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HDFC Bank reported subdued results with operating growth ex treasury gains of 10% yoy, while lower provisions of Rs.3,312 cr (-29% yoy), resulting in a net profit of Rs.10,055 cr (23% yoy growth) for Q4FY22.

Key Highlights of Q4FY22 Results

Asset quality for the bank continues to see improvement, with reporting Gross non-performing loans (NPA) and net non-performing loans falling from 1.47%/0.48% in Q1FY22 to 1.17%/0.32 respectively in Q4FY22. Gross NPA includes a standard account of 19 basis points, as one of the other facility of the borrower is NPA. New bad loans continue to fall with annualized slippage ratio at 1.3% for the current quarter as compared to 1.6% in the prior quarter. Specific loan loss provision stands at 73%. The bank has made an additional contingent provision of Rs.1,000 cr in Q4FY22 and as a result, total provisions comprising specific, floating, contingent and general provisions were 182% of gross NPA. The total annualized credit cost for the quarter was 96 basis points which include the impact of the contingent provision of approximately 30 basis points. The restructuring under the RBI resolution framework for COVID-19 as of March-end stands at 114 basis points and the management expects slippage from this book to around 10-20 basis points. We believe the asset quality trends to be better going forward, thereby leading to lower credit costs in the future.

Loan book grew by 21% yoy, with corporate advances growing by 17% yoy and commercial and rural book growing at 30%. Retail grew at a slower pace, at 15% yoy due to supply chain issues in the auto segment. Management expects a pick up in auto loans and card loan growth, thereby leading to an increase in pace of retail loans. Deposits witnessed 17% yoy growth, with CASA deposits growing faster at 22% yoy. Low cost deposits increased by ~200bps yoy to 48% of the total deposits.

On the P&L front, NII grew at lower than loan growth at 10% yoy, as the bank focused on the low yielding high quality corporate book. However, with single digit cost to income ratio and low credit cost, the corporate book is return accretive for the bank. Fees and commission income constituting three-fourth of other income was at Rs.5,630 cr and grew by 12.1% over the prior year and 10.9% over the prior quarter. Retail constitutes approximately 94% of fees. Fees on payment products remained subdued due to lower late payment fees. Costto-income ratio for the quarter was at 38%. With stepped up investments in the technology and retail segment continuing to pick up pace, going forward, the bank anticipates the spend levels to increase in near term

OUTLOOK AND VALUATION

HDFC Bank is one of the leading private sector bank having strong parentage and brand equity created over many years. Bank has been consistent in gaining market share and better than industry NIMs over many years. Going forward, with pick up in loan growth, healthy NIM and lower credit cost, henceforth, we expect HDFC Bank to report ROA/ROE of 1.9%/17.6%. We recommend ‘BUY’ with a target price of Rs.1864, with an investment horizon of 18-24 months

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