Prudential provisioning to ensure steady earnings trajectory; FY21/22e EPS cut by Rs 2% due to present crisis; ‘Buy’ maintained
HDFC Bank (HDFCB) reported healthy business growth in Q4FY20, led by continued strength in its corporate portfolio while retail growth was soft. Operating performance stood flat as margin expansion was offset by lower fee income due to the COVID-19 impact. Further, the bank has made contingent provisions of Rs 15.5 bn, which affected earnings. We have fine-tuned our other income estimates factoring in the current trends, which has resulted in ~2% cut each in our FY21e/ FY22e earnings. Maintain Buy.
Stable earnings performance
HDFCB reported a steady quarter with PAT growth of ~18% y-o-y (-7% q-o-q), supported by NII growth of 16% y-o-y (7% q-o-q) as margins increased 10bp q-o-q to 4.3%. However, provisions spiked to Rs 37.8bn (+24% q-o-q) as the bank made contingent provision of Rs 15.5 bn toward COVID-19. For FY20: NII/PPoP/PAT grew 16/23/25% y-o-y to Rs 562/ 487/263 bn.
Core fee income growth moderated to ~15% y-o-y to Rs 42 bn affected by the lockdown, which resulted in loss of fees/other income of Rs 4.5 bn. C/I ratio increased to 39% (+110bp q-o-q) while PPoP stood flat q-o-q) at Rs 129.6 bn (+20% y-o-y).
Loans grew 21% y-o-y, led by corporate loans (+29% y-o-y) while retail loan growth was soft at 14.6% y-o-y. Deposits increased 24% y-o-y while CASA mix soared to 42.2% (+270bp q-o-q).
Slippages stood at Rs 31.5 bn (1.3% annualised) while some of the overdue accounts availed moratorium, which otherwise would have slipped during the quarter, resulting in ~6/21% q-o-q decline in GNPA/NNPA. Thus, GNPA/ NNPA ratios declined by 16bp y-o-y/12bp q-o-q (10bp/6bp benefit due to the moratorium). As a result, PCR improved by ~530bp q-o-q to 72%.
Highlights of mgmt commentary
COVID-19 impact: Under the stress case, we expect ~9% of the SME portfolio to be vulnerable and see maximum potential GNPA impact of ~50bp. Of the retail customers applying for moratorium, ~95-98% are not in default (0 dpd) as of 29th Feb’20.
CEO change: Aditya Puri is set to retire on 26th Oct’20; the bank has finalised three candidates and would be applying to the RBI for approval.
Valuations and view
HDFCB’s business growth remains robust despite economic activity getting impacted due to COVID-19. Although the RBI moratorium supports asset quality, credit cost is expected to stay elevated while provisioning buffers should limit the overall impact on earnings. A strong liability franchise would support margins while higher liquidity levels would enable the bank to ride out the current crisis and gain further market share. We, thus, estimate loan book/PAT to deliver CAGR of 16/17% over FY20-22e. Management succession remains a big event to watch out for. Maintain Buy with PT of Rs 1,200 (3.0x Sep’21e ABV).