA stood at impressive 2%. Capital adequacy stands robust with Tier-1 ratio at 11.1%, not including Q1 FY15 profits.

Retain BUY with 9-12 month target price to Rs952

We estimate HDFC Bank to continue to deliver historically high RoAs of 1.9-2% through FY15 and FY16 supported by robust NIMs, improving cost metrics and stable asset quality. High inherent profitability and performance predictability of the bank will support its premium valuation. Absolute valuation at 3.3x FY16 P/adj.BV does not look very expensive in the context of industry-best RoA delivery. Retain BUY recommendation on HDFC Bank and raise 9-12m target to Rs952.

Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Total operating income 226,637 264,022 308,818 380,349
yoy growth (%) 21.4 16.5 17.0 23.2
Operating profit (pre-prov) 114,276 143,600 173,343 213,716
Net profit 67,263 84,782 103,481 128,266
yoy growth (%) 30.2 26.0 22.1 24.0
EPS (Rs) 28.3 35.3 43.1 53.5
Adj.BVPS (Rs) 150.2 177.8 210.4 250.6
P/E (x) 29.3 23.4 19.2 15.5
P/BV (x) 5.5 4.7 3.9 3.3
ROE (%) 20.3 21.3 21.8 22.7
ROA (%) 1.8 1.9 1.9 1.9
Dividend yield (%) 0.7 0.8 1.0 1.3
CAR (%) 16.8 16.1 14.7 13.4
Source: Company, India Infoline Research
NSE 1,935.00 [0.75] ([0.04]%)

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