HDFC Bank - Core Profitability Below Trend, Asset Quality Benign; Result Update Q2FY15 :: Edelweiss, PDF link

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HDFC Bank’s Q2FY15 PAT at INR23.8bn (up 20% YoY) came in line with our estimate. NII grew over 23% YoY due to better NIMs (4.5%, up 10bps QoQ) and strong loan growth (up 22% YoY). However, core operating profit (ex-treasury) continued to be below trend (growth in lower teens) following higher opex (up 19% YoY) and slower fee traction (up 11% YoY). Going ahead, though we expect higher contribution of nascent branch network to spur revenue, improvement in fee income will be a key monitorable. On the other hand, after 4 quarters of controlled opex (single digit growth rate) HDFC Bank reported 19% opex growth, thus pushing up cost-income ratio to 46.3% (45.3% in Q1FY15); its sustainability will be key monitorable. We estimate 22% earnings growth over FY14-16, resulting in RoA of 2%. Assigning 3.8x FY16E ABV, we arrive at TP of INR965.

Revenue growth gains traction, but sustainability key monitorable

After 3 quarters of QoQ moderation, HDFC Bank’s core revenue growth (ex-treasury) improved (up 14.9% YoY). The improved traction was largely following strong NII growth (up over 23% YoY versus higher teens over last four quarters). However, other income contribution remains at lower levels (albeit some improvement is witnessed on sequential basis). We do expect other income to look up with improvement in associated industries (insurance, mutual funds, etc), but scalability of same needs monitoring. On the other hand, profitability was suppressed due to higher opex largely on account of: (1) addition of higher number of metro/urban branches; (2) increased staffing; (3) higher retail disbursement leading to increased DSA payments; and (4) higher card payout on point of sale machines—all of these explains 80-90% of increased expense. As a result, cost-income ratio inched up to 46.3% (45.3% in Q1FY15); sustainability of the same will be key monitorable.

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