CMP : Rs 1203
TARGET : Rs 1425
DURATION : 18 Months
HDFC Bank Ltd., incorporated in the year 1994, is a banking company (having a market cap of Rs 684473.03 Crore).
HDFC Bank Ltd. key Products/Revenue Segments include Interest & Discount on Advances & Bills which contributed Rs 91787.88 Crore to Sales Value (79.94 % of Total Sales), Income From Investment which contributed Rs 20633.32 Crore to Sales Value (17.97 % of Total Sales), Interest On Balances with RBI and Other Inter-Bank Funds which contributed Rs 1828.93 Crore to Sales Value (1.59 % of Total Sales) and Interest which contributed Rs 562.52 Crore to Sales Value (0.48 % of Total Sales)for the year ending 31-Mar-2020.
The Bank has reported a Gross Non Performing Assets (Gross NPAs) of Rs .00 Crore (.00 % of total assets) and Net Non Performing Assets (Net NPAs) of Rs .00 Crore (.00% of total assets).
Price Analysis:
HDFC Bank reported a strong trend on Asset quality and operating performance in 2QFY21. The Bank used analytical model (Pro-forma basis) to declare NPA numbers. The reported GNPA ratio stood at 1.08% (against 1.38% under pro-forma basis and 1.36% in the previous quarter).
However, moratorium (9% declared earlier) lifted and NPA recognition held standstill, the bank witnessed negligible slippages. During the quarter it reported sequentially higher provisioning expenses (₹37.0bn v/s ₹38.9bn in 1QFY21).
At the same time core fee and commission income increased by 77% sequentially led by sharp uptick in retail loan origination along with, lower third-party product distribution income and lower forex income. Thus, the bank has reported sequential increase in PAT by 12.8% and ROA/ROE of 1.92%/16.15% v/s 1.76%/14.97% in the previous quarter.
Furthermore, best-in-class franchise, higher liquidity, marginal stress, adequate coverage and strong capital position makes the bank resilient and we recommend BUY.
Loan growth pick-up led by wholesale book:
Overall loan growth was 16% YoY and 3.5% QoQ driven by wholesale book which grew by 5% sequentially. The robust growth has come from many public sector corporations, MNCs and private corporations having higher liquidity. The internal risk assessments of wholesale book is time tested and remain fruitful for the bank.
Adequate coverage and Reported loan moratorium is lowest among large banks:
The last reported moratorium value (9% of book) stood lowest across the banking sector, the collection efficiencies has also improved further. As of 2QFY21, the unsecured retail book (PL & CC) contributes 15.3% of the total advances v/s 17% in previous quarter, 80% of unsecured book is accounted to salaried employees and rest 20% to the self-employed.
However, PLs are entirely towards salaried class. ~70% of the salaried base is towards the employee of big MNCs and AAA rated corporations. We see no impending major threat but remain cautious about the unsecured retail & business banking portfolio (6% of the book). We expect a delinquency of 10-30bps higher than the average run rate. However, the COVID provisioning (1.3% of loan book) would be adequate to absorb the stress.
Adequate Liquidity & Capital Position:
The Bank carries sufficient liquidity with LCR at 153% in 2QFY21 against the regulatory requirement of 80% announced by RBI on 17th April 2020. The bank has maintained a higher liquidity by virtue of robust deposit traction of 20.3% YoY and 3.4% QoQ.
Outlook and Valuation:
HDFC Bank is expected to weather the current storm 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% 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 target price of ₹1425 (based on 3.5xFY22 Price to Adjusted Book Value).
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