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HDFC Bank's Q4FY19 results (Outperformer) - Strong profit growth but retail and fees slow

• PAT of Rs59bn grew 23% yoy / 5% qoq and was in line. While PAT growth was strong, growth in retail loans and fees was below the normalized run-rate which was offset by sequential NIM improvement due to higher current deposits, strong growth in wholesale loans and lower credit cost.  Retail loan growth slipped to below 20% yoy while growth in fees and savings deposits also moderated to 11%.
• Loans grew 24% yoy and 5% qoq. Retail loan growth decelerated to 19% yoy and 2% qoq from 24% in 3Q and 28% in FY18 while growth in non-retail loans was strong at 36% yoy and 9% qoq as HDFC Bank seized short-term funding opportunities including NCLT cases. While growth rate has slowed in all retail segments, unsecured loans continued to grow faster than others at 29% yoy and 4.5% qoq, while car finance (at 6% yoy / -2 qoq), two-wheeler finance (at 17% yoy /-1% qoq) and business banking (14% yoy / 4% qoq) slowed. Mgmt explained slower retail growth with two reasons: 1) After strong growth in most retail segments, especially in unsecured loans and business banking in the last 7-8 quarters, the bank has taken a pause to assess product mix and test quality, 2) Competitive pricing in some segments like business banking, cars and some personal loans led to the bank consciously slowing down in these segments.
• Deposit growth remained strong at 17% yoy and 8% qoq. HDFC Bank offers higher rates on retail deposits compared to other banks. Unlike other banks, HDFC Bank does not access wholesale deposits in a big way so it can offer higher rates on retail and yet enjoy lower cost of funds. CASA ratio improved from 40.7% to 42.4% qoq due to a sharp growth in current deposits which was partly on account of HDFC Bank being the banker to the Embassy REIT offering. Current accounts grew 19% yoy and 27% qoq while savings grew slower at 11% yoy and 6% qoq.  Overall CASA grew 14% yoy and 13% qoq. The yoy growth in savings looks very low due to a deceleration in 3Q but the sequential growth is healthy at 6%. CD ratio eased a bit to 89% from 92% qoq but still remains high. The bank is comfortable on liquidity with LCR of 118%. NIM improved 10 bps qoq to 4.4% driven by higher current accounts. NII grew 23% yoy and 4% qoq.
• Non-int income growth moderated to 15% yoy due to lower fees and a decline in trading gains. Fee growth decelerated to 11% yoy and 1% qoq because 1) the full impact of lower TER on mutual funds was seen in 4Q19 and equity MF inflows declined yoy 2) processing fees were lower due to slower retail loan growth.  3) payments-related fees moderated on a high base. Decline in MF-related fees will continue for two more quarters.
• Slippage declined qoq to Rs35.8bn from Rs40bn as agri slippage subsided. As HDBK already made huge contingency provisions for agri in 3Q which did not recur in 4Q, total credit cost fell from 0.91% to 0.72% qoq.  GNPAs rose 3% qoq to 1.36% of loans.

Valuation and view: We upgrade TP to Rs2,700 as we roll over base to FY21. Despite a mixed set of earnings, we expect HDBK to maintain its premium valuation given its strong competitive position in a weak environment where corporate stress has started building up again and resolutions are very slow. We maintain Outperform. We believe retail loan growth is a key monitorable over the next few quarters.