Consistency, through thick & thin
HDFC Bank reported another quarter of steady performance reporting PAT in line with our estimates, up 27% yoy. While near term pressures are evident in terms of loan growth, PAT growth and provisioning, if we take a longer term look at the bank’s performance, the Bank’s ROA has been steady in a range of 1.7-2% over the past 9 years. Even though its loan and PAT growth has seen a step down over 3 phases from ~40% to ~20% currently, it has consistently gained share over peers and infact currently has significant incremental loan share of 18%. It is this consistency of profitability and growth that has helped multiples remain fairly consistently near long term averages of 3.5x P/B. We reiterate our BUY recommendation with a higher target price of Rs1,487, a 21% upside.
* Q2 Summary - Robust: After a temporary slowdown in Q1FY20, loans grew a robust 20% YoY largely on the back of corporate loans which grew 25% YoY without any chunky exposures being taken, although a few large deals did materialize in the NBFC, telecom and power sectors (to best-in-class clients). Retail loans grew 15% YoY but excluding auto loans growth was 19.4% YoY. Margins declined 10bps sequentially to 420bps as a consequence of higher LCR maintained in anticipation of better demand in Q3. Fee income grew a robust 23% YoY contributed in part by higher insurance sales partly offsetting weaker mutual fund sales. Asset quality remained stable even as the bank made a contingent provision of Rs.6.6bn to take care of contingencies that could arise in both the wholesale and retail books given the weak environment, taking up total provisioning to 124bps – flattish QoQ. Despite this, the bank reported healthy 27% growth and an ROA of 2%
* Stable asset quality: Asset quality stood stable as GNPA declined 2bps QoQ to 1.38%. GNPA excluding agriculture stood stable at 1.2% QoQ. Over past one year, agriculture GNPA has declined by ~40bps to 5.6%. PCR stood stable at 70%; however, the bank made a contingent provision of Rs.6.6bn in Q2FY20 vs Rs.3.7bn in Q1FY20. Management added that early indicators of asset quality for newer unsecured and vehicle loans is witnessing an improving trend.
* Earnings Outlook: We have factored in higher provisioning for FY20E and FY21E and consequently cut our earning estimates by 4% and 5% for FY20E and FY21E respectively leading to an RoA of 2.0% in FY20E and FY21E.
* Valuations and target price: HDFC Bank trades at 3.7x P/ABV and 24x P/E on 1- year forward. We increase our target price (from Rs1,473) to Rs.1,487 (which includes Rs74 per share of subsidiaries – HDB Financial Services and HDFC Securities – or about 6% of current market price) implying a 21% upside. Maintain BUY.
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