HDFC Bank’s Q1 FY16 profit after tax of R26.9 bn (up 20.7% year-on-year) was bang in line with our estimate. The quarter, however, was characterised by continued core revenue traction (ex treasury)—up 25% y-o-y.
Key highlights: (i) NII (net interest income) surged >23% y-o-y on above-average loan growth (up 4.5% quarter-on-quarter, with a tilt towards retail loans) and superior NIMs (net interest margins) of 4.3%; (ii) core fee income spurred revenue momentum; (iii) opex continued to surge with 26% y-o-y growth, in turn, restricting core profitability (ex-treasury) growth to sub-24%; and (iv) CASA (current account savings account) spurt continued to be on track (up 20% y-o-y), however, higher term deposit growth (>37%) optically kept CASA ratio down at 39.6%.
The bank’s best-in-class liability franchise, marginal stress baggage and growth ammunition place it in a sweet spot to capitalise on waning competition and emerging opportunities. Maintain ‘Buy’ with TP of Rs 1,327.
Asset quality intact: GNPLs/NNPLs (gross/net non-performing loans) continued to be benign at 0.95% /0.27% with slippages staying stable at 1.4%. During the quarter, the bank made additional floating provision of Rs 650m. Restructured book stands at a marginal 0.1%. Further, healthy outstanding floating provision (over Rs 15 bn) and robust coverage ratio of >70% lends comfort.
Outlook and valuations—a league apart: Best-in-class liability franchise, build-up in rural/semi-urban branches and productivity improvement due to digital focus will ensure that HDFC Bank maintains above-industry earnings growth, which, in turn, will sustain superior return ratios. Even after maintaining tier-1 at 12.8%, the bank is able to deliver superior RoE (return on equity) of ~20% due to best-in class RoA (return on assets) of 2%. The stock is trading at 3.3x FY17e ABV (adjusted book value).
Loan growth tilts towards retail: Unlike in the previous quarter, growth during Q1FY16 was driven by the retail segment (up 24.6% y-o-y as per regulatory classification and 26.1% y-o-y as per the bank’s internal classification).
Within retail, growth was largely driven by the auto segment, CV (commercial vehicle) segment, build up in home (up 37% y-o-y) and unsecured segment (12% of overall book versus 11% a year ago). Business banking too gained traction registering >19% y-o-y growth (based on bank’s internal classification).
On the other hand, non-retail book jumped 20% y-o-y (below trend growth) leading to a rise in the retail proportion to 49% (48% a year ago). The bank is now not targeting any specific mix between retail and corporate book and the mix will depend on demand, competitive scenario and credit filters.
Core fee income builds on momentum: The bank continued to build on core fee income traction for the third consecutive quarter, registering 26.4% y-o-y growth (crossing the 25% growth mark after six quarters). This was a broad-based improvement as: (i) fees and commission jumped 21.8% y-o-y, and (ii) forex income (up 55% y-o-y, low base last year). Other income was further supported by strong trading profit (R1.3bn versus run rate of R600m over past six quarters). We see revival in fee income as a key to boost revenue traction, especially against the backdrop of limited levers in operating and credit costs.
While CASA growth continued to be on track—up 20% y-o-y—aided by 18% y-o-y surge in savings and over 23% growth in current accounts, CASA in percentage terms dropped to 39.6%. This was largely due to healthy traction in time deposits (up 37% y-o-y versus overall deposit growth of 30%)—commendable given the slower moving deposit traction at industry level.