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Price Analysis:

HDFC Bank reported a strong trend on assets quality and operating performance in 2QFY22. The absolute GNPA amount decreased 4.4% sequentially, which resulted in improvement in GNPA ratio to 1.35% v/s 1.47% in the previous quarter. The reported GNPA is well below the historical trend of 1.4%. Moreover, the restructuring book increased to 170bps of overall loan v/s 80bps in the previous quarter; which is slight disappointing, however, the contingent stands adequate.

In 2QFY22, the provisioning expenses were lower sequentially at ₹39.2bn (v/s ₹47bn 1QFY22), which includes contingent provision buildup of ₹12bn. At the same time core fee and commission income increased by 18% QoQ. Thus, the bank has reported sequential increase in PAT by 14.3% and ROA/ROE of 2%/16.2% v/s 1.8%/14.1% in the previous quarter. However, superior underwriting practices, higher liquidity, adequate coverage and strong capital position makes the bank resilient and thus, we recommend BUY.

Gazing the core:

Credit quality improved; Restructuring is slightly disappointing: The absolute GNPA amount decreased by 4.4% sequentially to 1.35% of gross loan. Moreover, the restructuring under RBI resolution framework for covid-19 was approximately 170bps of advances (mainly in unsecured lending) against 80bps sequentially. It was slightly disappointing, however, strong contingent buffer shall neutralize the stress. On-time recovery (OTR) has improved to pre-covid levels at 97.5%, leading to lower slippages. The bank expects a low relapse rate (10-20bps of overall loans) from restructuring book. In 2QFY22, the bank has reported provisioning expenses of ₹39.2bn (including a buildup of ~₹12bn in contingent provision) down by 19% sequentially.

The higher contingent provision was because of anticipated stress from restructuring. PCR (calculated) grew to 71% from 68% in the previous quarter and it is in line with the historical trend. Along with cumulative provision of ~₹116bn, the bank also held floating provisions of ₹14.5bn and contingent provision of ₹77bn. Total Provision (Specific + Floating + Contingent + General) stood at 163% of GNPLs. The additional (covid + contingent) provision stood 1.26% of the book; grew 10bps sequentially.

Demand resolution improving; Digital journey fruitful:

During the quarter, the bounce rate is better than pre-covid level. ECLGS has helped reduce stress in MSME portfolio. Under ECLGS: 1.0, the bank has disbursed ~₹221bn across 119 thousand customers. Under ECLGS: 2.0 & 3.0, the bank’s participation was very less. In 2QFY22, the bank’s total branches stood at 5686 with 16642 ATMs & CDMs. UPI transactions, per value, has grown by 11%. P2P market share is at 10% and P2M market share is at 14%.

Card spend is 1.4x than the industry level. Adequate liquidity & Capital position:

The Bank carries sufficient liquidity with LCR stood at 123% in 2QFY22 against the regulatory requirement of 100%. The bank has maintained higher liquidity by virtue of decent deposit traction of 14.4% YoY and 4.5% QoQ. Moreover, higher CASA ratio (46.8% v/s 45.5% in the previous quarter) has translated in stable NIMs at 4.1%. Furthermore, the bank has strong capital position with Tier 1 of 18.7%.

Outlook and Valuation

HDFC Bank is expected to outperform the sector led by 1) healthy growth in operating income, 2) much higher provision then regulatory requirement in the balance sheet, 3) strong capital cushion of 17.9% at CET1 level and d) best in class underwriting and risk management practices. Given these strengths we expect HDFC Bank to remain one of the best among all the lending business. Thus, we continue to maintain BUY rating on the bank with revised target price of ₹2,058 (based on 4.2xFY23E Price to Adjusted Book Value).

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