HDFC Bank Weak quarter for the leader Stock Update Stock
HDFC Bank posted a weak earnings performance for Q3FY2020. Sector: Banks & Finance Operational growth came largely in line, but weak advances growth and Result Update rise in GNPAs impacted performance. Better recoveries and strong retail liability base helped post NIMs at 4.2% levels, which is stable on a y-o-y Change basis. Benefits of digitization and strong cost efficiency were seen with cost-to-income (C/I) at sub 38% levels. Operating performance was in line Reco: Buy with estimates, with advances growing by 19.9% y-o-y (we anticipated ~19% y-o-y growth) and PAT growth of 32.8% (we estimated 30% y-o-y growth). CMP: Rs. 1,255 Subdued growth in auto and retail was seen, but corporate loans growth Price Target: Rs. 1,510 was strong at 26% y-o-y. Provisions jumped by 12% y-o-y, with specific loan-loss provisions amounting to Rs. 2,883 crore, much higher than Q2; á Upgrade No change â Downgrade and this consecutive rise in specific provisions is a dampener. Other income saw treasury and trading profits and saw 24% fee income and Rs. 200 crore of recoveries. Even though management transition is an overhang Company details and notwithstanding the off-colour results, we believe business quality and strength of franchise of HDFC Bank make it one of the best banks in terms Market cap: Rs. 6,87,312 cr of visibility and sustainability of business. We retain our Buy rating on the stock with unchanged price target (PT) of Rs. 1,510. 52-week high/low: Rs. 1304/1012 Key positives NSE volume: (No of 43.9 lakh NIMs sustained at 4.2% levels, which is stable on a y-o-y basis and are shares) one of the best amongst comparable peers. The benefits of digitisation and strong cost efficiency continued, and cost-to-income (C/I) was at sub BSE code: 500180 38%. Miscellaneous income (including recoveries and dividend) more than NSE code: HDFCBANK doubled to Rs 940.4 crore during the quarter as recoveries included one- off item of recovery from an NCLT account, which helped, PAT growth. Sharekhan code: HDFCBANK Key negatives Free float: (No of 430.6 cr Asset-quality performance was weak. GNPAs were up by 7.4% q-o-q and shares) increased by 4 BPS q-o-q to 1.42%. Higher slippages of Rs. 5,339 crore versus Rs. 3,714 crore were seen, mainly impacted by the agricultural segment’s NPAs and a large account. Core slippages stood flat. Shareholding (%) Slower growth in net interest income (NII) due to tepid loan growth of 19.9%; while the corporate book grew strong at 26.6% y-o-y, but retail Promoters 26.2 loan growth was soft at 14% y-o-y and was the slowest seen in several quarters. FII 37.6 Our Call DII 17.2 Valuation: HDFC Bank currently trades at 3.6x its FY2021E book value per share (BVPS), which we believe is attractive for a bank with its strengths and Others 19.0 consistency. HDFC Bank continues to be at a strong position, performing consistently, buoyed by its ability to grow profitability (but at its own pace) and strong underwriting and risk measurement standards with pricing strength. Even though management transition is an overhang and notwithstanding the Price chart off-colour results, we believe business quality and strength of franchise of 1400 HDFC Bank make it one of the best banks in terms of visibility and sustainability of business. We maintain our Buy rating on the stock with an unchanged PT 1300 of Rs. 1,510. 1200 Key Risks 1100 Rise in NPAs in unsecured and other retail segments can pose risks to 1000 profitability. 19 20 19 19 - - - - Jan Jan Sep May Valuation Rs cr Particulars FY18 FY19 FY20E FY21E Price performance Net interest income (Rs cr) 40,095 48,243 57,079 69,780 Net profit (Rs cr) 17,487 21,070 26,124 32,767 (%) 1m 3m 6m 12m EPS (Rs) 33.7 38.7 47.7 59.9 Absolute 0.6 4.8 6.9 20.9 PE (x) 37.2 32.4 26.3 21.0 Book value (Rs/share) 204.8 272.3 305.9 350.7 Relative to P/BV (x) 6.1 4.6 4.1 3.6 -0.9 -2.6 -0.5 3.7 Sensex RoE (%) 17.9 16.5 16.5 18.2 RoA (%) 1.8 1.8 1.9 2.0 Sharekhan Research, Bloomberg Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates
