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The bank’s rating is “Buy” HDFC; Covid Wave Impacts Operating Performance

A man walks to a branch of HDFC Bank Ltd. in Mumbai, India on Saturday 21 April 2018. HDFC is expected to report fourth quarter results on 30 April. Photographer: Diraj Singh / Bloomberg

In the first quarter of fiscal year 22, HDFCB’s profit of Rs 77 billion increased 16% year-on-year, slightly below estimates, mainly due to higher bad debt loans and contingent provision of Rs 6 billion. As expected, slippage was higher and amounted to 2.9% of last year’s loans (YoY), but we expect them to decrease from the second quarter. The main highlight was management commentary that July lending and repayment trends are close to normal / pre-Covid levels and will be reflected in Q2 results. There is no updated RBI / card release information. Buy remains.

Q1 operating results were impacted by wave 2: During the first quarter, business was impacted by bottlenecks (external and internal due to intense Covid cases), which impacted the growth of personal loans (fixed structure) and commissions (decrease 23% YoY qoq) and led to an increase in slippage up to 2.9% of loans last year (up 60% qoq). This constrained revenue growth and increased borrowing costs, which was partially offset by lower operating costs. In terms of asset quality, gross NPLs fell from 1.3% of loans to 1.5% and the bank sold Rs 18bn (16bp of ARC loans). Non-performing loan coverage dropped slightly to 68% and the bank increased its reserve reserves from Rs 6-7 billion to 0.7% of loans. Restructured loans rose from 0.6% of loans in March to 0.8% now, and more may appear in the second quarter. Key indicators for the first quarter were 14% yoy loan growth, 9% increase in net interest rate, 4.1% decrease in net interest margin by 20 basis points yoy, 74% yoy increase in fees, op … profit (excluding cash increased by 24%) and net profit by 16% compared to the same period last year.

Encouraging upward trends: Management confirmed that while Wave 2 had a deeper impact on life, its impact on business was much smaller. It was nice to know that business activity has improved since June. Mgmt reported that the trend in collection efficiency (based on bounce rate) returned to levels on March 21 in July and was only 100 basis points below pre-Covid levels. The demand for loans to individuals, especially in such segments as housing / LAP, loans to individuals, also improved significantly since July (payments in the first quarter decreased by 30% qoq). Even the bank’s SME portfolio has had only a limited impact on disbursements, and their cash flows are close to normal. We reported such improvements in our recent memorandum and expect them to be a favorable wind for large banks / retail NBFCs.

Affiliated companies: The bank’s retail lending subsidiary (HDB-FS) reported a 54% decrease in profit qoq due to weaker lending activity and higher borrowing costs. On the other hand, HDFC Securities posted higher retail activity and profit growth of 95% yoy and 3% qoq.

Save purchase: We stick to our estimates and expect earnings to grow by 18% in fiscal years 21-24. The clarity of RBI technical issues / credit card restrictions should be a key factor in the revaluation, but so far MGMT has not received a response from RBI. We maintain Buy with a target price of Rs 1,900 and a bank value of 3.6x PB adjusted from 23 Jun-23p. Our target price for ADR is $ 93 based on our local currency target price and 22% premium.

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