Steady performance; business trends undergoing swift normalization
Collection efficiency improves to 97%
* HDFC Bank (HDFCB) reported a strong performance, with advances growth driven by corporate; select retail segments also showed signs of recovery, with credit card growing at 6% QoQ. Operating performance remained stable, led by steady business growth and cost control. However, margins moderated 20bp QoQ on account of higher liquidity and a change in the asset mix. The bank further shored up provisions as it provided for INR23b toward potential NPA (not declared due to the SC order) and other contingent provisions.
* We maintain our earnings for FY21/FY22 and also introduce FY23 estimates. We expect an earnings CAGR of 19% over FY20–23E. Maintain Buy.
Strong performance; loan growth continues to be driven by corporate
* HDFCB reported a strong quarter with PAT growth of ~18% YoY (+13% QoQ; in-line), supported by NII growth of 17% YoY and controlled opex of ~9% YoY. However, margins declined 20bp QoQ, primarily on account of higher liquidity and a change in the asset mix.
* Fee income declined 3% YoY on account of continued softness in retail loan origination, lower card spends up to Aug’20, and certain fee waivers. However, treasury gains were higher at INR10.2b (+111% YoY), resulting in other income growth of 9% YoY. Opex grew at 9% YoY and the C/I ratio thus stood at 36.8% (v/s 35% in 1QFY21). PPoP growth was robust at 18% YoY.
* Loans grew 16% YoY, led by corporate loans (+26% YoY), while retail loan growth moderated to 5% YoY (+2% QoQ). Credit card growth improved 6% QoQ and Gold loans grew at 8% QoQ, while Auto loans declined 2% QoQ.
* Deposits increased ~20% YoY (~3% QoQ increase), led by CASA growth of 27% YoY (+7% QoQ), and TD growth came in at 16% YoY. Overall, the CASA ratio improved to 41.6% (v/s 40.1% in 1QFY21).
* On the asset quality front, the GNPA/NNPA ratio improved by 28bp/16bp QoQ to ~1.08%/~0.17%, primarily due to the Supreme Court (SC) order temporary halting NPL recognition. Furthermore, if the SC had not temporarily halted NPA recognition, slippages would have come in at ~2.0% annualized, and GNPA/NNPA ratio would have been at 1.37%/0.35%. PCR, thus, improved to 84.5%.
* Overall, provisions remained elevated at INR37b (+37% YoY) as the bank made additional provisions of INR23b toward slippages (not declared NPA due to SC order) and additional contingent provisions.
Highlights from management commentary
* Overall, business activity was near pre-COVID levels, with collection trends back at 97% levels (~99% in non-moratorium book).
* Stress in the SME portfolio declined to 3% (v/s 9% earlier) as the MSME credit guarantee scheme provided a much-needed boost to the sector.
Valuations and view
* HDFCB has delivered strong growth amid a challenging macro environment, and business momentum is swiftly moving toward pre-COVID levels. Furthermore, the bank’s operating performance remains steady, aided by healthy revenue growth and controlled opex. HDFCB continued to make healthy provisions to further strengthen the balance sheet and still reported stable in-line earnings. Overall, we expect marginal deterioration in asset quality / earnings growth (on a high base) in 2HFY21. Although, a healthy provision buffer would limit the damage and enable the bank to quickly recover to a normal growth run-rate. We maintain our earnings estimates for FY21/FY22 and also introduce FY23E. We estimate a 19% PAT CAGR over FY20–FY23E, with ROA/ROE at 2.0%/17.8% for FY23E. Maintain Buy, with revised TP of INR1,400 (3.1x Sep’22E ABV).
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