HDFC Bank's Q4FY18 results (Outperformer) - Fee income is the star performer, deposit growth highest since FY10

Q4FY18 result highlights

• HDBK’s PAT of Rs48bn grew 20% yoy and 3% qoq, in line with expectations. Core PPOP grew 24% yoy and 8% qoq against 30% yoy and 10% qoq in 3Q. While loan growth was softer than expected, deposit growth was significantly higher than expected, the highest sequential growth since FY10.
• Loans grew 19% yoy and 4% qoq, a bit softer than expected because of slower growth in non-retail loans. Retail loans based on the bank’s internal classification grew 26% yoy and 6% qoq while growth in whole sale loans slowed to 1% qoq (5% yoy). While the yoy growth in corporate has been impacted by a high base even the sequential growth is muted. Within retail loans, all segments except home and gold loans grew strongly between 5-15% qoq with business banking seeing the highest growth at 15% qoq. HDBK has stopped buying home loans from parent HDFC as they await clarity on GST.
• Deposit growth was exceptionally strong at 23% yoy and 13% qoq at a time when the sector’s deposit growth moderated to 6.7% yoy and 4.9% qoq. While wholesale deposits were a big contributor to growth, growth in retail deposits was also higher than the sector average. Wholesale deposits grew 56% yoy and 32% qoq while retail deposits grew 14% yoy and 7% qoq. Proportion of retail deposits fell to 73% from 77% qoq and 79% yoy. Growth in savings deposits was strong at 16% yoy and 9% qoq. Growth in term deposits accelerated to 33% yoy and 14% qoq. Despite a sequentially declining CD ratio, NIM remained stable at 4.3% qoq. The growth in wholesale deposits was not back-ended so it is unlikely to have any big negative impact on NIMs in a big way in 1Q19.  NII grew 18% yoy /3% qoq.
• Fees grew 32% yoy and 16% qoq, much stronger than expected and there were no big one-offs. HDBK’s strong and consistent growth in fees over the last few quarters is commendable given that other fee-focussed banks have been reporting volatile growth numbers. Distribution of equity mutual funds and life insurance, growing spends on credit cards and strong growth in retail loans are the key drivers of fees. Opex grew 16% yoy and 6% qoq. 
• Total slippage for the quarter is Rs27.9bn (2% of lagged loans) versus Rs28.8bn ex JSPL in 3Q18. Agri slippages remain high the bank has made contingency provisions of Rs2.55bn in 4Q18 for potential stress in agri in the coming quarters. Gross NPLs remain low at 1.3% of loans.

Valuation and view

We maintain TP and reiterate Outperform given HDBK’s strong franchise, sound asset quality and strong earnings growth in a tough environment.  The proposed capital raise requires government approval which the bank has applied for; issue time-line remains uncertain. CET1 is healthy at 12.2%.