Report
Mahrukh Adajania

HDFC bank's Q2FY20 results (Outperformer) - Good numbers in a bad environment

Q2FY20 results highlights

  • PAT of Rs63.5bn grew 27% yoy / 14% qoq much higher than the average PAT growth of 20% yoy since 1QFY15, driven by a lower tax rate. While lower taxation, strong loan growth and higher profit on sale of investments were the positive earnings drivers, slower NII growth and slower balance sheet growth were the key negatives. 
  • Loans grew strongly at 19% yoy / 8% qoq driven by corporate loans while retail loan growth moderated due to weak growth in vehicle loans. Retail loans grew 15% yoy while non-retail loans grew strongly at 25% yoy / 13% qoq. Mgmt explained that incremental growth in non-retail loans came from well – rated NBFCs, power, telecom. Within retail, personal loans continue to grow strongly at 22%, credit cards at 28%, home loans at 25%, business banking at 15% while growth in vehicle loans was subdued at 2%. Deposits grew 23% yoy / 7% qoq.  While CASA grew 15% yoy, term deposits grew faster at 28% yoy.  Despite strong loan and deposit growth, total balance sheet growth moderated to 13% in 2Q (from 17% in 1Q) as the bank sold investments to book profit.
  • NIM declined 10bp yoy and qoq yo 4.2%. NII growth slowed to 15% yoy / 2% qoq partly due to slower balance sheet growth and partly due to higher liquidity (LCR). Mgmt explained that they plan to carry higher liquidity to ensure that when loan growth picks up they do not have to raise funds at high rates. According to mgmt. if LCR was lower at 115%, NII growth would be higher at 19% instead of 15%.
  • NPLs at 1.38% grew 6% qoq. Slippage declined to Rs37.1bn from Rs42bn qoq. Ex agri GNPAs are lower at 1.2%. Specific credit cost declined qoq to 91 bps from 116bps while the bank made higher contingency provisions of Rs6bn versus Rs2bn qoq.
  • CET1 improved to 15.3% from 14.8% qoq, amongst the highest in the sector. There was a release of 80bps of CET1 due to reduction in risk weights on retail loans announced by RBI.

Valuation and view

HDFC Bank is the best risk-off trade in the financial sector in the current environment. Despite slower asset growth and higher precautionary provisions, HDFC Bank remains the best investment option given its strong risk management, cautious provisioning, stronger-than-sector growth, high capital adequacy, digital leadership and wide distribution. We reiterate Outperformer.  Mgmt explained that early signs of revival are visible across retail segments which we believe would lead to higher growth / better asset quality in the quarters to come. Also as the bank lightens its excess liquidity buffer, NIMs could expand leading to higher PPOP growth. Mgmt has clarified that all collateral / security enchased by them with respect to stress borrowers is legal and based on existing rules. The bank’s NBFC subsidiary, HDB Financials, reported weak asset quality as it aligned its NPL recognition and provisioning policy to HDFC Bank’s. After the alignment, HDB’s policies are stricter than most other NBFCs.

Underlying
HDFC Bank Limited

HDFC Bank is a commercial banking group based in India. Co. is engaged in providing banking and financial services. Co.'s operations are organized along four segments: Treasury, which includes its investment operations; Retail Banking, which serves retail customers with deposit products, loans and other services through a branch network and other delivery channels; Wholesale Banking, which provides loans, non-fund facilities and transaction services to corporations, public sector units, government bodies, and medium scale enterprises; and Other Banking Business, which includes para banking activities such as credit cards and debit cards.

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Mahrukh Adajania

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