HDFC Bank's Q3FY18 results (Outperformer) - Highest PPOP growth in five quarters. Revise TP to Rs2,515

Q3FY18 result highlights

• HDBK’s PAT of Rs46bn grew 20% yoy and 12% qoq, in line with expectations. Core PPOP growth of 32% yoy and was the best in the last five quarters not only yoy but also qoq.
• Loans grew 28% yoy and 4% qoq. Loan growth is higher than 22% in 2Q because of the base effect driven by demonetization. On the other hand deposit growth looks low at 10% yoy because of a high base from demonetization. On a sequential basis loan growth is stable at 4% qoq while deposit growth has slowed to 1%. Retail loans (based on the bank’s internal classification) grew 30% yoy and 5% qoq, while wholesale loans grew 22% yoy and 4% qoq. Within retail, two wheelers, personal loans and credit cards grew strongly. Total assets grew 15% yoy and 2% qoq.
• NIM remained flat qoq and expanded 20 bps yoy. NII grew 24% yoy and 6% qoq, faster than the growth of 15% in assets.
• Fees grew 30% yoy and 10% qoq, much stronger than expected. The yoy growth was partly driven by a low base. The sequential growth is driven by growth in financial savings especially SIP of mutual funds. Growhfees from OMCs. 8, there were sme one-o decline in current deposits. driven by lower CASA that led to higher cost of funds. Cowth in operating expenses remained contained at 18% yoy and 3% qoq.
• Total slippage for the quarter was Rs46bn which includes JSPL of Rs17bn which was shown both as slippage and recovery in the same quarter. The bank disclosed that it had divergence of Rs20bn for FY17 across three accounts of which JSPL of Rs17bn was downgraded and upgraded in 3QFY18. Of the remaining 2 accounts of Rs3bn, Rs0.5bn was recovered while the remainder was classified as NPL in 1QFY18. The bank has also clarified that the decision to upgrade JSPL is a consortium decision taken by the JLF on December 30, 2017.  The bank had provided Rs3.9bn on JSPL through the income statement in 2Q and an additional Rs3bn by drawing down on existing floating provisions. Upon upgrade in 3Q, the provisions made in 2Q on JSPL have not been written back but have been reallocated.
• Excluding JSPL, slippage was Rs28.8bn higher than Rs25bn qoq. Due to farm waivers, agri NPLs have been higher than the normalized level in FY18 while NPLs in other businesses have been stable. Credit cost of Rs13bn was all specific and was higher than Rs10bn qoq.

Valuation and view

We reiterate Outperform given HDBK’s strong franchise, sound asset quality with low corporate stress and strong earnings growth in a tough environment.  We raise TP to Rs2,515 after factoring new equity from FY19E and building in Rs103 for HDB financials.