3QFY22 results — healthy underlying performance: HDFC Bank reported net profit growth of 18% YoY and 17% QoQ, to Rs103.4billion. NIMs were stable QoQ (at 4.1%). Operating profit growth was 10% YoY/ 6% QoQ. Slippage ratio at 1.7% of opening loans moderated (2.1% in 2QFY22), leading to a reduction in provisions (1.0% vs 1.4% QoQ). HDFCB made Rs9billion in contingency provisions in 3QFY22, taking additional provisions to 127bp of loans.
Highlights from management commentary: Credit card issuances have improved significantly (issued 0.95million credit cards in 3Q, 1.37million since August 2021). New liability account acquisitions are strong (4.2million in 3QFY22). Commentary on growth was optimistic. Card-related fee income remains impacted; however, management expects mid- to high-teens card fees growth in the medium term. Management was confident that any regulatory change in card fee structure will not impact profitability. NIMs are likely to increase gradually, with higher card revolver balances and better loan mix. Operating profits should grow in line with loan growth in the medium term.
Key questions: Is loan growth adequate? In our view, yes. The recovery in loan growth (16.5% YoY in Q3FY22, up from 14% YoY in 4QFY21 and versus 9.2% YoY for the System) is broad based across cards, personal loans, other retail, LAP, and commercial and rural banking. Are NIMs weak? Spreads (yield on funds — cost of funds) increased 4bp QoQ in 3QFY22. Cards and personal loans are at their pre-ban levels of c20% of incremental loans in 2Q+3QFY22. The NIM impact, given HDFCB’s scale, will take time to show. Are core fees weak? Core fees/average assets for 3QFY22 was 1.51% versus pre-pandemic levels of 1.54% in FY20 and 1.49% in FY19. This is after credit card fees not having recovered fully, with revolver balances at 0.8x pre-pandemic levels. In our view, fee income remains healthy.
Trading attractively, maintain ‘buy’ rating, target price (TP) of Rs2,020 unchanged: We revise earnings by +1.5 for FY22e, -0.5% for FY23e, and -1.1% for FY24e, with a higher loan growth estimate at a FY21-24e CAGR of 17.5%. Key potential stock catalysts include (i) a stronger-than-expected loan growth outlook, (ii) a recovery in credit card issuances and revenue, (iii) removal of the ban on launch of digital products, and (iv) a normalisation in credit costs. We estimate a 23% EPS CAGR over FY22-24e. We value the bank at Rs2,020 (unchanged) which implies a FY23e PB / PE of 4.0x / 24.3x and FY24e PB / PE of 3.4x /19.7x. Slowdown in growth is a key risk.