No sparks visible in Q3FY22 results of financial sector's leaders

HDFC Bank's quarterly show was in-line; Bajaj Finance was ahead on some metrics but low penetration of new app disappointed

Two market leaders in their respective segments have declared results for the quarter ended December 31, 2021 (Q3FY22). HDFC Bank is perhaps the most highly valued bank in the world and the results — which were announced over the weekend — were more or less in line with expectations.

Bajaj Finance is a market leader in the NBFC segment and also highly valued. It beat the Street estimates on some metrics but there was overall disappointment with the low penetration of its new app. The stock has lost over 3 per cent since the results were declared.

HDFC Bank's revenue rose 12 per cent YoY and 6 per cent QoQ. The pre-provisioning profit was up 10.5 per cent YoY and 6.1 per cent QoQ. The reported profit was up 18 per cent YoY and 17 per cent QoQ. There was an improvement in terms of slippages (below 1.5 per cent), besides a lower bounce rate. The net interest margin (NIM) was 4.2 per cent and the net interest income (NII) jumped 13 per cent YoY. Core fee income growth was lower at around 10 per cent.

Gross NPA dropped to 1.26 per cent, from 1.35 per cent in Q2FY22. Credit cost was reported at 0.94 per cent, lower than the 1.4-1.5 per cent averaged in the past few quarters. Restructured loans are at 1.37 per cent. Loans grew over 16 per cent YoY and 5 per cent QoQ, with commercial and rural growth of over 29 per cent YoY/ 6 per cent QoQ.

Retail witnessed a rebound of 13 per cent-plus YoY and 4.5 per cent QoQ.

The return on Equity (RoE) moderated to an average of 16.5 per cent in the last three financial years (including this) versus an average of 19 per cent RoE between FY2013-14 and 2017-18. Credit growth continues to be better than the industry trend.

Bajaj Finance saw loan growth at 9 per cent sequentially in Q3, despite strong competition. There was 25 per cent YoY AUM growth, 41 per cent NII growth, and a 22 per cent drop in provisions, leading to 85 per cent growth in profit after tax. Loan growth at 9 per cent QoQ reflected a pick-up in activity.

Competition remains strong across segments. The NIM expansion was led by a decline in funding costs, though this has likely bottomed out. Stressed loans declined and collections improved. The largest share of stressed assets in Stage 3 came from the auto loan sector at 42 per cent. Slippages dropped substantially in Q3. Gross and net NPA ratios improved to 1.73 per cent and 0.78 per cent, respectively, from 2.45 per cent and 1.1 per cent in Q2.

The digital transformation is behind schedule. Only about 6 million existing customers (about 12 per cent of the existing customer base) have migrated to the new app and phase-2 of the app will be launched in several bursts. The e-store generated 5.3 per cent of loans in Q3 versus 4 per cent in Q2. The company guidance is that phase-2 (digital platform for new customers) will be launched in 3-4 sprints; it did not provide any deadline. Growth in operating expenses was up 50 per cent YoY as investment in the digital transformation continued.

Most brokerages had buy or positive advisories on Bajaj Finance, with targets ranging from Rs 8,500 (Haitong) to Rs 9,060 (Morgan Stanley). But the price is down to around Rs 7,600 from Rs 7,850 before results. In the bear case, both Morgan Stanley and HDFC Securities believe the price can fall to Rs 5,500-5,600. On HDFC Bank, Edelweiss has a target of Rs 1,970 and Nirmal Bang has a target of Rs 2,006. Ambit has a Sell recommendation with a target of around the current price of Rs 1,540.