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Strong Q4 despite higher provisioning

HDFC Bank was incorporated in August 1994. It provides corporate banking and custodial services and is also involved in treasury and capital markets. In addition, it offers project advisory services and capital market products, including GDR and currency bonds.

* In Q4FY21, the bank saw a net interest income (NII) of Rs. 18,524cr (+13.9% YoY) as the core Net interest margin (NIM) stood at 4.2%.

* GNPA ratio improved 6bps QoQ to 1.32% and NNPA remained flat as compared to the previous quarter(pro-forma) at 0.40% in Q4FY21.

* The bank’s proposal to raise capital (~Rs. 50,000cr) will provide the necessary cushion to protect the balance sheet in the coming quarters.

* With healthy revenue growth and stable asset quality, we upgrade rating to BUY and value the stock at 3.4x FY23E BVPS with a revised target price of Rs. 1,653.

Operating metrics remain steady

Total interest income (comprising of Interest income, Income on investments, Interest on Cash balance with RBI & Others) inched up by 2.6% YoY to Rs. 32,607cr in Q4FY21. Interest expense declined 9.3% YoY and cost to income ratio improved to 37.2% (down 24bps YoY but up 11bps on QoQ basis) which can be attributed to lower spend levels in promotional activities, discretionary spends and investments. As a result, NII rose 13.9% YoY to Rs. 18,524cr aided by 14.0% YoY growth in advances, despite stable NIM QoQ at 4.2%. Non-interest income witnessed robust growth of 27.9% YoY to Rs. 8,303cr in Q4FY21, primarily driven by higher fee and commission income. Preprovisioning profit registered a healthy growth of 22.4% YoY at Rs. 17,018cr, only partly offset by higher operating expenses (+10.7% YoY). The bank increased its provisioning by 36.4% YoY to Rs. 5,753cr resulting in PAT ending at Rs. 8,444cr (+15.7% YoY).

Marginal improvement in asset quality

CASA ratio stood at 46.1% (+310bps QoQ) with total deposits of Rs. 1,335,060cr (+16.3% YoY). Total advances grew 14.0% YoY to Rs. 1,132,837cr as domestic advances (~97% of total loan portfolio) rose 14.1% YoY. GNPA/NNPA stood at 1.32%/0.40% [vs. 1.38%/0.40% in Q3FY21 (pro-forma)]. With continued focus on protecting the quality of deposits, the bank has maintained a healthy liquidity coverage ratio of 138% with capital adequacy ratio at 18.8% (vs. 18.5% in Q4FY20).

Key concall highlights

* Overall provisions stood at Rs. 4,694cr, inclusive of contingent provisions made to the tune of Rs. 1,300cr, of which Rs. 500cr were set aside to cover the SC directed interest refund to borrowers for the March-August 2020 period.

* GNPA ratio excluding NPAs in agri segment remained flat at 1.2% on QoQ basis.

* During the year, the bank has added 354 branches and 1,100 ATMs. As of 31st March 2021, bank’s total branch count stood at 5,608 along with 16,087 ATMs.

Outlook & valuation

Bank has seen signs of recovery in the retail segments with steady growth in both advances and deposits. Stable asset quality is further backed by sufficient provisioning built up over the prior quarters for contingent needs. With healthy revenue growth and sustainable margins, we upgrade our rating to BUY and value the stock at 3.4x FY23E BVPS with a revised target price of Rs. 1,653.

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