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Earnings/PPOP in line; asset quality robust

Restructuring increased to 1.5% of loans; contingent provision provides comfort

* HDFCB reported an inline quarter with NII/PPoP growth of 12%/14% YoY and PAT growth of 18% YoY to INR88.3b (inline). Profitability came in strong despite creating an additional contingent provision of INR12b, thus taking the total buffer to ~INR78b (~0.65% of loans).

* The bank witnessed a healthy pickup in business momentum as deposits / loans were up 4.5% QoQ each. Retail segment grew ~13% YoY while Commercial and Rural Banking grew robustly at 27.6% YoY. CASA deposits grew 29% YoY and the ratio now stands at 46.8% (+130bp QoQ).

* On the asset quality front, GNPA/NNPA ratio improved by 12bp/8bp QoQ to 1.35%/0.4%, with slippages moderating to INR53b (1.8% of loans). On the other hand, the restructured book increased to 1.5% of loans (v/s 0.8% in 1QFY22). The management said the net impact of the restructured book on NPAs is likely to be 10-20bp. Higher provision coverage, along with a contingent provision buffer, provides comfort on asset quality.

* Our estimates remain unchanged at 20% PAT CAGR over FY21-24E, with RoA/RoE at 2.1%/18.3% for FY24E. The stock trades at 3.5x FY23E P/B and 21x FY23E P/E. We maintain our Buy rating.

Healthy pick up in loan growth at 4.5% QoQ; NIM stable at 4.1%

* Strong recovery in retail loans along with robust trends in commercial and rural loans resulted in a pick-up in NII growth to 12% YoY vs 8.5% YoY in 1QFY22. Core NIMs stood flat QoQ at 4.1%. This coupled with healthy fee income resulted in a PAT of INR88.3b (+18% YoY; inline).

* Growth in other income was robust ~21% YoY to INR74b, aided by a strong recovery in fee income (+27% QoQ). Forex-related fees too stood strong at 55% YoY. However, treasury gains came in at INR6.75b (-34% YoY). Opex grew by ~15% YoY, with C/I ratio at 37% v/s 35% in 1QFY22. PPOP grew 14% YoY (in line). For 1HFY22, NII/PPOP/PAT grew ~10%/16%/ 17% YoY.

* Loans grew by ~15.5% YoY, led by robust (~28.5%) growth in Commercial and Rural loans (excluding Agri), while Retail/other Wholesales advances rose ~13%/~6% YoY. On a QoQ basis, Retail witnessed a strong recovery at 5.4%, Commercial and Rural loans (ex. Agri) grew 6.8%, Agri loans rose 11.8%, while the Corporate book was muted with a decline of ~1% QoQ.

* Deposits grew by ~14% YoY led by CASA growth of ~29%, while TD growth moderated to ~4%. CASA ratio increased by 130bp QoQ to 46.8%. Growth in CASA was led by both SA (6% QoQ) and CA (11% QoQ) deposits.

* On the asset quality front, GNPA/NNPA ratio improved by 12bp/8bp QoQ to 1.35%/0.4%, with slippages moderating to ~INR53b (1.8% of loans). PCR improved by ~300bp QoQ to 71%. On the other hand, the restructured book increased to ~INR180b (~1.5% of loans) v/s 0.8% of loans in 1QFY22.

* Performance of subsidiaries remains mixed: HDFC Securities reported a strong performance. Total revenue/PAT increased by 42%/~44% YoY to INR4.9b/~INR2.4b. HDB Financial Services reported muted business volumes with flattish loan growth. Total net operating revenue grew 12.5%, while PPOP growth was muted ~9% YoY. Provisions stood elevated at INR6.3b, while reported PAT stood at INR1.9b v/s a loss of INR0.85b in 2QFY21. It reported a modest recovery in asset quality with Gross Stage-3 assets moderating by ~200bp QoQ to ~6.1%.

Highlights from the management commentary

* Restructuring impact: The net impact of restructuring on potential NPAs is likely to be 10-20bp.

* Retail business momentum has picked up strongly and reached close to preCOVID levels across most segments. Demand resolution stands at 97.5%.

* A strong pick up in Credit Card spends was aided by robust festive demand.

Valuation and view

HDFCB continues to deliver strong business growth v/s peers, resulting in market share gains. This was led by a healthy pickup in the Retail segment, while Commercial and Rural Banking continues to remain robust. Earnings were in line, despite making additional contingent provisions to strengthen its Balance Sheet. Asset quality ratios have improved, while the restructured book increased to 1.5% of loans (v/s 0.8% in 1QFY22).

However, high provision coverage and contingent provision buffer provide comfort on asset quality. Pick up in loan growth particularly retail would aid NII and margins which would drive profitability. Our estimates remain unchanged at 20% PAT CAGR over FY21-24E, with a RoA/RoE at 2.1%/18.3% in FY24E. We maintain Buy and roll-forward our estimate to Sep’23E with a revised TP of INR2,000/share (3.6x Sep’23E ABV + INR120/share from subsidiaries).

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