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Earnings/PPOP in line; margin remains under pressure on an unfavorable asset mix

Restructured book under control at 0.8% of loans

* HDFCB reported an in line performance, though margin fell by 10bp QoQ on higher interest reversals, unfavorable asset mix, and lower revolving balances on Credit Cards. The bank further shored up its contingent provisions by INR6b to ~INR66b (~0.6% of loans), though this dragged net earnings growth to 16% YoY – the lowest in the past many years.

* Advances growth stood at 14% YoY, led by healthy trends in the Commercial and Rural Banking portfolio, while Retail growth was muted due to a sharp (7% QoQ) decline in the Credit Cards portfolio, which was affected by RBI’s restriction on sourcing of new Credit Cards and lower revolving balances. The bank deliberately curtailed Retail disbursements due to rising COVID-19 cases among its employees.

* Asset quality deteriorated marginally, with GNPA/NNPA ratio increasing by 15bp/8bp QoQ. Total slippages in 1QFY22 stands elevated ~INR73b (~2.5% of loans). Also, restructured loans rose to 0.8% of loans (v/s 0.6% in FY21). We broadly maintain our earnings estimates for FY22E/FY23E. We maintain our Buy rating.

PPOP in line; margin declines a further 10bp QoQ

* HDFCB reported a PAT growth of ~16% YoY to ~INR77.3b (in line). However, NII growth was weak (~9% YoY), despite a 14% YoY loan growth, as core NIM declined by 10bp QoQ to ~4.1%. The margin decline was mainly driven by the higher interest reversal on account of elevated slippages, low yielding asset mix, and lower revolving balances on Credit Cards.

* Other income declined by ~17% QoQ (up ~54% YoY due to a low base) as business activity remains sub-par for almost 35-40 days. These disruptions led to a decrease in Retail loan originations, lower sale of third party products, card spends, etc. Fee income fell ~23% QoQ (up 74% YoY). Treasury gains declined by ~45% YoY (8% QoQ) to INR6b. However, FX related fees remain strong (36% QoQ). Opex grew ~18% YoY, with C/I ratio at 35% v/s 37.2% in 4QFY21. PPOP grew 18% YoY (in line).

* Loans grew ~14% YoY led by robust (~25%) growth in Commercial and Rural loans, while Retail/other Wholesales grew ~9%/~10%. In the Retail segment, the Credit Cards portfolio witnessed a sharp (~7% QoQ) decline post RBI’s restriction on sourcing of new Credit Cards.

* Deposits grew ~13% YoY led by CASA growth of 28%, while TD growth moderated to ~3%. CASA ratio moderated 60bp QoQ to ~45.5%. The sequentially muted deposit growth was mainly led by a 10% decline in Wholesale deposits, while Retail deposits were up 3.5% QoQ (16.5% YoY).

* Asset quality deteriorated marginally, with GNPA/NNPA ratio increasing by 15bp/8bp QoQ. Total slippages in 1QFY22 stands elevated ~INR73b (~2.5% of loans). Provision coverage fell to 67.9% (v/s 69.8% in FY21). Restructured loans increased to 0.8% of loans (v/s 0.6% in FY21).

* Performance of subsidiaries remains mixed: HDFC Securities reported strong numbers, with total revenue up 67% YoY to INR4.58b, while PAT grew by ~95% YoY to INR2.61b. HDB Financial Services reported muted business volumes, lower revenue, and higher provisions. PAT declined to INR1.3b (v/s INR2.3b in 1QFY21). Asset quality deteriorated sharply, with GNPA ratio increasing to 7.75% (v/s 3.89% in FY21).

Highlights from the management commentary

* Retail: In the zero dpd portfolio, the bounce rate reverted back to pre-COVID levels. At the overall portfolio level, the bounce rate though was still higher than Mar’21 levels.

* SME: Incremental NPA during 1QFY22 stands lower. Gross NPA in this segment remains rangebound.

* Corporate: Portfolio asset quality remains stable, with no major slippages from this portfolio.

Valuations and view

HDFCB continues to deliver better growth in advances, led by healthy trends in Commercial and Rural Banking loans. The bank’s operating performance remains broadly in line, though margin has been under pressure owing to continued embargoes. Asset quality has deteriorated marginally due to disruptions in collections on account of the second COVID wave. The bank continues to make additional contingent provisions to further strengthen its Balance Sheet. Total restructured book increased to 0.8% of loans (v/s 0.6% of loans), however overall stress formation remains under control. In the near term, lifting of RBI restrictions remains a key monitorable. We broadly maintain our earnings estimates and project 18% PAT CAGR over FY21-23E. We maintain our Buy rating with a TP of INR1,800 per share (3.5x FY23E ABV).

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