HDFC bank's Q1FY19 results (Outperformer) - Softer than expected, like other retail banks

Q1FY19 results highlights

• HDBK’s PAT of Rs 46bn grew 18% yoy but declined 4% qoq and was 5% below the consensus estimate. MTM provisions of Rs 3.9bn, higher than expected agri slippage and decline in NIMs were the key reasons for the miss. Core PPOP grew 24% yoy and 1% qoq. NII grew 15% yoy / 1% qoq.
• Loans grew 22% yoy and 8% qoq. Retail loans grew 25% yoy and 5% qoq while corporate loan growth rebounded to 16% yoy and 10% qoq. Post GST, HDBK resumed buying home loans from HDFC in 1Q19.  
• Deposits grew 20% yoy and 2% qoq. While growth in term deposits continued to be strong at 25% yoy and 5% qoq, growth in CASA decelerated to 14% yoy due to a decline in current accounts. CASA ratio fell from 43.5% to 41.7% qoq. Growth in savings at 17% yoy and 1% qoq was lower than the previous quarter but there is always some seasonality in 1Q. Mgmt explained that they have no intention of raising rates on savings deposits.
• NIM declined 20bps yoy and 10bps qoq to 4.2%. Pressure on NIMs was driven by 1) lower yield on investments as duration of the investment portfolio declined in 1Q with more TBills. 2) Higher cost of funds with a higher proportion of term deposits. There was a huge growth in TDs in 4Q, the full impact of which was seen on cost of funds in 1Q 3) Higher qoq slippage
• Fees grew 23% yoy but declined 5% qoq due to seasonality in insurance distribution. Total non-interest income grew at a modest 9% yoy and declined 10% qoq due to MTM provisions of Rs 3.9bn which were taken upfront, not amortized.  Growth in opex moderated to 11% yoy from 16% in 4Q.
• Total slippage for the quarter was Rs35.8bn (2.06%) versus Rs27.9bn qoq. The qoq increase in slippage was driven by agri which forms 20% of total slippage. Agri NPLs account for 6% of the Kisan Gold Card portfolio. Mgmt had warned about higher agri NPLs at the 4Q18 earnings call. Unlike Kotak, HDFC Bank will continue to pursue growth in business banking. Within business banking, the LAP portfolio remains steady while NPLs in working capital loans have risen since demonetization (though not in 1q19) due to liquidity constraints and post GST issues. While credit cost has risen, it is still within the bank’s comfort zone and the risk reward remains attractive in business banking. Overall, GNPAs rose 11% qoq but they remain amongst the lowest in the industry at 1.33% of loans.

Valuation and view

We maintain our TP of Rs2,515 and reiterate Outperform given HDBK’s strong franchise, sound asset quality and strong earnings growth in a tough environment.  While margins and asset quality were soft in 1Q, we expect these to improve through the year. Read-through – agri NPLs for state banks could also be higher than expected.

IDFC Securities appreciates your support for our securities team . We request your similar support in the Asiamoney Brokers Poll 2018 for India Research, Sales and Trading team. (Ballot Link Attached)