Stock corner: ‘Buy’ on HDFC Bank, strong fee income key earnings driver

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Published: October 26, 2019 12:40 AM

We cut EPS by 1.3% for FY20 while largely maintaining our FY 21/22 estimate, trimming margins slightly while building a stronger fee income growth. Build in 25% EPS CAGR and 16% BVPS CAGR over FY19-22. The decline in PT reflects higher share count.

Bank had stepped up its unsecured loan NPL
provisioning rate last quarter and continues to follow it, being prudent and conservative.

Core PPOP was up 18% y-o-y (2.1% below JEFe) owing to softer NIM (down 10 bps) but offset by strong fee income (up 23% y-o-y). Loan growth was strong; ex of vehicle, retail grew 19% y-o-y while corporate grew 31%. Asset quality was steady—agri was weak while vehicle & unsecured segments were strong. Retain Buy with price target of Rs 1,485.

Loan growth

Overall loan growth for the quarter was 19.5% y-o-y, with retail growing 14% and corporate 31%. Vehicle financing was impacted by slower auto sales; ex-vehicle, retail loans grew 18.9%. On corporate side, growth was broad-based. The bank lent to NBFCs, telecom as well as power sector, but to the best positioned entities with an eye on credit risk. The bank continues to invest in the distribution – added 489 branches and plans to add another 600 in the coming year.

Deposits

Overall deposits grew 22.6% y-o-y, as strong term deposit growth (+28.3% y-o-y) offset slower savings deposit growth (+12.7% y-o-y). The bank has been focusing on garnering retail deposit growth which could support overall loan book growth and term-deposits is therefore a core source of funding.

Profitability

NIMs for the quarter were at 4.20% (10 bps lower y-o-y/q-o-q), slightly impacted by slower retail loan growth and deposit mix shift towards term deposits. While NII growth at 14.9% y-o-y has been modest, 23% y-o-y growth in core fee income has been the key earnings driver. Management highlighted the strong traction in third party product distribution fee in both insurance (high margin businesses) and mutual funds. Bank had on-boarded non-group company insurance partners on its platform which aids fee income growth.

Asset quality

Overall gross NPL for the bank was at 1.38% (vs 1.40% as of Q1). Gross NPLs ex-agri was 1.2% (flat q-o-q). Bank had stepped up its unsecured loan NPL
provisioning rate last quarter and continues to follow it, being prudent and conservative.

Change in estimates and valuation

We cut EPS by 1.3% for FY20 while largely maintaining our FY 21/22 estimate, trimming margins slightly while building a stronger fee income growth. Build in 25% EPS CAGR and 16% BVPS CAGR over FY19-22. The decline in PT reflects higher share count.

 

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