Rating: Buy
HDFC Bank?s (HDFCB) Q2FY15 PAT (profit after tax) grew 20% year-on-year (in-line) to R23.8 bn. A 10 basis point quarter-on-quarter improvement in NIM (net interest margin) was to an extent compensated by lower-than-expected other income (+11% y-o-y) and higher opex (+19% y-o-y), resulting in in-line PAT.
After six quarters of 10% y-o-y growth, the bank reported some traction in fee income (+13% y-o-y) on account of a pickup in third-party business, higher retail liability fees and good traction in transactional banking fees. Post an average 5% growth over the last four quarters, opex grew 19% y-o-y, led by 23% y-o-y growth in other operating expenses on account of higher DSA (direct sales agent) commissions (traction in retail disbursements and strong branch additions). The cost to core income ratio increased to 46.9% from 45.4% in Q1FY15.
Other highlights: (i) net stressed loans declined 12bp q-o-q led by a 10bp reduction in restructured loans, (ii) ex-FCNR (foreign currency non-repatriable) deposits raised in Q3FY14, core loan and deposits growth stood at 18.8% and 18.4% respectively, (iii) CV/CE (commercial vehicle, construction equipment) q-o-q growth (+4%) turned positive after three quarters of continuous decline and (iv) CASA (current account savings account) deposits grew 20% y-o-y (+5% q-o-q). CASA ratio rose +20bp q-o-q to 43.2%.
Valuation and view: HDFCB is best-placed in the current environment, with a CASA ratio of 43%, growth outlook of at least 1.3x industry, least asset quality risk and healthy CET1 (common equity tier-1) of 11%+.
While restriction on FII (foreign institutional investors) limit remains an overhang, we believe valuations are reasonable. Comfort on earnings (23%+ CAGR) remains high. RoE (return on equity) is likely to be 23%+. Maintain Buy.
NIM expands 10bp q-o-q; Fee income looking up: NIM expanded 10bp q-o-q to 4.5% on account of (a) better CA float and average CASA ratio was relatively better q-o-q (b) improved retail high yielding business/dealer loans growth and (c) improved yield on investments q-o-q due to higher corporate bonds q-o-q.
Non-interest income grew 11% y-o-y to R20.5 bn. After six quarters of 10% y-o-y growth, HDFCB reported some traction in fee income (+13% y-o-y). Key drivers of fee income during the quarter: (a) Pickup in third party business especially Mutual fund (b) Higher retail liability fees and (c) Good traction in transactional banking fees.
Forex income was stable q-o-q at R2.2 bn; however, declined from R5 bn Q2FY14 (exceptionally strong quarter due to one-offs).
Pick up in other opex growth; strong control over employee expenses: Post-average 5% y-o-y opex growth over the last four quarters, it grew 19% y-o-y. Increase in opex growth was led by a 23% y-o-y. growth in other operating expenses.
Key drivers of other operating expenses during the quarter: (a) Payouts related to cards business (b) DSA commissions due to higher retail disbursements (c) Higher establishment expenses as HDFCB added 112 branches and 87ATMs in Q2
Cost to core income ratio increased to 46.9% from 45.4% in Q1FY15. Employee expenses remained controlled at 13% y-o-y and 4% q-o-q to R11.7 bn. Employee head count up 8% y-o-y to 75k.
Retail loan growth at 10% y-o-y: Reported loans grew 22% y-o-y and 5% q-o-q (in-line. Retail loan disbursal for H1FY15 was up 22% y-o-y. Retail loan portfolio growth increased to 10% y-o-y (+5% q-o-q).
Vehicle loans growth increased to +5% y-o-y (+1% y-o-y in Q1FY15) led by 8% q-o-q growth in auto and 2W (two-wheeler) loans. CV/CE q-o-q growth (+4% q-o-q) turned positive after three quarters of continuous decline.
Auto business and CV loans have shown some improvement at the ground level. Strong branch expansion in past three years will help HDFCB gain market share in coming quarters thus, growth is likely to remain healthy.
Within other retail segments, growth was weak in business banking (down 1% q-o-q and -15% y-o-y) and gold loans (flat q-o-q and -13% y-o-y). Strong growth continued in (i) personal loans (+8% q-o-q and 20% y-o-y), (ii) credit cards (+6% q-o-q and 29% y-o-y) and (iii) Kissan gold cards (+17% q-o-q and 63% y-o-y).
Domestic corporate and international loans grew 5% q-o-q and 36% y-o-y. This segment formed 52% of the domestic loans. Corporate banking loan growth is largely driven by working capital and trade finance related products; lower focus on term loans.
Asset quality stable; Net stress loans down 12bp: In absolute terms, GNPA (gross non-performing assets) was flat q-o-q; while, NNPA (net non-performing assets) declined 9% q-o-q PCR (provision coverage ratio) increased 270bp q-o-q to 72.7% in Q1FY15. In percentage terms, GNPA stood at 1.0% (1.1% in Q1FY15) and NNPA percentage was at 0.3%.
Restructured standard loan portfolio declined 10bp q-o-q to 0.1% of loans and consequently net stress loans also declined to 38bp from 50bp in Q1FY15.
?Motilal Oswal