1QFY19 PAT at Rs 46.0 billion (+18% year-on-year, -4% quarter-on-quarter) was 3% below our estimates and 4% below consensus. Margin decline of 10 basis points quarter-on-quarter (to 4.2%) and mark-to-market loss on investments of Rs 3.9 billion were partly offset by low opex growth of 11%. Loan growth was strong (+22% year-on-year) led by retail but Casa rose 14% year-on-year (Casa ratio down 180 basis points quarter-on-quarter to 42%). Asset quality was healthy with gross NPA stable at 1.3% of loans though agri segment saw some stress.
Loan growth of 22% was led by the retail segment (up 26% year-on-year) while corporate loans rose 19% year-on-year. The bank purchased Rs 90 billion of home loans from HDFC which it had foregone in the past couple of quarters. Casa growth of 14% (Casa ratio 42%) has been a bit low, especially due to current deposits. Higher share of home loans (lower yielding), lower Casa ratio, lower yield on investments (shift to shorter tenor) and interest reversals on NPLs led to 10 basis points quarter-on-quarter compression in margins to 4.2% (the bank reiterated its target range of 4-4.4%). We will watch for recovery in margins, especially as MCLR increases get passed through in loans.
Due to the rise in bond yields, the bank took a Rs 3.9 billion mark-to-market loss on investments (RBI dispensation to amortise not used), which dragged total income. However, opex growth of 11% (cost-income ratio of 41%) was a positive and supported a 15% rise in operating profit. The bank highlighted that this reflects benefits of digitisation / higher productivity. HDFC Bank has received capital of Rs 85 billion from HDFC and plans to raise remaining Rs 155 billion from other investors in the coming months. Healthy loan growth and cost optimisation will drive profitability and support premium valuations. Maintain ‘Buy’ with a target price of Rs 2,590 (earlier Rs 2,425) based on 4.8x Sep-19 adjusted PB.