Resilient, confident show despite challenges
HDFC Bank’s Q1FY21 performance was commendable and the management’s narrative was resilient, despite challenges reflected in: 1) Morat 2.0 portfolio at 9% (lowest heard till now), 2) confidence in credit reserves of ~55bps coupled with 76% NPL coverage being sufficient ceteris paribus, 3) digital initiatives, franchise strength and sharp focus helping capture opportunities without compromising quality. Market share gain (21% advance growth), steady NIMs at 4.3% (despite 70bps MCLR cut) and operating cost agility (down 24% YoY ex-employee cost) aided 7% core operating profit growth in the most disrupted quarter. Accelerated recognition of 30bps of advances and expedited provisioning (coverage up 4%) initiated on non-morat pool – though contingency buffer was limited at mere 10bps. Earnings growth of 20% was buoyed by treasury gains of Rs10.9bn. Performance reaffirms our stance that HDFC Bank will lead responsibly and is best positioned to rebound quicker offsetting nearterm weakness. Maintain BUY.
* Morat 2.0 lowest in the industry; contingency buffer sufficient enough: The portfolio under morat 2.0 is merely 9% (70% customers are paying up and in unsecured loans, 98% morat customers have received salary credits and 97% customers are 0-dpd). On non-morat book, bank based on analytics has expedited NPL recognition (~30bps of advances) and has inched up coverage by 4 percentage points to 76%. Credit cost, including contingency buffer of Rs10bn, at 1.6% settled lower than our FY21 estimate of 2.3%. While the management sounded confident on credit cost having peaked, given the challenging macros, we remain wary of future stress and are building in elevated credit cost of 2%.
* Credit growth led by wholesale advances: Advance growth of 21% was supported by 36% growth in wholesale advances (up 8% QoQ) – skewed towards highly rated corporates with access to liquidity and resistant businesses. Retail advances moderated more than anticipated (to 7% YoY, down 4% QoQ) – as fresh originations were down 76% - maximum in personal loans, down 87%. In business banking (now 100% selffunded vertical), it is pursuing granular opportunities using digital infrastructure towards entities improving cashflows moderated. Stress testing in SME banking suggests hardly 5% would face difficulty.
* NIM contraction not playing out yet: Against our expectation of pressure on NIMs, given MCLR cut of 60bps since March ‘20, CD ratio declines to 84% and incremental growth towards yielding corporate advances, NIMs have held on this quarter as well at 4.3%. Undoubtedly, cut in deposit rates is aiding funding cost but pressure should be imminent in coming quarters, if not now.
* Agility on cost efficiency and linkage to business volume was demonstrated: Operating expenses (ex-employee cost) were down 24% YoY/10% QoQ reflecting lower origination and business volume. This supported reduction in cost/income to 35% and as we had highlighted earlier, it proved it has enough buffer to curtail costs to cushion any earnings volatility during business slowdown. Capital efficiency too kicked in with <5% growth in RWA compared to >20% asset growth.
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