HDFC Bank concluded FY21 – a year of pandemic and business disruption – with 19% earnings growth (almost similar to past 5-year average), 1.32% GNPAs (lower than pre-pandemic levels), 0.6% restructuring, 1.7% slippage run-rate, 1.5% credit cost (including 30bps contingency buffer), 14% advance growth, and 16% deposit growth.
That’s indeed commendable and what gives us further confidence in the franchise, are: (i) precautionary credit reserve of 60bps still exists; (ii) best-in-class deposit franchise (<4% deposit cost) supporting 4.2% NIMs; (iii) beefing-up of resources (123 branches added) to boost retail growth (from 6.7% in FY21); and (iv) enhancing technology capabilities to address outage issues.
We revise earnings by 5%/8% for FY22/23E and maintain Buy with a revised TP of Rs 1,818 (valuing the bank at 3.7x FY23E P/ABV). Key risks: (i) recent technology outage further defers visibility on credit card rollout ban; (ii) the second wave of Covid, if prolonged, can weigh on credit cost or growth. How we read Q4FY21 earnings: (i) GNPAs settling at 1.32% surprised the most; slippages too were contained at 1.66% (similar run-rate as for 9MFY21); (ii) credit cost at 1.65%, albeit relatively higher than the 9MFY21 figure of 1.4%, is in line with our FY21 expectations of 1.5%; (iii) provisioning includes Rs 13 bn of contingency buffer (Rs 8 bn credit reserves and Rs 5 bn interest on interest reversal); with this it carries cumulative credit-related contingency + floating buffer of 60bps; (iv) NII growth moderated a tad to 13% with NIMs steady at 4.2%;
(v) advance growth on a higher base and due to corporate repayments settled at 14% (lower than recent past averages); (vi) core fee income regained its lost momentum (up 20% y-o-y) further supported by higher forex income and recoveries; (vii) HDB Financial Services with IGAAP NPA of 3.9% (vs. proforma stage-3 of 5.9% in Q3) and credit cost of 4% (down from >5.5% in Q3FY21) reported a profit of Rs 2.8 bn.
Read-through for other banks on a few aspects: (i) HDFC Bank, despite its resilient asset quality performance in FY21 and existing contingency buffer, built further buffer in Q4FY21 (albeit marginal, of 8bps). Mgmt highlighted that it is precautionary in nature rather than anticipatory due to Covid second wave. We believe other banks too would create intermediate disruption buffers. (ii) Impact of waiving interest on interest for loans above Rs 20 mn has led to provisioning of Rs 5 bn. We can extrapolate a similar trend for other banks to gauge NIM impact.
Enhancing technology capabilities to resolve outage issues: HDFC Bank highlighted that last month’s (March) outages were intermittent due to server hardware failure. It is building up technological capabilities on the core system. Bank has demarcated various initiatives for the shorter term as well as medium-to-longer term and will effectively address the risk of outage issues.