January 20, 2020 2 Stock Update Stock
Key result highlights from earnings call Increased liquidity, drag on margins: HDFC Bank’s average liquidity coverage ratio increased to 140% in Q3 from 133% in Q2, in line with the strategy to continue to build on deposits, thereby strengthening the liquidity position further. While the excess liquidity positions the Bank well to get benefit from potential loan demand in future, it impacts current NIM by around 10 to 20 BPS. As mentioned in the last quarter, this drag was offset by monetizing some of the investments in the form of trading gains, which essentially makes the bank’s y-o-y NII growth at about 18% or so. Fees Income: Fee income growth was granular, driven by retail customers who contributed about two- thirds to the total. Other miscellaneous income of Rs. 940 crore includes certain one-off recoveries arising from the resolution of NCLT matter, which is approximately Rs. 200 crore. Festive Treats programme: HDFC Bank was running the program through the quarter, which led to some incremental costs, still C/I ratio was at 37.9%, better on a q-o-q basis. And since this program will be an ongoing effort, so the name will change, but the campaign will continue. Network growth: HDFC Bank added 382 banking outlets (70 in Q3, 242 added year-to-date). The bank added 1,126 ATM cash deposits and withdrawal machines during the quarter. Staff count increased by 2,773 during the quarter and by 17,556 during the last 12 months. Asset quality: Annualised core slippage ratio was at 1.7% in the current quarter (same in Q3FY2019 and Q2FY2020). The current quarter slippage includes one-off large-ticket amounts. This as well as agri have been excluded in the core slippage ratio. No Technical Write-Offs: Including contingent provisions, the coverage ratio is ~78%. There are no technical write-offs included anywhere. HDFC Bank’s head office and branch books are fully integrated. Provisions: Contingent provisions at Rs. 1,457 crore and floating provisions remained at Rs. 1,451 crore. Total provisions in the current quarter included one-offs of approximately Rs. 700 crore, primarily relating to certain corporate accounts as well as accelerated provisions for some accounts, including those accounts in the resolution plan process. Credit Costs: Core credit cost ratio, i.e., specific loan loss ratio excluding one-offs was stable at 0.92% of the advances, as against 0.90% for the prior quarter and 0.88% for the prior year. Yields: Business banking and corporate banking yields have been impacted, more so in large corporates. However, NIMs have continued to hold up, helped by reduction in funding cost. Business Banking: Some drop in overdrafts have been seen due to GST payment release. Pickup in credit demand has been seen in Punjab, Southern India, Central India and Eastern India. Trends in Gujarat and some adjoining regions have remained soft, which are expected to pick up in Q4. Slippages: Core slippage of 1.7% represents slippage of Rs. 3,839 crore, of which Rs. 1,500 crore due to a lumpy one-offs and agri (Rs. 975 crore). Growth versus delinquency: Even if there is 10-15 BPS increase in delinquencies, the bank will not forgo growth in the retail segment. SMA-2: Even from a growth perspective, the bank did not see too much of growth in SMA-2 numbers has been largely stable for the bank.
