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Buy HDFC Bank Ltd For Target Rs.1,818

HDFC Bank’s decadal low NII growth at 9% YoY in Q1FY22 dragged earnings growth below expectations at 16% (against past 6-year average of 18-20%). NIMs (at 4.1%) settled at the lower end of the guided range. Slippages, amidst second covid wave disruption, too were elevated at 2.54%, though partially offset by sale of NPAs (Rs18bn) and write-offs (Rs31bn). GNPAs rose only marginally to 1.47% (from 1.32% in FY21) and credit cost was contained at 1.7%. Stage-3 assets for its subsidiary, HDB Financial, almost doubled.

What gives confidence: 1) Demand resolution is just 100bps sigh of pre-covid levels; recoveries benefit to flow in coming quarters; 2) better-rated bureau score enquiries in every product is higher; and 3) MSME delinquency trend has shown QoQ improvement and utilisation rate has been rangebound. Maintain BUY with an unchanged target price of Rs1,818. Key risks: 1) Much-awaited lifting of credit card rollout embargo; and 2) higher-than-anticipated stress in HDB Financial.

* How we read Q1FY22 earnings: 1) NII growth moderated to sub-10% for the first time in past 10 years due to decline in yields. Rationale being a) low yielding corporate and home loan portfolio leading incremental growth; b) high yielding credit card portfolio declined 7% QoQ, particularly revolver balances; c) interest reversal impact on elevated slippages; d) high mandatory cash reserves. 2) Slippages at 2.54% were elevated relative to recent averages.

As MSME delinquency trend has improved and corporate book is resilient, stress seems to be flowing from retail/agri segment. 3) With Rs6bn of contingency buffer, it carries cumulative credit-related contingency + floating buffer of 70bps; 4) sequentially, advances were up (contrary to declining trend anticipated for peers) that sustained YoY growth of >14%; 5) elevated stress pool for HDB Financial reflected in IGAAP NPA doubling QoQ to 7.75%. This is over and above OTR 1.0 restructuring pool of 8.7% of AUM by FY21.

* Read-through for other banks on a few aspects: 1) Trend of elevated slippages (than recent averages) due to second covid wave disruption will be reflected for other banks, too. 2) HDFC Bank has built further buffer (albeit marginal, of 5bps). Other banks, too, will create disruption buffers. 3) NII moderation and NIMs settling lower can be phenomena for other banks, too, particularly due to focus on building low risk portfolio, CD ratio moderation and incremental stress formation. 4) Deposit re-pricing benefit is almost nearing an end with decline in cost of deposits/funds arrested.

* Embarking on project ‘Future Ready’: The bank has unveiled project ‘Future Ready’ to add strength to its strategic and execution muscle. It includes: 1) Identifying growth engines (created new business segments of MSME and rural banking), 2) adding digital marketing as another key delivery channel, 3) expanding semi-urban and rural markets, 4) creating a new digital factory to foster innovation, and 5) putting in place the right talent and further strengthen its core functions to drive project ‘Future Ready’.

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