IGI Logo

Elevated restructuring, contained credit cost; embarking on project Future Ready

HDFC Bank’s Q2FY22 NII growth retraced to 12.1% YoY (8.6% in Q1FY22), slippages moderated to 1.8% (2.54% in Q1FY22) and credit cost was contained at 1.3% (1.7% in Q1FY22). This, coupled with 25% YoY growth in core fee income, supported 18% earnings growth. GNPA for the bank came off by 12bps QoQ to 1.35% and stage-3 assets for HDB Financial Services improved 200bps to 6.1%. What surprised negatively: i) Exposure of Rs174bn (1.45% of advances) being restructured under OTR 2.0. ii) Higher than expected QoQ rise of 14% in operating expenses leading to marginally below expected PAT. What gives confidence: i) Demand resolution is back to pre-covid levels; recoveries are encouraging. ii) Bank is embarking on project Future Ready and building digital and franchise capabilities to capture growth opportunities. iii) Cumulative provisioning is equivalent to 2.2% of advances against 2.9% of stress pool. Maintain BUY with a revised target price of Rs1,955 (earlier: Rs1,818) assigning 4.0x FY23E book. Key risks: i) adverse behaviour of elevated restructured pool; ii) continued investments, which will keep opex high.

* How we read Q2FY22 earnings:

* 1.45% of advances getting restructured under OTR 2.0 was a negative surprise with >80% flowing from the retail portfolio. Also, of the restructured pool under OTR 1.0, >20% has slipped, >10% written-off and >7% repaid. Circumstances and developments post restructuring under OTR 1.0 and OTR 2.0 are different. However, behaviour of Q2FY22 restructured pool will be key to watch out.

* Flow into restructuring and improvement in collections restricted slippage run-rate to 1.8%. Since the corporate book is resilient and MSME dpd buckets are stable, the incremental stress seems to be flowing from retail/agri segments.

* NII growth, which moderated to <10% for the first time in past 10 years in Q1FY22 retraced to 12.1% YoY supported by 15.5% growth in advances and stable core NIMs at 4.1%. Incremental growth skewed towards the retail segment will provide further boost in our view.

* With Rs12bn of contingency buffer (primarily towards restructured provisioning), the bank carries cumulative credit-related contingency + floating buffer of 77bps.

* Management is building capabilities to capture growth opportunities and sounds optimistic on outlook for retail, rural and commercial banking.

* Stage-3 pool for HDB Financial Services improved by 200bps to 6.1%, which is somewhat encouraging, though credit cost stays elevated upwards of 4%

* Read-through for other banks on a few aspects:

1) Contrary to our expectations, restructuring under OTR 2.0 for HDFC Bank was elevated vis-à-vis OTR 1.0 (more than double). We need to closely watch this trend for peer banks.

2) HDFC Bank has built further buffer (of 10bps) against expectations of a pause or utilisation of buffer for the industry. We believe its restructuring quantum and provisions will determine the stance of other banks. 3) Stable core NIMs is something we can expect for other banks too.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer