HDFC
Bank has delivered a healthy performance on business growth and
operating
front in 1QFY18. Despite a mere 6.1% YoY growth in banking industry
loan, its loan book grew by 23.4% YoY and 4.8% QoQ, led by higher growth
in corporate, business banking and retail loan segments. This
outperformance on loan growth front with a huge margin vs. the industry
is really commendable as it is the second largest bank in India in terms
of loan book size. Its operating profit grew by 29.2% YoY and 3.3% QoQ
to Rs75.2bn led by 20.4% YoY and 3.5% QoQ growth in NII to Rs93.7bn.
Strong growth in loan book and 10bps QoQ growth in NIM to 4.4% led to
improvement in NII. However, net profit
grew by 20.2% YoY (-2.4% QoQ) to Rs38.9bn due to 79.8% YoY and 23.5% QoQ
rise in provisioning expenses to Rs15.6bn on the back of higher
slippages form agriculture portfolio. Its gross NPA and net NPA
increased by 23.1% QoQ and 37.1% QoQ, respectively in 1QFY18. However,
we are not much concerned over this marginal rise in gross NPA, as the
headline NPA and PCR continue to remain best-in-class in the industry
Management Commentary & Guidance
- Approximately 60% of incremental growth in NPA can be attributed to agri loan portfolio on the back of farm loan waiver offered by several state governments. Notably, the Bank has provided for adequate provisioning towards the same.
- Provisioning expenses were higher primarily due to general loan loss provisioning of Rs2.1bn and higher specific loan loss provisioning for incremental slippages from agri loan portfolio.
- The Management expects system loan growth to normalise in coming quarters, and the Bank will continue to grow higher than the overall industry growth. Currently, loan growth is equally contributed by both retail and wholesale segments.
- The Bank continues to maintain its guidance of NIM in the range of 4-4.4% in coming period.
- Capital adequacy ratio improved by 100bps QoQ to 15.6% led by fresh issue of Rs80bn of Tier-I Capital Bond and Rs20bn of Tier-II bond.
Outlook & Valuation
Despite
adverse operating environment, the Bank continued to deliver strong
performance on business growth as well as operating and assets quality
fronts. It has been consistently outperforming its peers both in
financial and operational fronts backed by strong liability franchise,
low exposure to stressed sectors and superior risk management practices.
We have revised our loan growth target to 20-21% from earlier estimate
of 17-18% led by relatively higher loan growth over last two quarters.
As a result, we have upwardly revised our earnings estimates by 1.9% and
3.1% for FY18E & FY19E, respectively. We maintain our BUY recommendation on the stock with an
upwardly revised Target Price of Rs1,940 (from Rs1,833 earlier) based on 4x FY19E Adjusted Book Value.
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