Franchise remains strong; bank primed to gain from slackened competition; ‘Buy’ maintained with TP up to Rs 2,530 from Rs 2,454
HDFC Bank’s Q3FY19 was characterised by sustained traction in core operating performance (up >25% y-o-y). However, overall earnings were impacted by higher contingency provisions. Key highlights: (a) NIM at upper end of the guided range at 4.3% with improved traction in loan growth leading to 22% NII growth.
Furthermore, a strong tier-1 at 15.8% (post-capital raising) and rising market opportunities (slackened competition) enhance growth visibility; (b) this, bolstered by core fee traction and controlled opex aided core profitability; and (c) uncharacteristically, GNPLs rose a tad (5bps q-o-q) to 1.38% (still best-in-class) following higher agri slippages.
Meanwhile, the bank chose to make contingency provision, leading to higher credit cost. Key variables to watch out for are: (i) softening SA growth; and (ii) performance of agri portfolio in wake of general election. Given the challenges in the operating environment, we expect a flight to safety in favour of private banks, particularly HDFC Bank. Maintain Buy with revised TP of `2,530 (`2,454 earlier) as we roll forward to FY21e.
Core revenue build-up encouraging
Loan growth sustained its momentum–up ~24% y-o-y– and was broad-based across corporate and retail segment. This, along with superior Net interest margin (4.3%), led to 25%-plus core operating growth (ex-treasury). Armed with strong capital, and distribution, the bank is well placed to benefit from slackened competition. We believe, HDFC Bank will gain from market churn and rising pricing power, which improves visibility on 20% plus earnings growth.
Marginal rise in GNPL
GNPL rose to 1.38% (up 5bps q-o-q), with slippages higher at 2.1%, largely impacted by the agri segment (effects of farm loan waiver); excluding this, slippages were broadly in line with historical trend. The bank conservatively chose to provide higher on this agri portfolio, leading to elevated credit cost. That said, marginal stress baggage places it in a sweet spot to capitalise on emerging opportunities (personal loans, credit cards, etc).
Outlook & valuations: Strong franchise
Best-in-class liability franchise, expansion of rural/semi-urban branches and productivity improvement will drive the HDFC Bank’s above-industry earnings growth — >24% CAGR over FY18–21e and sustain its superior return ratios (RoA of 2.1%). At CMP, the stock trades at FY21E P/ABV (post-capital) of 3.0x and P/E of 17.2x. We maintain ‘BUY/SO’.
Q3FY19 Earnings Call Takeaways
Asset quality: Excluding agriculture, slippages came in at 1.7%. Given that three states have announced farm loan waiver and with general elections around the corner, the bank has provided contingent provision of `3.22 bn. Given the retail nature of loans and repeat instances in this segments there would be a new policy coming up which will introduce some write-offs. GNPL (ex-agri) at 1.1% (stable across Q3FY18 to Q2FY19).