Strong growth, asset quality outlook; technobanking to help deliver next leg of growth
* Despite low NIMs at 4.1% due to excess liquidity on B/sheet and low loan yields, HDFCB reported healthy 18% yoy growth in PAT at Rs75bn, mainly led by strong treasury gains. The stay on NPA tagging led to lower NPA formation, but the bank has still made adequate provisions on unrecognized NPAs and shored up the Covid-19-related provision buffer to 0.7% of loans.
* Collection trends are better with demand resolutions at 95% in Sep’20 and 97% in Oct’20 due to its superior customer profile and collection mechanism. The bank expects delinquency rates to not exceed the last peak of ~2%, with low restructuring. Overall asset quality trends at HDB Financial remain sub-par, reflecting weakness in the NBFC space.
* The deal pipeline in corporate remains strong and the bank guides for strong outlook on retail credit growth, led by healthy disbursement trends. Amid management transition, the bank is embarking on techno-banking to gain market share across business lines at a pace faster than the past 26 years at a far lower cost and thereby, deliver superior RoAs.
* We retain Buy/OW stance in EAP and raise the TP to Rs1,500 (valuing core bank at a high multiple of 3.2x + subs value of Rs57), given the bank’s ability to recover faster, reflecting in growth/asset quality outlook, and deliver superior return ratios across cycles.
* High corporate growth, balance sheet liquidity hurt NIMs, but improving trajectory on retail should provide support in 2H: Overall credit growth was better than the industry at 16% yoy/3% qoq, mainly led by continued strong traction in corporate loans. Traction in retail loans is also picking up with disbursals reaching 85% of last year and 2-2.5x times of Jun’20 levels with recovering economy activity and run-up to the festive season. The bank is also launching ‘Auto First’ a game-changing digital platform in the auto lending space. NIM fell sharply by 20bps qoq to 4.1% mainly due to low LDR, high corporate growth and possibly non-recognition of interest on stressed loans. However, better loan growth, especially in the retail segment, should gradually help normalize NIMs.
* Collection efficiency normalizing at a faster pace: The GNPA ratio declined 28bps qoq to 1.08% mainly due to the Supreme Court’s stay on NPA tagging, without which it would have been largely flat qoq at 1.37%. However, the bank provided Rs23bn on unrecognized NPAs, including Rs11.7bn additional contingent provisions to shore up Covid-19-related provisioning buffer. The bank now carries cumulative provisions of 0.7% of loans (floating -Rs14.5bn and contingent provisions-Rs63bn). The bank’s strong collection mechanism, superior customer profile and normalizing economic activity reflect in better-than-industry demand resolution rates at 95% in Sep’20 and 97% in Oct’20. The bank does not expects much restructuring as well. However, the overall asset quality trend in its NBFC subsidiary, HDB Fin Services, remains sub-par, with the GNPA ratio rising to 4.5% (vs. 3.4% in Q2FY20).
* Outlook and Valuations: Management has guided for stable/healthy NIMs and a structurally better cost-income ratio, while the high provisioning buffer should help absorb the ensuing moderate asset-quality risk. Retain Buy/OW stance in EAP with a revised TP of Rs1,500, valuing core bank at 3.2x Sep’22E ABV and sub value of Rs57 per share. Key risks to our call are slow loan growth, higher-than-anticipated NPAs in retail loans and management attrition
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