HDFC Bank Q3FY21 Results - Concall Highlights and Views of YES SECURITIES

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

Multiple positives to take home

Multiple positives to pay heed to viz. a) loan growth momentum near normalized (across products), b) persistent substantial SA accretion aiding margins, c) fee trajectory back on track, d) core PPOP margin at multi-quarter high, e) lower-than-expected Covid stress (restructuring + proforma NPL) and f) lower credit cost run-rate than H1 FY21. Management is confident of sustaining growth (gradual market share gains) in retail, SME and Corp. segments and the risk profile of the new acquisitions across products is significantly better than the industry; pointing towards robust asset quality performance even in future. For the bank, the impact of Covid is behind, there is no new risk on the anvil and the balance sheet is stronger than ever with high capitalization (16.8% Tier-1 ratio) and provisioning buffer (90-100 bps of advances). The only monitorable remains the performance of HDB Financial which reported a small loss in the quarter due to spike in delinquencies (GNPL at 5.9%) and upfront provisions taken.

Upgrading earnings estimates again, now building 20% CAGR over FY20-23 - Valuation will get a lift

We are revising FY21/22/23 earnings estimates by 10%/3%/4% respectively and ABV estimates by 1.5-2% for these years, after having upgraded these numbers even towards the end of November in our collection feedback report. Earnings revisions thus could be sharper for the consensus. The stand-alone bank trades at 2.8x P/ABV and 16x P/E on FY23 estimates, adjusted for the valuation of its holdings in HDB Financial and HDFC Securities. Valuation is palatable and can move higher as it stands just above the long-term mean on 1-yr rolling fwd. basis and the probability of 20% earnings CAGR over FY20-23 has improved substantially. Also, the bank trades at significant discount to KMB despite better growth delivery.

HDFC Bank Q3 FY21 Call Highlights

Retails Assets Growth

- Strong growth momentum in Q3 FY21 with disbursements up 40% qoq - bank confident of traction continuing in Q4
- Q3 FY21 disbursements surpassed pre-Covid run-rate, and in December it was 20% higher yoy
- HL, Auto, Gold Loan, LAP, Unsecured and WC (Retail SME) driving growth
- Card sales was up 20%+ qoq and spends were up even more
- In auto and 2w, the bank is ahead of pre-Covid traction - PL is on same level - BL and others lagging as market not conducive and bank's caution
- CB sores of new customers acquisition across all products substantially better than the industry - about 50% better in unsecured products, 30% better in secured products and 2x better in CV financing
- MFI biz collection stabilizing and normal disbursements will begin from January
- For unsecured products, the bank has increased sourcing from internal customers

Wholesale Portfolio Growth

- Growth coming from high-rated public and private sector enterprises
- Gross incremental portfolio rating at 4.37 - corresponds to AA and AAA external rating
- Around 68% of portfolio below internal rating of 5 - average rating steady at 4.4
- Unsecured book better rated than secured portfolio - weighted average rating of 3.4
- Collection were higher 11% yoy - December collections higher 20%+ yoy
- Wholesale SME OD utilization has normalized
- No unusual restructuring and NPL trend in Corporate

SME Portfolio Trends

- Cash flows into customer's accounts has been improving from June - now stands higher 15% compared to February (pre-Covid)
- 30+ dpd improving MoM since September - FITL at 0.5-0.7% of the portfolio
- Stress test results - initial estimate of 9% in June, then 3% in Sept and now further lowered to 2.3%
- Utilization of loan facilities holding steady in early 70%
- Delinquency trend qoq has shown improvement across all buckets - good resolutions and recoveries witnessed
- Collateral coverage at 85%
- Behavioral score of the portfolio gravitating towards the pre-Covid days
- Bank has disbursed Rs220bn under ECLGS 1.0

Asset Quality - Collection, Restructuring/NPLs and Credit Cost

- Demand resolution was 95% in September, which moved to 97% in December - 98% was pre-Covid level, and this will be attained soon
- Cheque bounce trends improving MoM since September - now closer to pre-Covid level - improvement seen across products
- Collection resolution also improving - bounce resolution better than pre-Covid times - in older buckets, it yet to catch-up
- Recoveries in w/off cases 15% better than pre-Covid times
- Restructured assets at 0.5% of book - majority of it is Retail - will not see any meaningful addition in Q4
- Restructuring was done based on customers request and not based on bank's view of these loans - the latter is reflected in proforma NPL reported - thus some restructured assets could be a part of it

NIMs, Fees and Cost/Income

- Cost/income to revert to 38-39% in short term - will come down though over the longer term
- Interest reversals on proforma NPLs reflected in P&L

HDB Financial Services

- Disbursements were higher 20% qoq
- Provisions at Rs8.2bn which is mainly GP - no benefits of standstill taken in P&L
- Gross and Net NPLs at 2.7% and 1.7% respectively on reported basis - on proforma basis, the GNPL is at 5.9% v/s 2.9% as of last year
- Strong capital adequacy at 19.5%

Shares of HDFC Bank Ltd was last trading in BSE at Rs.1467.95 as compared to the previous close of Rs. 1468.05. The total number of shares traded during the day was 236472 in over 8195 trades.

The stock hit an intraday high of Rs. 1474 and intraday low of 1445.5. The net turnover during the day was Rs. 344803524.

Source : Equity Bulls

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