HDFC Bank Stock Falls Most In Over Two Months On Asset Quality Drop, But Analysts Stay Bullish

A customer wearing a protective mask approaches a HDFC Bank Ltd. mobile ATM van in a residential neighborhood of Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

HDFC Bank Stock Falls Most In Over Two Months On Asset Quality Drop, But Analysts Stay Bullish

Shares of HDFC Bank Ltd. dropped the most in more than two months after the private lender’s asset quality worsened and provisions rose in the quarter ended June.

But a pick up in retail disbursements and growth in advances offset part of the concerns and prompted most analysts to maintain their bullish investment recommendation on the lender.

They also see lifting of the Reserve Bank of India’s ban on HDFC Bank from issuing fresh credit cards and implementing any new digital launches as a key catalyst for the stock in the near term.

The bank saw its net profit drop 5.6% sequentially on higher provisions. But the bottom line rose 16% over the year earlier.

Its gross non-performing assets rose 15 basis points sequentially to 1.47% of gross advances in the first quarter. That’s the highest in 46 quarters.

  • Its net NPA ratio was at 0.48% compared with 0.4% on March 31, 2021.

  • Total slippages in the quarter stood at Rs 7,300 crore, making up 2.5% of all loans.

The private lender’s commercial and rural banking loans were up 25% over the year earlier, while retail loans rose 9.3% in the quarter ended June. Within the retail segment, the credit card portfolio witnessed a 7% sequential decline after the RBI’s ban.

“The second wave of Covid-19 disrupted business activities for close to two-thirds of the quarter, leading to a decrease in efficiency in collection efforts and a higher level of provisions,” the bank said in a statement with its results.

Shares fell as much as 3.18%, the most since April 30, 2021, around 9:30 a.m. on Monday. Of the 50 analysts tracking the stock, 45 have a ‘buy’ rating, four suggest a ‘hold’ and one recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a upside of 15%.

Here's what brokerages made of HDFC Bank's Q1:

JPMorgan

  • Maintains ‘overweight’ stance, price target remains unchanged at Rs 1,800 apiece.

  • Asset quality ticked down at 2.7% with slippages and restructuring as the bank had eased down on collections in April and May to protect staff and customers following the second wave.

  • The bank should bounce back 2022 onwards as normalisation has started. Removal of the RBI’s digital ban should be a near-term catalyst as the bank has complied with 85% of the RBI’s directives/advisories.

  • Slippages rose on account of impact to collections, expect recovery in Q2 and Q3 on normalisation.

  • Cuts FY22/23 estimates by 2.7% and 1.3%, respectively.

CLSA

  • Maintain ‘buy’ rating, raises target price from Rs 1,825 to Rs 1,850, implying a potential upside of 22%.

  • HDFC Bank’s Q1 FY22 results were mixed with a manageable NPA increase but weak NII trends.

  • Slippage at Rs 7,300 crore was higher than the run-rate in the second half of FY21 but needs to be looked at in the context of no moratorium during the second wave and a low base for slippage in FY21.

  • NII growth of less than 10% year-on-year was weak and reflects a big loan mix shift to corporate over the past two years and the recent drop in its unsecured credit book, part of which should reverse as retail disbursements pick-up.

  • There was no update on the credit card ban which will remain a near-term overhang.

  • Asset quality performance, and more importantly commentary, was comforting and Indicates fast normalisation. HDFC Bank’s growth over the past two years has been driven by corporate loans and is now clearly showing in slower NII growth. While part of that will reverse, the credit card ban will delay a core pre-provision operating profit growth pick-up.

  • Cuts FY22 estimate by 5% and FY23/FY24 estimates by 2%.

Nirmal Bang

  • Maintains ‘buy’ rating with a target price of Rs 1,817, implying a potential upside of 19%.

  • Due to lockdowns and curtailed economic activity, third-party product sales were affected, which led to fee income dropping by 23% QoQ.

  • Incremental retail demand trend for the bank looks encouraging. Bureau data indicates that current demand for retail loans is at 80% of Q4FY21 level, an encouraging sign from an economic recovery standpoint.

  • Remains sanguine about the bank’s growth prospects and expects 16% growth over FY22-23. But thinks that the asset quality deterioration will be a key investor concern in the near term.

  • The current GNPA ratio is at a 46-quarter high (since 4QFY10) even though the bank’s overall asset quality still remains best-in-class.

  • Collections were affected in Q1FY22 due to the second Covid wave as employee safety was prioritised.

  • Collections/asset quality in the commercial transportation sector will need to be monitored due to elevated diesel prices, which have affected truckers’ profitability

  • Maintains a positive outlook on the bank. Lifting of the cards ban and a stronger recovery in asset quality can be near-term positive triggers for the stock.

Prabhudas Lilladher

  • Maintains ‘buy’ rating, raises target price to Rs 1,872 from Rs 1,735.

  • NII growth came in at flat, lowest rate in many years as strong lending to non-retail is reflecting in top line growth. Liquidity and lower retail traction — lower revolvers, spends & asset quality impact is playing out in operating performance.

  • Deployment of liquidity in non-retail and asset quality/lending conservatism in retail has changed mix rapidly. The brokerage expects the trend to continue for some time ahead as retail pickup will be slower than anticipated.

  • Bank is facing multiple challenges from tech outages led digital products ban to asset quality issues to asset mix changes leading to volatility in performance.

  • Yet, the brokerage remains convinced of the bank’s delivery on strong return on equity of 17-18% and remains best in class in the sector.

Motilal Oswal

  • Maintains ‘buy’ rating with a target price of Rs 1,800 apiece, implying an upside of 18%.

  • HDFC Bank continues to deliver better growth in advances, led by healthy trends in commercial and rural banking loans.

  • The bank’s operating performance remains broadly in line, though margin has been under pressure owing to continued embargoes.

  • Asset quality has deteriorated marginally due to disruptions in collections on account of the second Covid wave.

  • The bank continues to make additional contingent provisions to further strengthen its balance sheet.

  • Total restructured book increased to 0.8% of loans (versus 0.6% of loans). However, overall stress formation remains under control.

  • In the near term, lifting of the RBI restrictions remains a key monitorable.

Jefferies

  • Maintains ‘buy’ rating with a target price of Rs 1,900 apiece

  • As expected, slippages were higher at 2.9% of past year loans, but the research firm expects it to moderate from Q2.

  • Key positive was in management commentary that both lending and collection trends for July seem close to normal/pre-Covid levels and will reflect in performance from Q2.

  • During Q1, business was impacted by lockdowns that affected growth in retail loans (flattish QoQ) and fees (down 23% QoQ), and pushed-up slippages to 2.9% of past year loans (up 60% QoQ). This dragged income growth and pushed-up credit costs, which was partly compensated by lower operating expenses.

  • Maintains estimates and sees 18% CAGR in profit over FY21-24.

  • Clarity on tech issues and the RBI’s restrictions on credit cards should be a key rerating trigger, but so far management hasn’t heard back from the RBI.

Citi

  • Maintains ‘buy’ rating.

  • Lower net interest income and higher provisions hurt HDFC Bank’s Q1 results, even through loan growth of 14% was healthy, led by the wholesale book.

  • Gross slippages rose 60% quarter-on-quarter to about Rs 7,300 crore as field collections were adversely impacted in April and May.

  • Covid-related restructuring stood at 0.8% of loans vs 0.6% in Q4 and was largely led by retail loans.

  • Some of the slippages from Q1 could get restructured in coming quarters and the bank expects collections to improve as lockdown restrictions are eased.

Also read: HDFC Bank Q1 Results: Net Profit Rises 16%, Misses Estimate

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