IGI Logo

...profitability dragged due to treasury losses

Price Analysis

HDFC Bank reported moderate operating performance in 1QFY23. The slippages increased 88% sequentially, which resulted in slight deterioration in GNPA ratio to 1.28% v/s 1.17% in the previous quarter. However, the reported GNPA is below the historical trend of 1.4%. Moreover, the restructuring book decreased to ~76bps of overall loan v/s 115bps in the previous quarter; Secured loans contributes ~30% of restructured book. Furthermore, the contingent stands adequate. In 4QFY22, the provisioning expenses were slightly lower sequentially at ?32bn (v/s ?33bn 4QFY22). At the same time NII growth was at par (14.5% YoY, 3.2% QoQ) against the loan growth (21.6% YoY, 2% QoQ). The bank reported treasury losses of ?13.2bn. Thus, the bank has reported sequential decrease in PAT by 8.5% and ROA/ROE of 1.8%/14.7%. Excluding treasury losses the bank’s ROA/ROE stood 2%/17%. We believe, superior underwriting practices, higher liquidity, adequate coverage and strong capital position makes the bank well placed. We recommend BUY.

Credit quality worsens marginally; Restructuring is lower sequentially:

The GNPA/NNPA/ PCR stood at 1.28%/0.35%/73% v/1.17%/0.32%/73% in the previous quarter. Out of the GNPA ratio of 1.28%; 18bps is from a standard account, which is considered stress because another facility of the borrower became NPA. The slippages up sequentially and stood at ~?72bn (2.1% annualized) for the quarter v/s ~?40bn in the previous quarter. The bank’s write-offs in the quarter were ~23bn and up-grades were ~?30bn. The absolute GNPA (?180bn) grew by 11.7% sequentially. The restructuring under RBI resolution framework for covid-19 was approximately 76bps of net advances against 115bps sequentially.

Provisions down sequentially and Buffer improved:

In 1QFY23, the bank has reported provisioning expenses of ?32bn; down by 3.8% sequentially. PCR (calculated) inched up marginally at 73% and it is in line with the historical trend. Along with cumulative provision of ~?131bn, the bank also held floating provisions of ?14.5bn and contingent provision of ?96bn. Total Provision (Specific + Floating + Contingent + General) stood at 170% of GNPLs. The additional (COVID + contingent) provision stood 1.3% of the book.

Growth maintained: The bank’s net advances stood at ?14tn; 21.6% YoY and 2% QoQ. Loan Mix carries: Retail (including business banking): 44%, Corporate (including oversea): 56%. Retail assets witnessed a sequential growth of 3.9%. The bank’s deposit stood at ~?16tn; grew by 19% YoY and 3% QoQ. CASA deposit grew by 20% YoY and negative 2% QoQ and ratio stood at 45.8% v/s 48.2% in the previous quarter. The bank has opened more than 36 branches in the quarter. The higher deposit base can keep the CDR at normal range with margin benefits. The bank’s CRAR stood at 17.5% with Tier 1 of 16.5%. The bank is adequately capitalized and sees no further dilution. The bank’s RWA to total asset stood at 66%.

Treasury losses dragged profitability: The bank’s NII stood at ?194.8bn; grew by 14.5% YoY and 3.2% sequentially. The bank’s reported NIMs stood at 4.2%. The bank’s loan book mix carries 45% fixed rate loans and 55% floating rate loans. Around 27% of total book is linked to Repo and ~14% linked to T-bills. The bank reported treasury loss of ?13.2bn. moreover, the fee income de-grew by 4.8%. Other income (excluding trading and MTM losses) were up by 35.4% YoY. :* PPOP grew by 1.5% YoY and down by 6% QoQ to ?153bn owing to loss in treasury income (MTM losses because of shift in bonds’ yield curve). The bank’s Provisioning Expense stood sequentially lower at ?32bn v/s ?33bn in 4QFY22. Core credit cost at 91bps v/s 96bps in the previous quarter. The bank has reported a PAT of ?92bn; up 22.8% YoY and down 8.5% sequentially. ROA/ROE stood at 1.84% and 14.7% respectively. Excluding treasury losses the bank’s ROA/ROE stood 2%/17%.

RBI approval regarding the amalgamation: RBI has no objection to the scheme of amalgamation and it does not have anything to do with stakes in subsidiaries/associates. With respect to holdings in HDB Financial and HDFC Life insurance, the bank can hold stake in insurance below 30% or above 50%. HDFC stake in HDFC life is 47.8% and it will increase to 50% if required or below 30% as suggested by RBI.

Outlook and Valuation

HDFC Bank is expected to outperform the sector in long run led by 1) healthy balance sheet growth, 2) much higher provision then regulatory requirement in the balance sheet, 4) best in class underwriting and risk management practices. Given these strengths we expect HDFC Bank to remain one of the best among all the lending business. Thus, we continue to maintain BUY rating on the bank with target price of ?1709.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at www.lkpsec.com/#foo

SEBI Registration number is INM000002483

Above views are of the author and not of the website kindly read disclaimer