Results Rs cr Particulars Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % Interest income 29,369.7 25,889.5 13.4 28,166.3 4.3 Interest expense 15,196.8 13,313.5 14.1 14,651.2 3.7 Net interest income 14,172.9 12,576.0 12.7 13,515.0 4.9 Non-interest income 6,669.3 4,921.0 35.5 5,588.7 19.3 Net total income 20,842.2 17,497.0 19.1 19,103.8 9.1 Operating expenses 7,896.8 6,719.3 17.5 7,405.7 6.6 Pre-provisioning profit 12,945.4 10,777.7 20.1 11,698.1 10.7 Provisions 3,043.6 2,211.5 37.6 2,700.7 12.7 Profit before tax 9,901.9 8,566.2 15.6 8,997.4 10.1 Tax 2,485.4 2,981.0 -16.6 2,652.4 -6.3 Profit after tax 7,416.5 5,585.1 32.8 6,345.0 16.9 Source: Company; Sharekhan Research
January 20, 2020 3 Stock Update Stock
Outlook We believe structural drivers are well in place for the bank, helping it achieve market share gains, aided by operational efficiencies and best-in-class asset quality. HDFC Bank’s operating performance remains strong, and we expect growth to pick up in H2FY2020, as the bank sees demand improve due to better monsoons, stimulus measures benefits and its own efforts. Notably, the franchise continues to be one of the best-managed and strongest business models and needs to be seen with a long-term perspective. Overall, the asset-quality picture looks sanguine, with its calibrated growth and already strong underwriting and assessment capabilities, with healthy digitalisation benefits adding to the moat of its business strength. HDFC Bank’s floating provision cushion of Rs. 1,450 crore and comfortable capitalisation levels (Tier 1 at 17.1%) are further positives. Even though management transition is an overhang and notwithstanding the off-colour results, we believe business quality and strength of franchise of HDFC Bank make it one of the best banks in terms of visibility and sustainability of business. Valuation HDFC Bank currently trades at 3.6x its FY2021E BVPS, which we believe is attractive for a bank with its strengths and consistency. HDFC Bank continues to be at a strong position, performing consistently, buoyed by its ability to grow profitability (but at its own pace) and strong underwriting and risk measurement standards with pricing strength. Even though management transition is an overhang and notwithstanding the off-colour results, we believe business quality and strength of franchise of HDFC Bank make it one of the best banks in terms of visibility and sustainability of business. We maintain our Buy rating on the stock with an unchanged PT of Rs. 1,510.
One year forward P/BV (x) band
6.0
4.5
3.0
1.5
- 14 15 16 17 18 19 20 ------Jan Jan Jan Jan Jan Jan Jan
PBV +1 sd 3-yr Avg -1 sd
Source: Sharekhan Research
Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Companies Rs/Share FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E HDFC Bank 1,255 4.1 3.5 25.6 20.9 1.9 2.0 16.5 18.2 ICICI Bank 535 3.0 2.6 31.5 18.8 1.5 1.6 16.5 17.8 Axis Bank 727 2.4 2.1 29.0 14.3 0.9 1.0 11.2 15.0 Kotak Mahindra 1618 6.2 5.3 44.7 35.8 1.9 1.9 13.7 14.2 Bank Source: Company, Sharekhan research
January 20, 2020 4 Stock Update Stock
About company HDFC Bank is a largest private bank having pan-India presence. The bank has been designated by the RBI as a Domestic Systemically Important Bank (D-SIB), which means that its continued functioning is critical for the economy. HDFC Bank caters to a wide range of banking services covering commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. Its loan book consists of 46% retail and 54% wholesale loans. As a business entity, HDFC Bank continues to deliver steady performance with well-maintained margins and conservative asset-quality performance.
Investment theme HDFC Bank is among the top performing banks in the country having deep roots in the retail segment. Despite the general slowdown in credit growth, the bank continues to report strong growth in advances from retail products. Over the years, under credit / interest rate cycles, HDFC Bank has been able to not only sustain its business growth, but also been able to maintain its asset quality along with improving margins, which is indicative of the strong business franchise strength and leadership qualities. We believe that Relatively high margins (compared with its peers), strong branch network and better asset quality make HDFC Bank a attractive business with a scope for expansion in its valuations bolstered by its consistency and strong balance sheet quality.
Key Risks Rise in NPAs in unsecured and other retail segments can pose risks to profitability.
Additional Data
Key management personnel Mr Aditya Puri Managing Director Mr Kaizad Bharucha Executive Director Mr Jimmy Tata Chief Risk Officer Mr Sashi Jagdhishan Group Chief Financial Officer Mr Arvind Vohra Group Head, Retail Branch Banking at HDFC Bank Mr Arvind Kapil Group Head - Unsecured Loans, Home, and Mortgage Loans Ms Ashima Bhat Group Head - Finance, Administration & Infrastructure Source: Company Website
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Capital Group Cos Inc/The 7.11 2 INVALID HOLDER 5.48 3 SBI Funds Management Pvt Ltd 2.81 4 50 SBI-ETF NIFTY 2.35 5 Life Insurance Corp of India 2.04 6 FIL Ltd 1.22 7 ICICI Prudential Life Insurance Co 1.07 8 HDFC Asset Management Co Ltd 1.05 9 Republic of Singapore 1.01 10 Schroders PLC 0.99 Source: Bloomberg
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January 20, 2020 5 Know more about our products and services
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