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Margin contraction dampens the positivity of asset growth

Result Highlights

Asset quality: Annualized gross slippage ratio for 4QFY22 was 1.3% (Rs 40bn), with recoveries and upgrades amounting to Rs 21bn

Margin picture: NIM at 4.0% declined ~10 bps QoQ, as loan mix changes more than offset the positive impact of faster loan growth

Asset growth: Advances grew 8.5%/20.7% QoQ/YoY driven by corporate, agri and commercial & rural banking

Opex control: Total opex rose 3.1%/10.6% QoQ/YoY, employee expenses degrew/grew -0.3%/17.4% QoQ/YoY and other exp. grew 4.7%/7.8% QoQ/YoY

Fee income: Fees and commissions rose 10.9%/12.1% QoQ/YoY even as Payments fees growth was about 11% YoY

Our view – Margin contraction dampens the positivity of asset growth

While management stated that it has deliberately chosen lower NIM to keep opex and credit cost under control, a 2.3% NII growth QoQ is disappointing: The bank has adopted a lower-risk strategy post the pandemic and is preferring to save on opex and credit cost, both of which would be higher if faster retail growth would have been pursued. If credit RWA were to be used as the denominator, then the margin would be 20 bps higher than pre-pandemic. However, a 2.3% NII growth QoQ is disappointing and especially so, when loan growth was 8.5% QoQ. We had flagged “risk of further downside” to HDFCB’s NIM in our sector report dated 30th Jun 2021 (see page 166)

Slippages declined sequentially but HDFCB chose to make contingent standard asset provisions: Annualised slippage ratio of 1.3% was about 30 bps QoQ. Total provisions for the quarter amounted to Rs 33.12bn. Of this, Rs 17.78bn were specific loan loss provisions and another Rs 10bn were contingent provisions.

Loan growth was characterized by whole-hearted pursuit of wholesale loans, while the environment held back parts of retail lending: The bank is happy to pursue good quality wholesale loan growth in order to add relationships, as corporate loans grew 11.6% QoQ. Cost to income ratio for the wholesale business is in single digits and the expected credit loss is very low. Vehicle loans were negatively impacted due to supply side issues, with auto loans growing 4.2% QoQ. Credit card revolve rates are still at 70- 80% of pre-Covid levels, with Payment product loans growing 4.7% QoQ

We reiterate ADD rating on HDFCB with a revised price target of Rs 1668: We value the standalone bank at 3.0x FY23 P/BV for an FY22/23E/24E RoE profile of 16.7/15.1/15.2%. We assign a value of Rs 239 per share to the subsidiaries, on SOTP

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