1. HDFC Bank rated ‘Buy’; Jefferies says offers relative stability, but earnings likely to stay weak

HDFC Bank rated ‘Buy’; Jefferies says offers relative stability, but earnings likely to stay weak

HDFCB delivered on our numbers but did better than muted consensus exp; beat driven by better fee income. Little was on offer from management to make sense of the trends, which was disappointing.

By: | New Delhi | Updated: January 30, 2017 4:19 AM
Lending activity remains below normal: While total retail disbursals were up 11% y-o-y in Q3, management indicated activity levels still remain below par (70-80% of normal) and certainly much below Oct’16 (festival season). (Reuters) Lending activity remains below normal: While total retail disbursals were up 11% y-o-y in Q3, management indicated activity levels still remain below par (70-80% of normal) and certainly much below Oct’16 (festival season). (Reuters)

HDFCB delivered on our numbers but did better than muted consensus exp; beat driven by better fee income. Little was on offer from management to make sense of the trends, which was disappointing. Rollover and raise PT to Rs 1,495. Retain Buy given past track record.

Fee income drives earnings beat: Fee income was strong (+11.6% vs JEFe) with 80-85% from retail & SME, as always. Management didn’t fail to list all factors that derailed fee income without highlighting where the offset came from — we suspect this was driven by credit card interchange, merchant fee and liability fee (reactivated accounts owing to cash deposit during demonetisation led to levying back-dated penalties). Sequentially, this won’t be available, so a slowdown in lending activity will reflect in lower fee in Q4 and onward.

graph-hdfc

Lending activity remains below normal: While total retail disbursals were up 11% y-o-y in Q3, management indicated activity levels still remain below par (70-80% of normal) and certainly much below Oct’16 (festival season). Management expects a good half of Q4 will go before normalcy levels could return. Growth in Q3 was driven by credit card receivables and vehicle & CV/CE portfolio. Mgmt believes it has gained market share in these segments. Corporate loan growth faced tough competition from money market, but with MCLR cut in Jan’17, this should improve. Adjusting for $2 billion FCNR linked leveraged-loan maturing, the underlying growth in loan book was 17.4% y-o-y (Retail:17.8%, Wholesale:16.8%).

graph-hdfc-2

 

CASA ratio up 5% q-o-q and CASA deposits up 20.4% q-o-q: CASA growth was strong at 20.4% q-o-q, although the CASA ratio improvement on comparable basis was 3.6% (rest 1.4% was optical as $3 bn of FCNR was redeemed). Still, this is a healthy gain which should help the bank fight out a very aggressive price competition. NIMs are expected to be stable around historical levels.

Tweak ests: Our EPS ests remain largely unchanged. While we model for an absolute higher base in loans outstanding and fee income resulting in slightly better earnings trajectory, we think this will entail its own costs, leaving a non-material improvement in EPS. We forecast earnings to remain relatively weak compared to recent history with FY16-19e EPS CAGR of 20%.

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Valuation/Risks: We value HDFCB on blended valuation of 3.9x trailing book (Dec-17e) and 19.1x EPS (12m to Dec-18e). It trades at 3.9x trailing book (Dec-16) and 19.3x EPS (12 m to Dec-17e); 10year average of 4.6x and 19.9x respectively. Key risks: Weaker loan growth and asset quality.

Key takeaways from Conference call RBI provided relaxation on NPA recognition amounting to 5 bps; without utilising this relaxation GNPAs would have been 1.10% instead of reported 1.05%.

CASA ratio jumped 5% q-o-q to 45.4%. This jump has been combination of two factors: (i) a surge in CASA deposits post demonetisation and holding up deposits due to withdrawal restrictions, (ii) An outflow of ~R200 bn on account of FCNR (B) maturity leading to reduction in time deposits.

On a reported basis, the total loan book grew 13.5% y-o-y. However, adjusted for R130 bn closure of loans related to FCNR(B) deposits, the underlying growth was 17.4% y-o-y.

SME related business loans saw q-o-q decline. This was primarily on account of lower drawdown in Cash Credit/Overdraft facilities post demonetisation. Loan demand and disbursals were subdued in retail business line like gold, agri and 2-wheeler. However, credit card related loans did better.

On the wholesale front, management expressed its inability to quantify the impact of demonetisation on the loan demand from this segment. In fact they cited two factors impacting this segment: (i) Overall corporate credit demand for the banking system continued to remain soft (ii) Owing to widening gap in money market rates and bank loan rates over the last few quarters, commercial papers and bonds were replacing bank credit. However, with large MCLR cuts in January, this trend should slow down.

Core fee income growth was slower due to multiple factors. Regulatory interventions led to abolishment/reduction of charges such as ATM fee, Merchant Discount Rate (MDR), etc. Additionally, the bank consciously chose not to aggressively push third party products.

In revenue headlines numbers there were a host of impact from demonetisation. NII was affected by temporary extra CRR requirements, cash related logistics issues leading to cash sitting idle and lower disbursements. Cash handling logistics, increased insurance cover, ATM recaliberation, etc. led to increased non-employee expenses. Employee expenses were lower due to the bank’s productivity focus strategy leading to reduction in employee count from ~95K to ~90K q-o-q.

In terms of the current situation and outlook in the SME segment, management said it is a mixed bag. Some of the businesses in this segment have recovered well by December end, while some still faces challenges.

In the retail segment, some of the products have almost recovered post demonetisation, while some products like Auto, 2-wheeler, etc are still some distance away from a total recovery. Beyond the broad commentary, management avoided giving any quantitative data on demonetisation impact on revenue line items, asset quality, and disbursements.

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