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You are here : IndiaNotes >> Research & Analysis >> Companies >> HDFC Bank Ltd. >> Research

HDFC Bank Q3FY18: Steady performance, solid prospects - retain ADD

Equirus Securities | 25 Jan, 2018  | Follow Author | Add to my Favourites 
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Stable NIMs (4.3%) and healthy advances growth (+28% yoy) enabled HDFC Bank (HDFCB) to report an in-line 3QFY18 PAT of Rs 46.4bn (EE Rs 46.5bn; +20% yoy). Systemic credit growth is gradually reviving with various banks indicating an uptick in corporate demand, especially for brownfield capex, shift from bonds to bank borrowings and NCLT resolutions. We believe HDFCB is well-poised to capture a good share of the incremental credit demand, driven by low cost of funds (~5.2%), a healthy tier-1 ratio (~13.6%) and contained stressed assets (GNPA: 1.3%). A healthy mix of retail and corporate loan growth will likely drive a FY18E-FY20E loan CAGR of 19%, NIMs of ~4.4% and a PAT CAGR of 19%. We marginally change our estimates and Retain ADD with an ERoE-based Mar’19 TP of Rs 2,150 (vs. a Sep’18 TP of Rs 2,000) set at 4.9x/4.2x Mar’19/Mar’20 ABV.


NIMs stable at 4.3% qoq:
Despite a 50bps reduction in SA deposit rates by HDFCB, its NIMs – though in line with EE – remained flat qoq at 4.3% due to continued competitive pressure on yields. However, the bank indicated that deposit rates are now at an inflection point and may start inching upwards as systemic deposit growth lags credit growth. We expect HDFCB to comfortably maintain FY19E NIMs at ~4.4% given (a) HDFCB’s healthy CASA ratio (43.9%), (b) potential benefits on NIM from pending QIP infusion of Rs 240bn and (c) peer private banks have increased MCLR by 5bps-10bps in Jan’18. Within non-interest income (Rs 38.7bn, +23% yoy), core fee income grew 30% yoy to Rs 28.7bn while trading gains declined 35% yoy. HDFCB continues to improve its C/I ratio with (a) digitization, which led to lower cost and higher productivity, and (b) branches added over the last three years attaining breakeven.


Business banking/personal loans drive 28% yoy loan growth: HDFCB continues its dominance in the retail lending space with branch-driven business banking/personal loan segment growing 59%/44% yoy. Corporate loan growth was strong at 16% qoq (29% yoy). However, deposit growth was modest at 10% yoy owing to a demonetization-linked high 3QFY17 base.


FY17 divergence with RBI at Rs 20.5bn, of which Rs 17.1bn upgraded:
GNPA/NNPA ratios were steady qoq at 1.3%/0.4% with the PCR ratio at ~66%. RBI divergence of Rs 20.5bn included one project loan account of Rs 17.1bn that underwent 5:25 restructuring. The account was classified as NPA with effect from Mar’16, but upgraded in 3QFY18 by all banks on timely repayments and no overdue with any lenders. HDFCB is seeing some stress in its agri portfolio (~5.5% GNPA). Given the various credit-screening frameworks applied by HDFCB, we believe FY18E/FY19E fresh slippages will be contained at ~1.4-1.5%.


Key risks: A protracted slowdown in the economy, considerable increase in fresh slippages and adverse regulatory changes are key risks to our call.


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