HDFC Bank - Profitability levers well at work! - Prabhudas Lilladher

HDFCB's revenue momentum seems to be catching up with the weak macros and Q2FY14 also exposes some vulnerability on liabilities. However, the bank has surprised everyone on the quantum of opex flexibility. This, along with credit costs flexibility, makes HDFCB best placed among defensives to weather the storm. Hence, we maintain our 'BUY' rating with a PT of Rs725/share and relative preference for HDFCB v/s other defensives (HDFC Ltd/ Kotak).

Some vulnerability on liabilities for HDFCB as well: High LAF dependence and low floating rate book seems the key reasons for the ~20-25bps QoQ margin decline and exposes liability vulnerability even for HDFCB. A flatter yield curve should aid margins in H2FY14 v/s Q2FY14 but not exploring alternate funding avenues (re-financing/ FX loans) seems a little surprising to us.

Growth slowdown - Some incidental and some intentional: Retail loan growth across product categories have come off finally (9% YoY auto loan growth) inline with trend in OEM sales and is unlikely to recover in the near term. Some part of the slowdown in corporate book (15% YoY growth v/s 17-18% in the last 2-3 quarters) was largely a margin decision which could pick-up with funding having eased a bit.

Profitability levers working well with slowing revenues: Revenue momentum slowdown, with peaking NIMs and falling OEM sales (slower growth), was largely expected but HDFCB has managed PPOP growth fairly well (27% YoY growth in Q2FY14). Opex growth has moderated to ~10% YoY now and though levers could be getting a little stretched, opex growth is unlikely to jump meaningfully in the near term aiding PPOP growth. Also, asset quality Ex-CV/CE has held up well with limited slippages in the corporate book and credit costs lever in the form of floating provisions (Rs19bn) still remains untapped.

Other highlights: (1) Fee growth: CEB growth of 11% YoY was similar to last two quarters but has been moderating v/s FY11-13 trends. FX income included a Rs600m one-off SWAP gain adjusted for which high FX volatility + NRI volumes drove ~70% YoY growth (2) Conservative treasury accounting: HDFCB accounted for Rs1.7bn of MTM losses and choose not to amortise MTM losses of Rs1.4bn.

Source : Equity Bulls

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