HDFC Bank (HDFCB IN): Q2FY17 Review - Unexciting results |
Rating BUY Price Target INR1,500.00 (from INR1,450.00) Price INR1,250.30 |
Key Takeaway HDFCB reported a muted quarter where the growth and margins both came below our estimates. Lower operating and provisioning cost helped the company to meet the bottomline expectations. However, management guides for uptick in margins and growth. Expect bottomline to pick up in FY18. Rollover and raise PT to Rs1,500. Retain Buy.
Weaker loan growth, retail growth not sufficient to offset slow wholesale growth. Loans and advances grew 18% yoy, lower than our estimate (-5.2%). As per the bank's internal classification, proportion of retail (including business banking) is 65% of loans, growing at 22%, while wholesale growth was tepid at 12% yoy. Management attributed this weak growth to run off of short-term loan contracted in the year earlier.
Credit costs declines, asset quality stable. Gross NPA (1.02%) and Net NPA (0.30%) marginally improved sequentially (2bps each). Restructured assets continue to remain 10bps of the loans, with net stressed assets reduced 2bps sequentially to 40bps of loans. Slippage ratio improved to 1.4% in this quarter from 1.8% in Q1FY17. The total credit cost for the quarter was at 62bps, up vs. 76bps yoy and 74bps qoq. Provision coverage ratio continued to remain strong at ~70.6%, marginally improving sequentially.
Core PPOP below our estimates, net profit in line, driven by higher treasury gains. NII grew 20% yoy, (4.3% below JEFe), driven by a loan growth of 18% yoy. Core fee income grew at 12.6% yoy. However, treasury income showed a very strong growth of 75% yoy, resulting in a non-interest income growth of 14% yoy. PPOP was up 19.5% yoy, 2.8% below JEFe. Core PPOP (ex. treasury gains) grew 17.6%, 4.7% below JEFe. Provisioning came down 14% sequentially to Rs7.5bn and was 20% lower than JEFe. Net profit was Rs34.55bn for the quarter, up 20.4% yoy (in line with JEFe).
Tweak ests. Our EPS estimates remain largely unchanged – a reflection of slightly slower loan growth resulting in lower NII, offset by lower operating and provisioning costs. We forecast bottomline growth of 20% in FY17E rising toward 22% in FY18, with FY16-19E CAGR of 22.2%.
We value HDFCB at 4.1x trailing book (Sep-17E) and 19.3x EPS (12m to Sep-18E). It trades at 4.0x trailing book (Sep-16) and 19.3x EPS (12m to Sep-17E) – 10yr avg. of 4.7x and 20.1x respectively. Key risks: Weak loan growth and asset quality. |
Nilanjan Karfa *, Equity Analyst Avinash Singh, CFA *, Equity Associate
* Jefferies India Private Limited |
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