Slippages likely to fall from Q2; biz trends from July close to normal/pre-Covid levels; ‘Buy’ retained with a target price of Rs 1,900
For Q1FY22, HDFCB’s profit of Rs 77 bn was up 16% y-o-y, a tad below estimate largely due to higher credit cost on NPLs & contingent provision of Rs 6 bn. As expected, slippages were higher at 2.9% of past year loans (annualised), but we expect it to moderate from Q2. Key positive was in management commentary that both lending & collection trends for July seem close to normal/pre-Covid levels and will reflect in performance from Q2. No update on RBI/card issue. Buy stays.
Q1 operating performance impacted by wave 2: During Q1, business was impacted by lockdowns (external & internal due to intense Covid cases) that affected growth in retail loans (flattish q-o-q) and fees (down 23% q-o-q), & pushed up slippages to 2.9% of past year loans (up 60% q-o-q). This dragged income growth and pushed up credit costs, which was partly compensated by lower opex. On asset quality side, gross NPL rose from 1.3% of loans to 1.5% and bank sold Rs 18 bn (16bps of loans to ARCs). NPL coverage fell a bit to 68% & bank lifted buffer-provision by Rs 6-7 bn to 0.7% of loans. Restructured loans rose from 0.6% of loans in March to 0.8% now and more may come in Q2. Key Q1 indicators were loan growth of 14% y-o-y, NII rise of 9%, NIM at 4.1% down 20bps y-o-y, fees up 74% y-o-y, op. profit (ex-treasury up 24%) and net profit up 16% y-o-y.
Incremental trends encouraging: Management reiterated that while wave 2 had deeper impact on life, its impact on business was much lower. It was encouraging to hear that business activity has improved since June. Mgmt indicated that collection efficiency trend (based on bounce rate) in July was back to Mar-21 levels & was just 100bps below pre-Covid levels. Retail loan demand, especially in segments like housing/LAP, personal loans, has also seen strong improvement from July onwards (disbursement in Q1 was down 30% q-o-q). Even bank’s SME book has seen limited impact on repayments and their cash-inflows are getting quite close to normal levels. We had indicated about such improvements in our recent note, and expect them to be tailwinds for large banks/retail NBFCs.
Subsidiaries: The bank’s retail lending subsidiary (HDB-FS) reported 54% q-o-q drop in profits due to weaker lending activity and higher credit costs. On the other hand, HDFC Securities rode higher retail trading activity and reported 95% y-o-y and 3% q-o-q rise in profits.
Maintain Buy: We maintain our estimates and see 18% CAGR in profit over FY21-24. Clarity on tech issues/RBI’s restrictions on credit cards should be a key rerating trigger, but so far mgmt hasn’t heard back from RBI. We maintain Buy with a TP of Rs 1,900 with value of bank at 3.6x Jun-23E adjusted PB. Our price target for ADR is $93, based on FX conversion of our local price target and a 22% premium.