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‘Strong profitability trend to continue’

* HDFC Bank Ltd. (HDFCB) reported better than expected growth in profitability in Q2FY22 driven by lower provisioning and pick-up of fee income on normalization of economic activity. HDFC reported PAT of Rs88 bn which grew by 17.6% YoY & 14.3% QoQ in Q2FY22 thereby reflecting a strong improvement compared to previous quarter which was impacted by localized lockdown. NII growth improved to 12.1% YoY (from 8.6% YoY in Q1FY22), though it remained contained due to weak interest income. NIM remained stable at 4.1% supported by low cost of funds. Fee income picked up 27.3% sequentially amid normalizing business activity.

* Slippages ratio declined to 1.8% in Q2FY22 (2.5% in Q1FY22) leading to 12 bps QoQ improvement in GNPA at 1.35%. Despite stabilizing assets quality scenario, bank continued to make aggressive standard provisioning. HDFCB made Rs12 bn contingent provisions taking tool pool to Rs77.6 bn. Total provision including standard, contingent, general and floating stood at Rs266.4 bn (163% of GNPAs) thereby remaining at comfortable level. Restructuring book rose to 1.5% of loans (0.8% in Q1FY21) while mgmt confident over book quality and expect modest slippage ~10-20 bps from this pool. Demand resolution improving to 97.5% in Sept’21, nearly back to the pre-covid level of 98%.

* Credit growth picked up to 15.5% YoY supported by healthy growth in the broader segments. Retail advances growth grew at double digit of 13% YoY for the second consecutive quarter as retail disbursement is getting positive momentum with revival of economy. Bank is optimistic about retail credit growth trajectory aided by new product launches, lifting ban on credit card by the RBI and coming festival seasons. Wholesale grew by 17% YoY (18.1% YoY in Q1FY22) in line with the historical trend. Increase in infrastructure spending in the economy and buoyant SME sector continue to provide traction to non-retail loans.

* Broader pick up in credit growth is encouraging for HDFCB which would bring back NII growth to historical trajectory. Margin to get support with improving growth in high yield retail products. While decline in slippages and high standard assets provisioning reflects stable assets quality positioning. Strong profitability trend is expected to continue in coming fiscals with RoE remaining above over 16%

* HDFCB is a leading private sector bank with consistent growth and operational performance over various cycles. The bank has maintained superior return ratios compared to its peers resulting in premium valuations. We assign ‘Buy’ rating on stock with target price of Rs1,960 valuing standalone business at Rs1,890 (P/ABVx 3.4xFY24E) + value of subsidiaries.

Pick up in fee income and lower provisioning boost profitability

NII growth improved to 12.1% YoY (8.6% YoY), however it remained below the historical trend of over 15% for the last three quarters. Focus on secured assets and high rated corporates continue to put pressure on yield. Though, growth in high margin retail products is picking up.

Fee income grew by 27.3% QoQ on better economic activity and retail business contributed 93% of fee income. OPEX grew by 15.2% YoY in line with mgmt commentary, while C/I at 37% largely remained contained. Provisioning declined by -18.8% QoQ on lower slippages and high recoveries which provided boost to bottom line. PAT grew by 17.6% YoY & 14.3% QoQ to Rs88 bn in Q2FY22.

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