HDFC Bank - Resilient, confident show despite challenges - ICICI Securities

HDFC Bank's Q1FY21 performance was commendable and the management's narrative was resilient, despite challenges reflected in: 1) Morat 2.0 portfolio at 9% (lowest heard till now), 2) confidence in credit reserves of ~55bps coupled with 76% NPL coverage being sufficient ceteris paribus, 3) digital initiatives, franchise strength and sharp focus helping capture opportunities without compromising quality. Market share gain (21% advance growth), steady NIMs at 4.3% (despite 70bps MCLR cut) and operating cost agility (down 24% YoY ex-employee cost) aided 7% core operating profit growth in the most disrupted quarter. Accelerated recognition of 30bps of advances and expedited provisioning (coverage up 4%) initiated on non-morat pool - though contingency buffer was limited at mere 10bps. Earnings growth of 20% was buoyed by treasury gains of Rs10.9bn. Performance reaffirms our stance that HDFC. Bank will lead responsibly and is best positioned to rebound quicker offsetting near-term weakness. Maintain BUY.

Morat 2.0 lowest in the industry; contingency buffer sufficient enough: The portfolio under morat 2.0 is merely 9% (70% customers are paying up and in unsecured loans, 98% morat customers have received salary credits and 97% customers are 0-dpd). On non-morat book, bank based on analytics has expedited NPL recognition (~30bps of advances) and has inched up coverage by 4 percentage points to 76%. Credit cost, including contingency buffer of Rs10bn, at 1.6% settled lower than our FY21 estimate of 2.3%. While the management sounded confident on credit cost having peaked, given the challenging macros, we remain wary of future stress and are building in elevated credit cost of 2%.

Credit growth led by wholesale advances: Advance growth of 21% was supported by 36% growth in wholesale advances (up 8% QoQ) - skewed towards highly rated corporates with access to liquidity and resistant businesses. Retail advances moderated more than anticipated (to 7% YoY, down 4% QoQ) - as fresh originations were down 76% - maximum in personal loans, down 87%. In business banking (now 100% self-funded vertical), it is pursuing granular opportunities using digital infrastructure towards entities improving cashflows moderated. Stress testing in SME banking suggests hardly 5% would face difficulty.

NIM contraction not playing out yet: Against our expectation of pressure on NIMs, given MCLR cut of 60bps since March '20, CD ratio declines to 84% and incremental growth towards yielding corporate advances, NIMs have held on this quarter as well at 4.3%. Undoubtedly, cut in deposit rates is aiding funding cost but pressure should be imminent in coming quarters, if not now.

Agility on cost efficiency and linkage to business volume was demonstrated: Operating expenses (ex-employee cost) were down 24% YoY/10% QoQ reflecting lower origination and business volume. This supported reduction in cost/income to 35% and as we had highlighted earlier, it proved it has enough buffer to curtail costs to cushion any earnings volatility during business slowdown. Capital efficiency too kicked in with <5% growth in RWA compared to >20% asset growth.

Shares of HDFC Bank Ltd was last trading in BSE at Rs.1099.15 as compared to the previous close of Rs. 1062.35. The total number of shares traded during the day was 1025663 in over 15563 trades.

The stock hit an intraday high of Rs. 1103.85 and intraday low of 1059. The net turnover during the day was Rs. 1104329581.

Source : Equity Bulls

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