Brokerages On HDFC Bank: Almost Pandemic-Proof But Growth Lags

HDFC Bank Ltd.’s steady growth in profit and stable asset quality continue to reflect the resilience of its book, said brokerages after the lender’s fourth-quarter earnings. But the Reserve Bank of India’s curbs due to technology outages remain an overhang.

The lender reported a net profit of Rs 8,186 crore for the January-March quarter, up 18.17% year-on-year. Its net interest income, or core income, rose 12.6% from a year ago to Rs 17,120 crore, the country’s largest private sector lender said in a statement on the exchanges. Other income rose 26% over a year ago to Rs 7,594 crore.

The bank’s gross non-performing asset ratio stood at 1.32% during the period compared with 1.38% in the October-December quarter. The net NPA ratio remained unchanged at 0.4% at the end of the financial year. It restructured loans worth Rs 6,508.37 crore, which included Rs 5,456 crore in retail loans, according to the disclosures.

Here’s what brokerages have to say...

CLSA

• The results were strong. Pro-forma slippage of just Rs 4,700 crore (1.7% of loans) and a credit cost of 110 basis points over the past five quarters (excluding contingency provisioning), indicates its portfolio has remained pandemic-proof.
• The bank delivered very strong asset quality during the first wave but growth outcomes in the near term will need to be watched given corporate deleveraging and slower unsecured growth.
• Retail disbursement momentum was strong till March 2021 (+20% year-on-year) and impact from the second wave of Covid-19 should be manageable given regional/smaller lockdowns.
• Limited visibility on the lifting of the RBI ban can be a near-term constraint on multiples.
• Maintains target price at Rs 1,825 based on a 3.5x FY23 book and 22x FY23 earnings and reiterates ‘buy’ rating on HDFC Bank, which is trading below long-term average multiples.

Kotak Institutional Equities

• Asset quality ratios are back to pre-Covid levels and the bank has another 50 basis points of reserves for slippages this year. A fresh Covid wave can potentially disrupt the recovery of businesses hurting some sections of the loan book.
• Retail loan growth would be a key variable to watch given that the recent surge in Covid could delay this normalisation.
• Growth is a challenge, especially with the Covid resurgence. This remains a focus area as retail is a highly profitable business for the bank. This would impact revenue growth.
• The bank has indicated that it is working with various agencies to address recent business disruptions for which the RBI has asked the bank to stop the origination of certain products like credit cards. “Overall, we have not seen any business impact as the liability franchise is holding up well. The bank is working with its existing credit card base to generate business currently, but this issue would have an impact in the medium term if not resolved soon.”
• Maintains ‘add’ rating with ‘fair value’ at Rs 1,650.
• The near-term outlook for large banks remains quite strong. “The impact of Covid has been negligible and hence, we expect the bank to report best-in-class loan growth and return ratios.”

ICICI Securities

• HDFC Bank, despite its resilient asset quality performance in FY21 and existing contingency buffer, built further buffer in Q4 FY21. Management highlighted that it is precautionary in nature rather than anticipatory (of stress outlook) due to Covid second wave.
• With the overall economy on a revival path and normalising, retail unsecured lending is likely to resume its growth trajectory after the slight pause in FY21. Bank highlighted that retail assets momentum is getting back to pre-Covid levels as the resilience of the middle class is coming back.
• Key risks include a recent technology outage, which further defers visibility on the credit card rollout ban. The second wave of Covid, if prolonged, can weigh on credit cost or growth.
• Maintains ‘buy’ with a revised target price of Rs 1,818 apiece.