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HDFC Bank Strong Fundamentals Stay Amidst Uncertainty Stock Update Stock

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HDFC Bank Strong Fundamentals Stay Amidst Uncertainty Stock Update Stock HDFC Bank Strong Fundamentals stay amidst uncertainty Stock Update Stock HDFC Bank posted a decent earnings show for Q4FY2020 with strong Sector: Banks & Finance operational growth (healthy advances growth) and fall in GNPAs. For the Result Update quarter, NII rose by 29.2% y-o-y driven by a 21.3% growth in advances and deposits growth of 24.3% y-o-y. Net interest margin (NIM) for the quarter was up by 10 bps q-o-q to 4.3% helped by lower cost of funds and recoveries. Change Total provisions for Q4 included credit reserves (contingent provision for Reco: Buy COVID-19) of Rs. 1,550 crore. The bank holds floating provisions of Rs 1,451 crore and contingent provisions of Rs. 2,996 crore (total 45 bps of advances) CMP: Rs. 910 and the management indicated that the provisions held were sufficient in their assessment for COVID-19 related stress. The core credit cost ratio at 0.77% (was Price Target: Rs. 1,400 â 0.92% in Q3 FY20; 0.69% in Q4 FY19) was helped by regulatory forbearance. Asset quality wise, the bank is fairly well-placed with average rating of its á Upgrade No change â Downgrade wholesale loans above investment grade. As per the bank’s stress assessment, while ~9% of their SME loans may be vulnerable, it may result in a ~0.5% higher than usual delinquency run-rate, which appears manageable. Company details Operating performance was in line with estimates, but higher provision cost Market cap: Rs. 4,99,198 cr resulted in a PAT growth of 17.7% (as against our estimates of a 22% y-o-y growth). The bank has finalised three candidates for the position of the MD & 52-week high/low: Rs. 1304/739 CEO (to succeed Mr Aditya Puri who retires in October 2020). Going forward, we expect segments such as agri, rural and SME and some segments of NSE volume: (No of unsecured loans to face challenges on the credit cost front. Moreover, we 78.9 lakh expect slower credit growth for H1FY21E may also impact profitability due to shares) lower fee income, etc. We believe that the medium term may be uncertain for the banking sector, including HDFC Bank as implications of the COVID-19 are BSE code: 500180 still in progress. However, HDFC Bank’s business quality and franchise strength will help it tide over near-term challenges. We have fine-tuned our estimates NSE code: HDFCBANK and target multiples for the bank factoring in lower growth and the economic impact of the lockdown. We retain our Buy rating on the stock with revised price Sharekhan code: HDFCBANK target (PT) of Rs. 1,400. Key positives Free float: (No of 431.9 cr shares) Net interest margin (NIM) rose by 10 bps q-o-q to 4.3% helped by a lower cost of funds and recoveries. Healthy fee income growth of 27.5% y-o-y despite the lockdown impacted Shareholding (%) volumes and collection. The lockdown resulted in /other income coming lower by Rs 450 crore. Promoters 26.1 Key negatives Slippage ratio would have been higher by 40 bps if the moratorium due to FII 36.7 COVID-19 impact was not taken into consideration Our Call DII 21.8 Valuation: HDFC Bank currently trades at a reasonable 2.6x FY2021E and 2.3x its FY2022E book value per share (BVPS). Due to market weakness, the price has Others 15.4 corrected significantly and at present, the stock is available at below its long term average 1-yr forward PBV multiple of 3.7x. HDFC Bank consistency is buoyed by its strong underwriting capability and risk measurement standards and thus we expect it to recover faster once business environment normalises. We opine that Price chart any further weakness in the stock could be an opportunity for investors to add it 1400 to their long-term portfolio. We have fine-tuned our estimates and target multiples for the bank, factoring in lower growth and the economic impact of the lockdown. 1200 We retain our Buy rating on the stock with revised price target (PT) of Rs. 1,400. 1000 Key Risks 800 A rise in NPAs in unsecured and other retail segments can pose risks to profitability. 