HDFC Bank Rating ‘Buy’; a healthy performance in the quarter

HDFCB’s Q2FY21 profit of Rs 75 bn, up 18% y-o-y, was healthy even if a tad below estimate. Key positive was collections of 97% of Sept-dues and indicates that restructuring will be just 1-2% of loans; contingent provision at 0.6% of loans. SC verdict held back downgrades; adj. NPL at 1.4% was steady. Topline was ahead of estimate & pick-up in retail-lending will aid this further. HDB-FS’ 94% y-o-y fall in H1 profit was disappointing. We raise bank’s estimates; Buy stays.

Collections doing well: The key positive in HDFCB’s results was that overall collections have reached 97% of dues and even for moratorium loans (9% in Q1) it was at 85%. This implies that overdue loans are around 1.5% and hence the level of restructuring might be 1-2% of loans only. At the same time, we note that government-backed ECLGS scheme would have helped address stress at SME level.

Reported gross NPL ratios fell to 1.1% as SC’s order prevented downgrades, but proforma levels were around 1.4% (vs. 1.4% in Q1) and bank has made contingent provisions (total at 0.6% of loans; after proforma NPLs). With high base of tax rate behind, bank may taper off contingent provisioning from Q3.

Retail momentum pick-up will help topline: Topline growth was better than expected with 17% rise in NII and flattish fee growth. This was led by 21% rise in assets (NIMs fell 10bps y-o-y due to higher liquidity/rise in share of corporate loans) and pick-up in lending/credit card transactions/distribution fees. As highlighted earlier, private banks have defended lending spreads through fall in funding costs and back-book repricing. Loan growth of 16% was led by corporate loans (up 27%) that offset a mere 5% rise in retail loans.

Management highlighted uptick in most retail segments and is hoping for a good festive demand; it’s still cautious in select unsecured/SME segments. We are most encouraged to see 27% y-o-y growth in Casa deposits and lower funding cost has been key enabler for market share gain in corporate loans. Bank has done well in customer acquisition and has also started adding staff/branches.

Pressure at HDB-FS: During H1, banks’ retail lending subsidiary reported 94% fall in profits due to sharp rise in credit costs. While mgmt stated it has been conservative in provisioning, it also reflects that stress-levels may be non-linear across segments. Hence, lenders focusing on Tier-III/below clients may take longer to get back on normalised growth/profitability. Broking subsidiary reported 84% y-o-y rise in H1 profit, reflecting high retail-trading activity.

Maintain Buy: We raise bank’s earnings to factor in better asset quality & recovery in retail demand. We maintain Buy & roll-forward TP to Rs 1,450, with value of bank at 3.4x Sep-22 adjusted PB. We also initiate on HDFCB’s ADR with PT of $68, based on fx conversion of local PT and 15% average premium.