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Modest revenue growth; controlled provisioning drives earnings beat

Growth outlook robust; restructured book declines to 1.14%

HDFCB reported a mixed 4QFY22 with lower-than-estimated NII/PPoP growth at 10%/5% YoY, respectively. However, PAT grew 23% YoY to INR100.5b (4% beat), propelled by a sharp 29% YoY decline in provisioning.

The bank witnessed a healthy pick-up in business as loans grew 8.6% QoQ/20.8% YoY. The Retail segment grew 15.2% YoY, while Commercial and Rural Banking saw a robust growth of 30.4% YoY. Corporate portfolio also saw better traction and delivered 17.4% YoY growth.

GNPA/NNPA ratio improved 9bp/5bp QoQ to 1.17%/0.32%, respectively, with slippages moderating to INR40b (1.3% of loans). Restructured book moderated to ~1.14% of loans (v/s 1.4% in 3QFY22) and management reiterated that the net impact of the restructured book on NPAs is likely to be 10-20bp. Healthy provision coverage of 72.7% along with a contingent provision buffer (71bp of loans) provides comfort on asset quality.

We estimate ~20% PAT CAGR over FY22-24E, with RoA/RoE at 2.1%/17.8% for FY24. HDFCB remains one of our preferred BUYs and we expect the stock to recover gradually as revenue and margin revive over FY23, while clarity emerges on several aspects related to the merger with HDFC Ltd.

Loans grow ~9% QoQ; NIM declines on faster growth in wholesale book

NII grew 10.2% YoY v/s 13% YoY in 3QFY22 as NIM declined 10bp QoQ to 4%. This was led by faster growth in higher-rated wholesale/corporate advances. NII/PPoP/PAT grew ~11%/12%/19% YoY in FY22, respectively.

Other income was flat YoY at INR76.3b. Excluding trading income, other income rose 10.6% YoY. This was fueled by higher fee and commission income (12% YoY growth) and healthy growth in miscellaneous income, including recoveries and dividends (+11% YoY). Treasury losses were muted at INR0.4b v/s gains of INR6.6b in 4QFY21.

Opex grew ~11% YoY, with C/I ratio at 38.3% (+130bp QoQ/+115bp YoY). Core PPOP grew 10.2% YoY.

Loans grew 20.8% YoY led by a robust 30.4% YoY increase in Commercial and Rural loans along with 15.2%/17.4% YoY jump in Retail and Wholesale advances. Retail loans sustained strong recovery at 5.2% QoQ. Deposits rose ~17% YoY driven by CASA growth of ~22% YoY. CASA ratio, thus, expanded 110bp QoQ to 48.2%.

On the asset quality front, GNPA/NNPA ratio improved 9bp/5bp QoQ to 1.17%/0.32%, respectively, with slippages moderating to ~INR40b (1.3% of loans). PCR improved to ~73%. Restructured book declined to ~INR157b (~1.14% of loans) v/s 1.4% in 3QFY22. The bank further made contingent provisions of INR10b taking the total buffer to INR96.85b (71bp of loans). HDFCB, in addition, held floating provision buffer of INR14.5b.

Weak subsidiary performance: While revenue of HDFC Securities grew 16% YoY to INR5.1b in 4QFY22, PAT declined 4% YoY to INR2.4b. HDB Financial reported a marginal QoQ growth (1.4%) in loans to INR613.3b, while revenue grew 8% YoY. PAT stood at INR4.27b v/s INR5.12b/INR3.04 in 4QFY21/3QFY22. GS-3 assets stood at 4.99% (-106bp QoQ), while CAR/Tier I stood healthy at 20.2%/15.2%

Highlights from the management commentary

NIM wasimpacted adversely due to a shift in product mix towards wholesale loans.

C/I ratio is likely to increase in the near term due to a pick-up in Retail business and investments in business. However, this is likely to revert to mid-30s over the next 3-5 years

Revolve rate within credit card business is still at 75-80% of the pre-Covid levels.

Strong business growth and improved asset quality render stability; BUY

HDFCB continued to deliver strong business growth v/s its peers, resulting in market share gains. This was propelled by a sustained momentum in Retail segment along with robust growth in Commercial and Rural Banking and a sharp pick-up in wholesale loans. NII and PPoP growth stood modest due to a decline in margins even as earnings were buoyant because of benign credit cost despite making additional contingent provisions. Asset quality ratios have improved, while the restructured book too moderated to ~1.14% of loans. Healthy PCR and contingent provisioning buffer provide comfort on asset quality. We estimate HDFCB to deliver ~20% PAT CAGR over FY22-24, with an RoA/RoE of 2.1%/17.8% in FY24. We maintain our BUY rating with a TP of INR1,850 (premised on 3.1x FY24E ABV + INR104 from its subsidiaries). HDFCB remains one of our preferred BUYs and we expect the stock to recover gradually as revenue and margin revive over FY23, while clarity emerges on several aspects related to the merger with HDFC Ltd.

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