HDFC Bank (Q2 FY14)

HDFC Bank delivered a modest loan growth of 16% yoy, lower than our estimate of 18% yoy.

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs650, Target Rs730, Upside 12.3%

  • Loan growth slows to 16% yoy; sharp deceleration in retail segment

  • CASA ratio was stable; brisk network expansion continues

  • NIM decline higher than expected; long term margin outlook encouraging

  • Fee growth remains sluggish; C/I ratio improves on lower cost growth

  • Slippages were likely benign; asset quality to remain relatively robust 

  • Retain BUY with 9-month target price of Rs730

Result table
(Rs mn) Q2 FY14 Q1 FY14 % qoq Q2 FY13 % yoy
Total Interest Income 100,933 96,630 4.5 85,247 18.4
Interest expended (56,168) (52,443) 7.1 (47,930) 17.2
Net Interest Income 44,765 44,187 1.3 37,317 20.0
Other income 18,444 19,256 (4.2) 13,451 37.1
Total Income 63,209 63,443 (0.4) 50,768 24.5
Operating expenses (29,342) (30,382) (3.4) (25,055) 17.1
Provisions (3,859) (5,271) (26.8) (2,929) 31.8
PBT 30,008 27,790 8.0 22,784 31.7
Tax (10,184) (9,351) 8.9 (7,184) 41.8
Reported PAT 19,824 18,439 7.5 15,600 27.1
EPS 33.2 30.9 7.5 26.4 25.6

Key  Ratios Q2 FY14 Q1 FY14 chg qoq Q2 FY13 chg yoy
NIM (%) 4.3 4.6 (0.3) 4.2 0.1
Yield on advances (%)* 11.7 11.8 (0.1) 11.6 0.1
Yield on funds (%)* 10.3 10.1 0.2 10.1 0.2
Cost of funds (%)* 6.5 6.2 0.2 6.5 (0.0)
CASA (%) 45.0 44.7 0.3 45.9 (0.9)
C/D (x) 85.8 85.3 0.6 84.5 1.3
Non-interest income (%) 29.2 30.4 (1.2) 26.5 2.7
Cost to Income (%) 46.4 47.9 (1.5) 49.4 (2.9)
RoE (%) 0.6 0.8 (0.3) 0.5 0.1
RoA (%) 19.6 19.2 0.4 18.7 0.9
CAR (%) 2.0 2.0 - 1.6 0.4
Gross NPA (%) 14.6 16.0 (1.4) 17.0 (2.4)
Net NPA (%) 1.1 1.0 0.1 0.9 0.2
Source: Company, India Infoline Research; *Calculated

Loan growth slows to 16% yoy; sharp deceleration in retail segment 

HDFC Bank delivered a modest loan growth of 16% yoy, lower than our estimate of 18% yoy. Growth moderated in both retail and corporate segments to 17.3% and 14.5% respectively. The deceleration in the retail portfolio growth was steep coming-off from 25.5% in the previous quarter. Growth slowdown was widely spread across products and was more prominent in vehicle financing (CV/CE, Auto and 2W loans), unsecured products (Credit Cards and Personal loans) and home loans (due to lower retention of the loans originated). On the corporate side, lending opportunities were not attractive enough from spread perspective given the spike in wholesale funding rates.

Due to increased growth challenges in both corporate and retail segment, we marginally downgrade loan growth assumptions for the bank to 17% (earlier 18%) in FY14. In our view, loan mix would gradually move towards the retail segment in the medium term.

CASA ratio was stable; brisk network expansion continues

Deposits growth was also modest at 14% yoy. Savings deposits growth was sturdy at 18% yoy given current challenges. Bank has been successful in sustaining the savings ratio near 30% over the past couple of years despite higher rate differential of retail TD and higher rates offered by smaller peers. The CASA ratio was stable sequentially at 45%. HDFC Bank added significant 132 branches during the quarter taking the total network to 3,251. Over the past four quarters, the bank has added 631 branches widening its network by 24%.

NIM decline was higher-than-expected; long term margin outlook encouraging

NIM declined by 25bps qoq to 4.5% against our expectation of 20bps contraction. During the quarter, cost of funds (computed) increased by 22bps qoq driven by higher retail TD rates of <1-year duration and steep spike in wholesale funding rates (15-16% of total deposits). Blended lending yield marginally declined on the back of segmental mix change and product mix change within the retail segment. On the corporate side, the effect of the announced base rate hike and higher re-pricing on renewals would reflect in the coming quarters. Yield on investments spiked by 70bps qoq on account of hardening of yield across maturities. NIM outlook is fairly encouraging with cyclical and structural factors likely to play out.   

Fee growth continues to be sluggish; C/I ratio improves on lower cost growth

Fee income exhibited sustained sluggishness with growth at 12% yoy as compared to 22% yoy in the corresponding quarter last year. Growth in third party product distribution fees has been severely impacted by adverse regulatory changes, volume moderation and mix change. On account of higher yields, bank recorded a treasury loss of Rs1.7bn comprising of MTM loss of Rs1.35bn (full hit taken; did not amortize) on corporate bond portfolio and Rs350mn realized loss on other investments. Forex income jumped 60% qoq and 113% yoy on the back of robust transaction volume due to exceptional currency volatility. Opex growth was modest at 17% yoy (compared to 25% yoy in Q1 FY14) notwithstanding substantial branch additions. As per the bank, focus on cost cutting initiatives along with improving new branch productivity and widened product distribution has been kicking-in efficiency gains. Cost/income ratio improved substantially by 300bps yoy to 46.4% despite a higher treasury loss.

Slippages were likely benign; asset quality to remain relatively robust   

On the back of benign slippages (stress persisted in CV/CE financing), Gross NPL increased by 8% qoq and by Rs2.3bn in absolute terms. As sequential credit growth was muted, the gross NPL ratio inched up to 1.1%.  Credit cost at annualized 62bps (on an overall basis) was much lower than 89bps in the previous quarter. We expect some normalization in asset quality in coming quarters due to persistent economic challenges and this could drive a marginal uptick in credit cost. Quarterly annualized RoA stood at impressive 2% supported by cost efficiencies and lower provisioning. Capital adequacy was robust with Tier-1 ratio at 10.9% after including H1 audited profits. 

Retain BUY with 9-month target price of Rs730

We have tweaked upwards our FY14 earnings estimate of the bank mainly on the back of non-interest income and credit cost beat. HDFC Bank’s RoA is largely immuned to any negative surprise in asset quality due to robust NIMs and headroom for efficiency improvement. Thus, despite building 75-80bps of credit charge, we estimate that RoA would remain at historically high level of 1.8-1.9% in FY14/15. High inherent profitability and performance predictability of the bank will support its premium valuation. If macro continues to deteriorate, the relative premium would only expand. Retain BUY recommendation on HDFC Bank with 9m target of Rs730.  

Financial Summary

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