HDFC Bank's Q2FY19 results (Outperformer) - Strong earnings and liquidity

Q2FY19 results highlights

• PAT of Rs50bn grew 21% yoy and 9% qoq, in line with expectations. Strong NII growth driven by strong loan growth and the capital issuance, strong core fees and stable asset quality are key drivers. Core PPOP grew strongly at 27% yoy, higher than 24% in 1Q. 
• Loans grew 24% yoy and 6% qoq with both retail and corporate growing strongly at 24% and 25%. Within retail, personal loans, credit cards and two wheelers grew faster than others. Proportion of unsecured loans increased further to 17% from 16% qoq.
• Deposit growth remained strong at 20% yoy and 3% qoq. CASA ratio expanded 30 bps qoq to 42%, with CASA deposits growing 18% yoy and 4% qoq. The bank continues to enjoy a strong liquidity position with LCR of 118% against the RBI requirement of 90%.
• NIM expanded 10 bps qoq to 4.3% mainly due to the capital issuance. Excluding new capital, NIM was flat qoq. With better NIMs and higher loan growth, NII growth accelerated to 21% yoy and 9% qoq from 15% yoy and 1.5% qoq in 1QFY19.
• Fees grew 26% yoy and 4% qoq. Payments business remains the key driver of fees, followed by increase in life insurance distribution which has grown after the bank adopted the open architecture, and growth in retail assets. Income from mutual fund distribution was weak as expected and was offset by higher insurance and payments fees. Cost / income ratio at 39.92% declined from 40.9% qoq. Growth in total non-interest income of 11% yoy was subdued and lower than growth in core fees due to lower trading gains.
• Total slippage for 2Q19 was Rs32.8bn, lower than Rs35.5bn qoq but higher than the normalized levels. On a yoy basis, SME/ business banking NPLs have risen, however not sequentially. Agri slippages after spiking in 1Q have eased off due to harvest related cash flows but these remain higher than the normalized levels due to farm waivers. Gross NPLs remained stable qoq at 1.33%.
• The bank continues to lend to NBFCs and has not withdrawn any sanction. They are not seeing stress in the NBFCs they have lent to. A large proportion of NBFC lending is to retail NBFCs and a small proportion to wholesale NBFCs.  Most of the real estate exposure is to LAP and LRD, and a small proportion is to developers.

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.  After the recent price correction and capital raise, we believe at 3.2xPBV FY20E the stock offers good risk reward. We believe HDBK is a valuable combination of strong profitability and liquidity