HDFC Bank Q2FY21 Results - Retain BUY with PT Rs1500 - Call Highlights & YES SECURITIES View

Mr. Rajiv Mehta, Lead Analyst - Institutional Equities, YES SECURITIES

Call Highlights & Management Commentary

Retail Assets growth

- Recent traction has been positive - July to Sept saw double-digit volume improvement month-on-month

- Disbursals in Q2 at 80-85% of last year level - recent month was 90% of pre-covid run-rate - bank sees quarter-on-quarter growth from hereon

- Recent bureau trends indicating credit enquiry levels near pre-covid times - particularly in products like auto, 2w and home loans

- Demand resurgence for secured and unsecured products in Rural and semi-urban areas

- Unsecured loans traction should reach pre-covid level by October - robust traction experienced in gold loans - volumes in LAP and retail WC loans already at pre-Covid level - MFI will see full recovery in next 90 days

- Massive increase in 2w sales driven by rural demand - strong demand for tractor loans due to two consecutive good monsoon - Agri portfolio doing well due to bumper rabi crop and strong kharif sowing

- From on-ground engagement sensing capacity utilization improving for the Self-employed/Business segment in various business locations across India

- In personal loans, the bank would be digitizing open market customer acquisition in the coming months

- Step-up in cards business both in terms of spends and acquisition - hitting 97% of Sept 2019 run-rate - Q3 will be even better on yoy basis

- Growth across many retail products also driven by credit policy normalization after having tightened it significantly after Covid outbreak - the bank has reverted to pre-covid credit policies in Auto and 2w loans - remains conservative on customers selection in PL

- Festive treats (45-day program) will lift business traction in Q3 - the bank has aggregated offers from more vendors and enhanced reach/distribution

- Job loss assessment based on internal salary accounts data - large companies have not seen any significant reduction in their payrolls

Collection performance of Retail portfolio

- Cheque Bounce in September was lower than expectation - should be back to pre-covid levels soon

- Sept demand resolution was 95% - October could be 97% - pre-covid was 99%, so still a 2% gap - will take a few quarters to reach normal level

- Non-morat portfolio collection efficiency was 99% in Sept

- Recoveries have been a pleasant surprise and were higher than pre-covid levels

Corp Banking

- Growth in corporate portfolio continued despite churning by a couple of large accounts

- Remain optimistic about cyclical economic recovery - near-term driver would be festive season spending

- Q2 collections were higher yoy and jumped 41% qoq - it is improving month by month - Sept collections higher 14% yoy

- Normalization in NTB acquisition and disbursement in wholesale SME segment

- Growth in customers Assets (Adv + Inv) came from top half of the 10-point internal rating scale

- Asset tenor remains below 1-year

- Wholesale book NIM improved both qoq and yoy - not compromising margins for growth

- Quality of the book remains intact - delivering growth with no dilution in credit standards - incremental portfolio in Q2 FY21 came at 4.4 avg. internal rating (scale of 1-10 with 1 the safest), corresponding to AA external rating, which is same as for the stock for the last several quarters

- Unsecured exposure rated at 3.5 avg. on internal rating scale - so very safe and much lower risk category than aggregate secured

SME portfolio

- Vulnerable portfolio assessment down from initial 9-10% to 4-5% in Q1 and now to around 3% (though has good probability of recovery)

- SME customers witnessing improvement in capacity utilization and CF generation - bank is witnessing limit utilization creeping up

NIM & Capital

- NIM decline in Q2 was largely driven by increase BS liquidity

- Historically have operated in 4-4.5% NIM range based on prudent ALM management. Would continue this range for coming months.

- Internal generation of capital adequate to manage growth and asset quality in the short term - net capital generated in Q2 was 22 bps and 56 bps in H1 FY21 - generated 140 bps in FY20

HDB Financial continues to reel under pressure

- Loan growth decelerates to 2% yoy (book at Rs570bn)

- NII declines 5% yoy with liquidity buffer raised substantially

- Profits slumps to Rs300mn (Rs2.1bn in Q2 FY20) on higher provisioning

- Gross NPLs rise to 4.3% - Net NPLs elevated at 3.1% on lower coverage

Bank performing ahead of expectations; but HDB Fin constricts any material price target upgrade

HDFC Bank, on stand-alone basis, delivered a stellar show with 6% core PPOP beat on our estimates, largely driven by robust recovery in core fee income. The bank was prudent to provide for impending slippages (from SC order + early recognition) and augment its Covid shield (now at 65 bps of Adv.). We expect loan growth to not decelerate substantially in H2 FY21, aided by festive treats program and acceleration in economic activity. Similarly, NIM seems to have made a trough and should recover gradually from hereon. Basis encouraging collection efficiency trends and management's expectation of full normalization in a few months, the credit cost may not spike as feared earlier.

Given encouraging business trends and management commentary, bank's valuation should mean revert over the medium term (current 1-yr rolling P/ABV at 3.2x v/s avg. 3.5x since Apr 2015). Our 1-yr target undergoes a slight upgrade to Rs1500.

Shares of HDFC Bank Ltd was last trading in BSE at Rs.1199 as compared to the previous close of Rs. 1169.15. The total number of shares traded during the day was 401346 in over 12293 trades.

The stock hit an intraday high of Rs. 1203 and intraday low of 1172.95. The net turnover during the day was Rs. 478414159.

Source : Equity Bulls

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