600 19 19 20 19 - - - - Valuation Rs cr Apr Apr Dec Aug Particulars FY18 FY19 FY20 FY21E FY22E Net interest income 40,095 48,243 56,186 69,271 80,787 Price performance Net profit 17,487 21,070 26,257 30,955 40,245 (%) 1m 3m 6m 12m EPS (Rs) 33.7 38.7 48.0 56.6 73.6 PE (x) 27.0 23.5 19.0 16.1 12.4 Absolute 1.6 -27.5 -26.5 -19.7 Book value (Rs/share) 204.8 272.3 310.9 348.4 403.6 P/BV (x) 4.4 3.3 2.9 2.6 2.3 Relative to -7.8 -2.8 -6.9 -0.4 RoE (%) 17.9 16.5 16.4 17.1 19.5 Sensex RoA (%) 1.8 1.8 1.9 1.9 2.1 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates April 17, 2020 2 Stock Update Stock Concall Key Highlights Operational comments due to lockdown: Most employees are working from home. New paradigm in operational parameters, two-factor authentication, etc. Around 95% of branches and ATMs are operational too. While productivity has improved in the wholesale segment, other segments are still evolving. The client engagement is maintained at same levels. The wholesale business is now completely working on a work-from-home (WFH) model and is able to maintain TAT in disbursal and client management. Anywhere working model developed: Capability development model, which Includes customer safety is making 200,000 customer engagements daily. Balance Sheet strength: HDFC Bank is well placed to gain market share. Its Liquidity Coverage Ratio (LCR) indicates strong liquidity and the bank focuses on deposits and bringing in new customers. Average credit-deposit (C/D) ratio is at 78%, while the CRAR is at 18.5% and CET-1 at 16.4% (over the 7.5% regulatory minimum). Maintains Rs 4447 crore of Provision buffer. Have Rs. 50,000 crore is the surplus liquidity, and deposit growth are outpacing the advances growth Steps in tightening of credit which is why seeing a higher rejection ratio Net Interest Margins: NIMs stable at 4.1-4.5% range, now at 4.3%. Building on deposit to maintain liquidity. Excess liquidity impacts current NIMs by 10 bps, offset by some trading income. Fee income impact: The lockdown saw impact on loan origination, third-party products sales, collections etc, waiving off certain fees all of which impacted the fee income growth during Q4FY2020. This should normalise in due time. Of the fees income, 93% of fee income arose from the retail segment, while the rest was from the wholesale segment. Credit card spends dropped by 35% in the second half of Q4. Network additions: Added 313/74 banking outlets during FY20/Q4. Around 250 branches are getting ready to be functional shortly. Credit cost: Annualized core slippage ratio has been lower by 40 bps, GNPA by 10 bps NNPA by 6 bps due to the moratorium benefit. Specific limited liability provision (LLP) Rs. 1,918 crore in Q4FY20 as against Rs1,430 crore in Q4FY19. PCR is at 72%. There are no technical write-offs. Core credit cost, specific loan loss was 77 bps (92 bps in Q3 FY20, 69 BOPS in Q4 FY19). Total credit cost for quarter was 151 bps ( 129 bps for Q3 FY20, 92 bps for Q4 FY19) HDFC Bank has a great distribution network, de-risked the balance sheet. S&P has re-affirmed the bank’s rating, two notches above Sovereign grade. The bank is not chasing growth as it has a great distribution platform for SME, wholesale, retail, segments, etc. Large part of growth come from wholesale, retail has been muted and would be tepid in the coming quarters. Corp baking: Bank has refocused on business have strong liquidity (government business, access to strong parents, etc). Over 92% of incremental loans are to clients from top 30% of the rating scale, rest are to clients who are lower rated but have a higher-rated parent backing, etc. Over 80% disbursement was for assets with <1yr maturity. SME loans have granularity (2/3rd of SME loans have a ticket size of less than Rs. 1 crore), also Geography spread, strong own contribution by promoters are comfort factors. Wholesale may see market share gains: The bank continues to benefit from flight to safety, so growth will better industry. The bank expects several large corporates to become clients, as they will likely choose to conserve cash and approach HDFC Bank for funding. Corporate loans form 75% of book to clients with an ‘AA’ and above rating. April 17, 2020 3 Stock Update Stock Retail portfolio: o Delinquency levels will be 40-60% of credit risk below market. Even in the low CIBIL band, the bank has 30% less delinquency compared to market. o Even self-employed borrowers are of better with lower risk as compared to the market. Sourced from Bureaus form very a small proportion of the loan disbursed. o Lending is based on score card system, Geography spread, etc which provides a “Composite score called “P27” of the borrower. This has performed 2.5-3x better than other tools for screening in the market and has been in use for well over a year. o 10-second loans: The bank is still extending these loans.
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