India-based HDFC Bank's auto-loan growth gains strong momentum

The bank's 2QFY15 performance is mostly all hits.

India-based HDFC Bank is observed to have had strong momentum in auto-loan growth in 2QFY15, as auto loan momentum has picked up especially in cars with ~9% q=q growth and ~15% growth YTD with HDFCB gaining some share.

According to a research note from Nomura, the bank's 2Q performance was mostly all hits. For instance, CV book grew sequentially after 5-6 quarters of contraction.

Pick-up in retail growth, meanwhile, is encouraging both from a NIM perspective and also from profitability perspective as most ROA drivers (NIM and credit costs) are maxed out and PAT growth now will have to be more balance sheet growth-driven.

Further, the bank's NIMs inched up ~15bps sequentially aiding to some extent by investment yields; improving share of retail mix should support NIMs going forward but is unlikely to tick up further from current levels.

Here's more from Nomura:

Marginal fee income pick-up: Core fees grew by ~13% y-y driven by better momentum in third party, retail asset/liability and transaction banking fees. While the pick-up in moderate and fee growth still lags balance sheet growth, core fee growth is finally improving.

Provisions on expected lines - slippages lower sequentially: Credit costs at ~55bps was in line but flat gross NPAs q-q indicate of moderation in CV/SME slippages v/s 1QFY15. With s pick up in freight demand and expected improvement in CV asset quality, we expect specific credit costs for HDFCB to moderate further and the company could return to increasing their floating provisions stock of INR17.5bn from 2QFY15.

Opex higher: Signs of some comfort on higher growth: Opex growth at ~19% y-y picked up much faster than our expectations, especially given single digit opex growth for the past 4-5 quarters. In our view, higher urban branch expansion, ~5000 employee adds, higher agent commissions and payout on credit cards all indicate that management is more comfortable on growth now and is building up for the expected improvement in macros.

Valuations: lower P/E reflects slower profit growth; premium P/B multiples seem justified due to better profitability. While EPS growth has admittedly slowed from ~25-26% CAGR in the past decade to ~21-22% expected in the next 2-3 years, we think a lower P/E of

~16x Sep-16 EPS vs 21x longer-term average more than adequately reflects

the growth slowdown. P/B multiples are likely to remain high due to improving ROAs/ROEs. Current valuations at 3.2x Sep-16 book appear reasonable, especially considering ~15% book accretion in case of an impending dilution (2.8x Sep-16 book assuming a INR100bn dilution).