HDFC Bank reported another quarter of stable performance with earnings growth of 20% y-o-y on the back of similar operating profit growth supported by cost control. Loan growth slowed down to 18% y-o-y led by retail loans growth (22% y-o-y), especially in unsecured loan products (32% y-o-y). We continue to like HDFC Bank’s strong market positioning in high-growth retail loans and calibrated growth in corporate loans. Retain ADD with target price of R1,400 (from R1,350).
Stable performance in Q2 aided by cost control and low credit cost
HDFC Bank reported another stable quarter with earnings growth of 20% y-o-y on the back of 18% revenue growth and benefit of operating leverage. NII growth (20% y-o-y) led by relatively moderate loan growth (18% y-o-y) and stable NIM (20 bps lower q-o-q and stable y-o-y) aided this performance, although there was a relatively subdued performance in non-interest income with higher contribution from treasury income. Retail loans grew 22% y-o-y while non-retail grew 15% y-o-y. Asset quality was broadly stable q-o-q with gross and net NPL of 1% and 0.3% respectively.
Retail loan growth momentum continues
Despite a fairly challenging environment on growth and high competition, HDFC Bank has been gaining market share in the retail business while selectively building scale in the corporate business. Contribution of retail loans is at 50% (up ~80 bps q-o-q). Wholesale segment grew at 15% y-o-y. The bank continues to exhibit its strength in execution with retail growth for the largest player growing ahead of industry average. We are yet to see our initial hypothesis of some loss of market share due to rising competition. While growth was solid across products, it is the unsecured loan portfolio (~27% of retail loans) that is still leading growth (32% y-o-y). There are risks but stronger balance sheet of retail customers is giving greater comfort to cross-sell these products.
Retain ADD with target price of R1,400 (from Rs 1,350)
We value the bank at R1,400 (from R1,350 earlier), which implies 3.7X book and 20X FY2018e EPS. Increase in target price is due to lower cost of equity. We expect the bank to deliver 20% CAGR in earnings for FY2017-19e and RoEs in the range of 19-20%. The basic premise of a strong compounding theme remains intact although the risk of time correction is reasonably high, especially if we see stronger ideas emerging from other banks or the macro sees a continuous improvement. We see HDFC Bank as a front runner in capturing the fast-growing retail opportunity. Even as other banks are getting more active in retail, HDFC Bank’s strong execution track-record of building a strong retail network underpinned by stable liability profile provides comfort on growth and profitability.
Unsecured loan growth remains high, contributing to 26% of retail loans
Unsecured loans have remained the mainstay of retail loan growth in past few quarters. Personal loan and credit card loans together grew 32% y-o-y and 7% q-o-q. Contribution of unsecured retail loans has grown to ~27% from ~22% in FY2014. With strong support from low-cost funding and yield pressure emerging in the system elsewhere, the bank has been aggressive in growing the unsecured book, thus providing support to the overall margins. Given the strength of the retail balance sheets at the moment, the current level of strong growth does not raise any red-flags at the moment.
HDFC Bank has grown at ~25% y-o-y in the past four quarters, well above the industry loan growth of 10-11%. The bank has indicated in the past that they intend to grow at 3-6 percent points above the system loan growth and the excess growth over this alpha may taper down. The bank does not explicitly target any share for retail, but the relative slowdown in corporate have led to increase in share of retail loans. Our own state-wise analysis suggests market share gains for HDFC Bank in both deposits and loans across most states.
Asset quality broadly stable; coverage ratio stable q-o-q at 71%
Gross NPL and net NPL ratios were broadly stable q-o-q at 1.0% and 0.3% of loans respectively. Provision coverage was stable q-o-q at 71%. We are less concerned on the NPL cycle and believe that the risk of further deterioration looks unlikely, which implies that the scope for provisions to remain at these levels would depend upon the change in the loan profile (higher share of lending to the unsecured loan portfolio). We forecast 1.1%-1.2% gross NPL ratio over next two years with credit costs of ~60 bps.