RBI curbs to have a limited impact but resolution of issues will take some time; most retail business lines back to pre-Covid level; ‘Buy’ retained
Bank is back to pre-covid level of credit evaluation across products.
We hosted Srinivasan Vaidyanathan (CFO of HDFC Bank) for an investor call where he highlighted the bank is working to resolve RBI’s concerns/ restrictions; still these shouldn’t disrupt business/earnings. Encouragingly, most retail business lines including unsecured loans have been opened up, which is positive for growth & margins; deposit inflows stay strong. Asset quality is stabilising, but bank may continue making provisions if earnings permit. Our Buy call stays.
Need to resolve RBI’s restrictions, but impact on business should be limited: Management highlighted that the three system outages suffered by HDFCB in the recent past (Nov-18, Dec-19 and Nov-20) were disparate events suffered in mobile banking, net banking and power-outage/back-up at data centre, respectively. As a result, RBI has imposed curbs on a) sourcing of new credit card customers; and b) new launches under Bank’s ‘Digital 2.0’ programme. Mgmt reiterated that the impact on business should be limited as these relate to incremental clients and roll-outs. The resolution of this will take some time that will include a few weeks for strengthening disaster recovery system followed by review by RBI, bank’s internal committee and independent-expert and any ensuing action, which in our view can take a few months.
Most retail business lines back to pre-Covid: Mgmt indicated that there has been a healthy pick-up in disbursements across retail loan verticals and this has sustained in Oct-Nov 2020. Bank is back to pre-covid level of credit evaluation across products. While disbursements momentum has normalised, it will take time to reflect on loan growth, as origination was impacted during lockdowns. Retail loan growth was soft at 5% y-o-y in Q2FY21 and a pick-up here will also be accretive to margins.
Confident on asset quality; surplus-provisions go beyond Covid: Management highlighted that asset quality continues to be strong and credit-costs should be within manageable limits. Bank is carrying surplus provisions (0.6% of loans) and as per management the surplus provisions go beyond Covid linked provisions. Hence if earnings can accommodate such provisions, bank will enhance buffers.
Maintain Buy: We see healthy growth in earnings and maintain our Buy rating with a SOTP-based TP of Rs 1,620/share including value of bank at 3.8x Sep-22 adjusted PB; price target for ADR is at $78.