For 3QFY2020, HDFC Bank's PAT surged 33% yoy led by 20% yoy increase in pre-
provision profit and higher other income coupled with tax benefits, which supported
profitability. Loan book continued to grow at 20% yoy supported by wholesale book,
however, NII growth was subdued at 13% (higher balance sheet liquidity). On asset
quality front, headline asset quality remained stable however; slippages and credit
costs remained elevated. Deposits grew at 25% yoy (4.5% qoq) owing to 28.6% yoy
growth in term CA deposit. CASA mix improved 24bps qoq to 39.5% (40.7% in
Loan growth strong led by pick up in corporate loan book: Softening of auto loan
segment (contributes 25% of retail loans), which grew 2.3% yoy led to moderate
growth in advances. Credit card and personal loans reported healthy growth of
28.6% yoy and 23.3% yoy, respectively. Wholesale loans grew by 26.6%, while retail
loans moderated to 14.1% yoy. Despite heavy advertisement during festive season,
retail growth remained moderate.
Non-interest income grew strong, cost/income declined: Total other income grew at a
healthy rate of 35.5% yoy led by healthy core fee income. Core fee income grew by
24.1% yoy owing to sustained growth in payment-related fees (~35% of total) and
improvement in fees from third-party products (improvement in yield). The
management said that retail accounts for ~93% of fee income, while treasury gains
and one-off recovery from the resolution of a NCLT matter also supported other
income. From last four quarters, the bank's C/I is consistently in a declining trend,
and for Q3FY2020, CI declined 50bps/87bps on yoy/qoq basis to 37.9% on the
back of 18% yoy growth in operating expenses and revenue growth of 19% yoy.
Management has guided for 300bps decline in C/I over the next 3-5 years.
Asset quality disappoints; slippages, credit costs higher: In absolute terms, GNPA
went up by `919cr, up 7.3% qoq and stood at 1.42%, NPA increased by `677cr, up
17% qoq. The provision coverage ratio for the quarter declined ~300bps to 67%
even after taking ~37% growth in provisions. Gross slippages remained high at
`5,300cr (2.4% annual slippages), this was largely driven by slippages in agriculture
portfolio and one-off corporate slippages. However, core slippages were at 1.7%.
Management gave positive commentary on retail asset quality while sounded a bit
concerned about CV/CE portfolio owing to the weak underlying macro environment.
The credit cost ratio remained high at 1.3%.
Outlook & Valuation: Credit growth beat the industry growth rate driven by strong
retail business. The strong liability franchise and healthy capitalisation provides
earnings visibility. We value HDFC Bank using SOTP method, valuing standalone
banking business at 3.7x of FY2021 ABV and its two subsidiaries at `78/share. We
recommend a Hold on the stock, with a target price of `1,390/ share.