HDFC Bank revenue growth disappoints: Q2FY14 was a stable quarter with earnings growth at 27% year-on-year (marginally lower due to high investment depreciation) but the key concern on revenue growth persists: NII (net interest margin) grew 15% y-o-y on the back of 16% loan growth while fee income grew 11% y-o-y. However, strong operating leverage (cost-income at 46%) and high forex income cushioned the impact of slow revenue growth. HDFC Bank shares have underperformed over the past year but we would be less negative on valuations as we were a few quarters back. Headwinds to business are primarily driving our negative call. We roll forward our target price to Rs 645 (from Rs 625 earlier).
Operating leverage and forex offset investment costs: HDFC Bank reported a marginal drop in earnings growth momentum primarily due to high investment depreciation (almost the entire cost was absorbed instead of using the RBI dispensation). Strong operating leverage (opex grew 9% y-o-y, cost-income ratio declined 150 bps q-o-q) and healthy forex income (doubled y-o-y) supported the high depreciation costs. However, a few key issues persist—(i) pressure on revenue growth continued with NII growth weak at 15% on the back of 16% loan growth, (ii) growth in retail is steadily shifting to unsecured loans, (iii) fee income continues to trail overall revenue growth at 11% y-o-y, and (iv) high cost for investment depreciation resulted in coverage ratio declining 200 bps to 74%.
HDFC Bank loan growth slower: Loan book grew at a moderate pace at 16% y-o-y (4% q-o-q). Growth in retail (17% y-o-y, 3% q-o-q), was driven by unsecured loans (23% y-o-y, 4% q-o-q) and business banking (20% y-o-y) as vehicle loans and gold loans saw a moderation in growth. Increasing competition and low industry growth appear to be affecting vehicle loan growth. Corporate loan growth at 15% y-o-y was lower than expectation given the surge in demand, but the management indicated that they hardly participated in it given the low appetite for this low-margin short-duration business opportunity.
HDFC Bank loan impairment ratios are broadly stable: Asset quality trends remained broadly stable though headline NPL