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Key Result and Call Highlights  

* Strong core PPOP growth continues: Core PPOP was marginally ahead of expectation; represented strong growth of 19% yoy (7‐quarter high). While NII growth (12.6% yoy) stood slightly behind loan growth (14% yoy), the robust recovery in core fee growth (25% yoy) and sustained tight leash on cost (11% yoy) drove superior PPOP performance. 

* Slippages were lower:  Annualized core slippages in Q4 stood at 1.66% v/s 1.86% in Q3. This was in‐line with our expectation which was premised on our channel checks finding of lower bounce/defaults and better resolutions across 0‐90 buckets across retail products during Jan‐Mar period      

* Bank enhances provisioning cushion: While providing adequately on the post‐ moratorium slippages (core PCR at 70%), the bank made additional provisions of Rs13bn in Q4 (included Rs5bn for interest‐on‐interest refund). Floating + Contingency provisions stand at Rs73bn (65 bps of Adv.) and overall provisions stood at 153% of GNPL (v/s 148% of proforma GNPL as of Dec 31)   

* Gaining market share in retail and SME segments: Retail disbursements were up 6% qoq and 21% yoy in Q4. While treading cautiously, the bank continues to gain market share in products like Auto, CV/CE, PL, Home and Business Banking. HDFCB’s SME book crossed Rs2tn (~18% share) on the back of significant ECLGS disbursements.

* Retail collections and bounce resolutions near pre‐Covid: Demand resolution has been steadily improving from October, and during March was within a whisker of pre‐Covid levels across products. Cheque bounces had normalized too, but witnessed an uptick in April (went back to January level). Bounce resolution (<30 dpd) is back to pre‐pandemic level, and recoveries are 30% better.  

* Growth with credit tightening = lower future credit cost:  Sourcing has been of high quality in retail products due to cautious stance and policy tightening. Bank’s share in higher CB scores has been improving, courtesy strong franchise and lower cost of funds. Recent high‐quality originations form 35‐40% of overall retail portfolio. Even in wholesale segment, avg. rating of incremental book remains better than the stock.

* Technology issues a near‐term growth irritant, but not impeding franchise growth: While not committing on likely resolution time frame, the bank remains focused on taking its technology platform to a futuristic level. However, despite the outage issues, franchise growth remains uninterrupted ‐ bank added 2mn new liability relationships in Q4 and 2.5mn corporate salary accounts in FY21  

* HDB financial makes a strong comeback: Business and collections reached pre‐Covid levels in Q4. Disbursements were up 15% yoy and 32% qoq. AUM, NII and PPOP were higher 5%, 15% and 20% respectively. Core credit cost witnessed normalization, and HDB delivered a PAT of Rs2.8bn. Our View: Balance Sheet is stronger than ever; reiterate strong BUY  

* Stringent and high‐quality underwriting in FY21, robust capital position (Tier‐1 17.6%), high core PCR (70% ‐ Covid 1st round stress fully addressed) and a healthy additional provisioning buffer (65 bps of Adv.) makes HDFCB’s balance sheet stronger than ever. Since current lockdowns are localized and less stringent, and job scenario is stronger, the credit cost impact of this pandemic round should be much lesser than the first one (80‐90 bps). The bank has displayed tremendous capability to carve out efficiencies from the cost lines (core C/I at 39% in FY21 v/s 41% in FY20), and most of the gains will be sustained in medium term. 

* It is most pertinent to note that bank has maintained core PPOP margins around 3.3%, even in challenging circumstances such as 1) retail slowdown driving increase in corporate share before pandemic and 2) tightening of underwriting post the pandemic. HDFCB is the least cyclical franchise in our coverage, with structural capability to keep growing at 15%+ in the foreseeable future. The core bank (adj. for sub value of Rs65/share) trades at 2.8x P/ABV and 16x P/E on FY23 basis. Retain high‐conviction BUY and 12m PT of Rs1,870.

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