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Net profit registers double digit growth

HDFC Bank was incorporated in August 1994. It provides corporate banking and custodial services and is also involved in treasury and capital markets. In addition, it offers project advisory services and capital market products, including GDR and currency bonds.

* NII grew 14.3% YoY in Q2FY22, on higher interest income (+5.6% YoY) and lower interest costs (-4.1%). Non-interest income was also up 18.2% YoY. Provisioning rose 6.6% YoY. PAT ended at Rs. 9,120cr (+18.3% YoY).

* In Q2FY22, GNPA/NNPA stood at 1.35%/0.40% (vs. 1.47%/0.48% in Q1FY22). Effect of RBI framework restructuring is 150bps of advances.

* Although the impact of RBI framework restructuring has a peak potential of 10-20bps on NPAs, bank has taken necessary steps to de-risk Balance Sheet. Given positive outlook, we reiterate our BUY rating and value the stock at 3.9x FY23E BVPS with a revised target price of Rs. 1,931.

Healthy profit with adequate provisioning

QFY22 interest income rose 5.6% YoY to Rs. 33,520cr on the back of 14.6% YoY increase in income from investments. This was slightly offset by 17.0% YoY decline in interest earned from balances maintained with RBI and other banks. On the other hand, Interest expense were down 4.1% YoY to Rs. 14,415cr, resulting in a healthy Net interest income (NII) growth of 14.3% YoY to Rs. 19,105cr. NIM marginally inched up to 4.65% vs. 4.64% in Q2FY21. Non-interest income grew 18.2% YoY to Rs. 7,916cr, on the back of fees and commission (+25.5% YoY). As a result, pre-provision operating profit increased 15.1% YoY to Rs. 17,036cr. Provisions were set at Rs. 4,713cr (+6.6% YoY). The quarter ended with PAT of Rs. 9,120cr (18.3% YoY; +14.9% QoQ).

Marginal improvement in asset quality

In Q2FY22, GNPA/NNPA stood at 1.35%/0.40% (vs. 1.47%/0.48% in Q1FY22). Total deposits grew by 14.4% YoY on the back of 28.7% YoY growth in CASA deposits. CASA ratio stood at 46.8% (+134bps QoQ). Total advances registered a sequential growth of 4.5% to Rs. 1,249,331cr on the back of strong rural activities (+7.4% QoQ) and upswing in retail business (+5.4% QoQ). It is to be noted that the restructuring under the RBI resolution framework for COVID-19 as of September 2021 stood at 150bps of the total advances. The bank maintains a strong liquidity coverage ratio of 157% with capital adequacy ratio at 20% (vs 19.1% in the previous quarter).

Key concall highlights

* On 21st September 2021, the bank launched its own landing zone using a hybrid multi-cloud strategy for hosting application under its digital umbrella.

* Although the industry level domestic vehicle sales unit declined 37% in the month of September 2021, the bank’s incremental auto loans dispersal increased 36% during the same period.

Outlook & valuation

At the ground level, the bank sees positive traction in rural economy which has shown positive signs since a good Rabi season is expected in the next six months and the employment rate is almost reaching pre-COVID levels in September 2021. Although the impact of restructuring shows a potential of 10-20bps on NPAs, adequate efforts has been taken to de-risk the Balance Sheet along with impressive deposits and advances growth seen in the past 2 quarters. Hence, we maintain our BUY rating and value the stock at 3.9x FY23E BVPS with a revised target price of Rs. 1,931.

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