FY20-21F earnings cut by 4-5% due to slower growth and credit costs; TP up to Rs 2,600 with rollover to Sept’21F
We believe the current retail slowdown will impact HDFCB’s retail growth over FY20-21F. Also, unlike the auto/retail slowdown in FY13/14, currently retail credit costs have structurally and cyclically inched up and hence we see small bumps in the path of HDCB’s retail juggernaut.
A positive is that some of the rise in the credit cost is also cyclical (autos/agri) which should reverse, and with strong opex optimisation, we believe HDFCB will manage to record ~18% PAT growth over FY19-21F. Hence, while the near-term core PPOP growth is likely to moderate for the bank, we do not see any significant challenges to its ability to compound earnings (we estimate 18% CAGR over FY19-21F). We factor in the slower growth and higher credit costs and cut our earnings by 4-5% for FY20-21F, but marginally raise TP to Rs 2,600 as we roll over to Sept-21F book. Our new TP implies 20x Sep-21F EPS and 3.3x Sep-21F book. The stock is trading at 2.9x Sep-21F book. We prefer ICICI/Axis Bank, both Buy rated.
Growth slowing down
+60% of the book growth has been driven by the non-corporate book in the past 3-4 years. Within that, auto/unsecured and business banking, where the near-term growth outlook is muted, contributed ~50% of the total incremental growth. Like in FY13/14, we believe loan growth will catch up with the slowing disbursement growth, and with ~15% market retail market share (ex-mortgages), we expect the compound annual growth rate (CAGR) to moderate to 17-18% in FY20-21F from 22%.
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Credit costs: normalising from low base
HDFCB’s credit costs have risen from 65bps over FY12-17 to 90-100bps over FY18-19 driven by structural factors like changing loan mix and normalisation of credit costs in few segments and cyclical factors like a spike in agri/auto credit costs. While we expect the cyclical factors to reverse, credit costs should inch up to 90-100bps in
FY20-21F from 60-65bps over FY12-17.
Robust profitability still likely
Despite the retail slowdown, we expect HDFCB to report ~2.5% RoRWA (return on riskweighted assets) driven by rising opex ratios and the medium-term normalisation of the cyclical spike in auto/agri credit costs.
Small bumps, but still resilient franchise
We believe the current retail slowdown will impact HDFCB’s retail growth over FY20-21F and unlike the auto/retail slowdown in FY13/14, retail credit costs have both structurally and cyclically inched up. A positive is that some of the rise in the credit cost is also cyclical (autos/agri) which we believe will reverse and with strong opex optimisation, HDFCB should be able to record ~18% PAT growth over FY19-21F. We factor in slower growth and higher credit costs and cut our earnings estimates by 4-5% for FY20-21F but marginally increase TP to Rs 2,600 as we roll over to Sept-21F book. Our new TP is based on 20x Sep-21F EPS and 3.3x
Sep-21F book (both based on historically traded average multiples). Key downside risks to our rating are further deepening of the current slowdown impacting growth and any sharp increase in the credit cost in the unsecured book.