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HDB posted a solid 2Q22 result beating consensus top and bottom line estimate

Investment Thesis 

  • HDB is expected to be a beneficiary of Indian GDP growth. 
  • Positive demographic trends. Long term positive view on the sector given increase in working population, growing disposable income and positive changes to the regulatory environment.
  •  Strong brand with strong national network (5,314 banking outlets across 2748 cities) with a customer base of over 49m. Market leader in credit cards (13.3m) and a leading provider of payment gateway services, leading to high quality non fund revenues. Strong deposit base with CASA deposits (low cost deposits) comprising 39.3% of total deposits. 
  •  Healthy business fundamentals reflected through high interest margins expected to continue. 
  •  Focus on digitalization to improve efficiency and reduce cost to income ratio. 
  • Stable provisioning/bad and doubtful debt levels. 
  •  Partnering with the government to push for customer acquisition. 
  • Rapid growth in subsidiaries is expected to continue. 
  •  Reliable and competent management team.

Key Risks

  • India is not without concerns, especially around volatility and risk (such as India’s trade deficit and being a net oil importer, adverse movements in oil prices and in the U.S dollar are potential risks).
  • Intensifying competition and weak economy leading to decline in loan growth. 
  •  Cyber security threats given high volume of transactions through internet and mobile (92% of total transactions). 
  •  Political and regulatory changes affecting the banking legislation. 
  •  Funding pressures for deposits and wholesale funding

FY22 Results Highlights

  • Net revenues (net interest income plus other income) increased +14.7% over pcp, driven by growth in advances of +15.5% (reaching new heights driven through relationship management, digital offering and breadth of products) and deposits growth of +14.4%. Net interest income grew +12.1% over pcp and remained at 70% of net revenues, reflecting the underlying shift from unsecured lending essentially gravitating towards higher rated segments in the Covid period. 
  •  Other income increased +21.5% over pcp (+17% QoQ) with Fees and Commission income (constitutes approximately 2/3 of the other income) growing by +25.5% over pcp (retail constitutes 93% and wholesale constitutes 7% of the fees and commission income), FX and derivatives income growing +55% over pcp and Trading income declining -34% over pcp. 
  •  Provisions and contingencies increased +6% over pcp to INR 3,924.7 crore (consisting of specific loan loss provisions of INR 2,286.4 crore and general and other provisions of INR 1,638.3 crore). 
  •  The total credit cost ratio declined -37bps over pcp (-11bps QoQ) to 1.30%.

Strong balance sheet with CAR significantly higher than regulatory requirement. 

  • Strong capital position with total Capital Adequacy Ratio (CAR) up +90bps over pcp to 20.0% (vs regulatory requirement of 11.075%), Tier 1 CAR up +100bps to 18.7% and CET 1 at 17.4%. 
  •  Ample liquidity with average LCR for the quarter at 123%, ~$6bn excess over a floor of 110%, which positions the Bank favourably to capitalize on the opportunities that would arise as the economy gains momentum during the festive months. 
  •  Total deposits increased +14.4% over pcp to INR 1,406,343 crore, with CASA (Current Account-Saving Account) deposits growing +28.7% (savings account deposits at INR 452,381 crore and current account deposits at INR 205,851 crore) and Time deposits growing +4.2% to INR 748,111 crore, resulting in CASA deposits comprising 46.8% of total deposits. Total advances increased +15.5% over pcp to INR 1,198,837 crore, with retail loans growing +12.9%, commercial and rural banking loans growing +27.6% and other wholesale loans grew +6.0%, and overseas advances constituting 3.5% of total advances.

Leadership maintained in Payment business to be further enhanced by growth in BNPL

Management maintained leadership in payments business with acquiring business market share of 47% (acquiring business volumes including credit, debit, UPI, EPI, direct pay grew +45% over pcp to INR3,53,000 crore for the quarter with merchant acceptance points growing +27% over pcp to 2.5m), remaining confident of achieving a scale of 20 million merchants over time to be the largest payments ecosystem in the country. Additionally, the Bank has seen momentum returning in credit card with 416,000 cards issued during last 5 weeks of 2Q22 and early results for the first 10 days of October showing +42% growth in card spends over similar period in September driven by festive spend

(Source: Banyantree)

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