HDFC Bank shares: J.P. Morgan, Kotak to Axis Capital, here is what brokerages have said after Q2 results unveiled

The management commentary revived investor’s confidence as they believe stress across segments is considerably low and business is returning back to normalcy.  

1) J.P. Morgan remains overweight and increases price target to Rs 1460.
2) Kotak Institutional Equities maintain an add rating with revised target to Rs 1,300 from Rs 1,200 earlier.
3) ICICI Securities maintains buy rating with revised price target of Rs 1493 from earlier target of Rs 1470.
4) Axis Capital maintains buy rating with revised target price of Rs 1450 vs Rs 1350 earlier.
5) Phillip Capital maintains buy rating with a revised target price of Rs 1380 vs earlier target of Rs 1260.
6) Emkay retain Buy/overweight stance and raise the target to Rs 1,500.

J.P. Morgan remains overweight and increases price target to Rs 1460. They believe while the earnings have been in line with expectation at net income and operating profit levels, key positive on the results is the management commentary on asset quality, stress across different segments is considerably low and restructuring flow is likely to be minimal. In the moratorium book, collections in October have reverted to 97% levels and the rest of the book at 99%. Estimated stress in the MSME sector is down 3% (vs 9% QoQ). Management clarified that impact of current account regulations will be minimal. The bank’s capital, funding, underwriting and growth remain one of the best in the sector.

Kotak Institutional Equities maintain add rating with revised target to Rs 1,300 from Rs 1,200 earlier.

HDFC Bank reported 18% YoY earnings growth on the back of:

(1) 14% YoY revenue growth
(2) 18% operating profit growth
(3) 35% YoY increase in provisions

NII grew 17% YoY with decline in non-interest income as fees declined 37% YoY. Loans grew ~16% yoy while NIM declined 20 bps to 4.1%. Business has recovered closer to pre-Covid levels, especially on fee income and the commentary on disbursements is also reflected in the growth in non-staff expenses. Asset quality has held up well (unchanged ratio post recognizing the full slippages).
HDFC Bank reported 18% yoy earnings growth on the back of similar operating profit growth. A strong commentary on business momentum (closer to pre Covid and likely to surpass soon) and solid performance on asset quality imply that HDFC Bank has a sizable lead as compared to all banks. Strong operating profits give an adequate cushion to manage stress, a risk that still remains.

ICICI Securities maintains buy rating with revised price target of Rs 1493 from earlier target of Rs 1470. They believe HDFC Bank’s solid performance in Q2 FY21 beats their expectations. HDFC Bank reported margins at 4.1%, down 20 bps QoQ, as excess Liquidity coverage ratio (at 153% caused a 15 bps squeeze. Overall, the long term NIM guidance has always been at 4.0-4.5% and NIMs are now settling at the lower end.

Performance was buoyed by lower credit cost, rebound in fee income, and higher investment profit (offsetting lower NIMs). Demand resolution (collection efficiency) for morat-retail portfolio at 97% in October (compared to 99% pre-Covid levels) and that for non-morat retail portfolio at 99%. Identified stress in SME portfolio down to 3% (from estimated 9%).

Further confidence comes from:
i) Credit reserves of 75 bps being sufficient
ii) Opportunism and optimism on growth potential given digital initiatives, franchise strength and sharp focus.

On the contrary, HDB Financial Services reported loss in Q2 FY21 of Rs 850 mn, due to more than 5% credit cost for H1 FY21.

Axis Capital maintains buy rating with revised target price of Rs 1450 vs Rs 1350 earlier. They believe Q2 earnings indicate strong performance from HDFC Bank and indicate business returns to normalcy sooner than expected. NII was up 17% YoY led by 16% loan growth. NIM slightly down at 4.1% (15 bps hit by excess liquidity). Also, the Fees at Rs 39 bn is 3% lower YoY which is already at pre-Covid levels. Strong treasury (Rs 10 bn), lower opex aided PPOP/ PAT at 18% YoY. NPLs stable with GNPA at 1.37% (proforma, reported not comparable). PCR stands at 74% (154% including all provisions). Bank provided Rs 13 bn for potential NPAs in Q2.  
 

Q2FY21 highlights:

(a) Corporate book (up 28% YoY/4.7% QoQ) is strong, as utilization levels are picking up; retail growth (5% YoY/2% QoQ) still muted, cards (6% QoQ) picking up; gold loans up 8% QoQ
(b) Fees impact of Rs 7 bn due to Covid-19, retail fees now at 91% of total fees
(c) GNPA / NNPA at 1.1%/0.17% (1.4%/0.35% proforma) vs 1.36%/0.33% in Q1, PCR increased to 84% (74% profroma, 76% in Q1); slippages at 0.8% (1.98% proforma vs 2% in Q1); core credit costs at 0.91% (vs 1.08% in Q1); overall contingency provision now at Rs 78 bn (75 bps of loans)
(d) Strong deposits growth, up 20% YoY/ 3% QoQ, CASA up 28% YoY/7% QoQ. CASA ratio at 42%; share of retail deposits at 80%
(e) Operational expenses were up 9% YoY, C/I ratio steady at 37%, but may normalize at 39% as the bank continues to invest in franchise, opened 104 branches in Q2
(f)  CET I (common equity tier 1) remains healthy at 17%
(g) HDB Financials performance was weak with AUM up 2% YoY, PAT at only Rs 299 mn, GNPA / NNPA at 4.3%/3.1%; tier I at 14.6%; HDB Securities PAT up 83%

The Collection efficiency likely to be at 97% in October and reach pre-Covid levels 99% in following months. Even as reported numbers appear strong due to robust corporate, retail banks seem to have moved ahead with little damage. Disbursements in retail are now at 80% of pre-Covid levels and improving consistently. With growth back, cost ratios better and asset quality contained, we expect strong earnings traction over the next few quarters.

Customer acquisition remains strong in Q2. HDFC Bank acquired 1.8 mn liabilities customers given strong digital capabilities reflecting in a 200 bps CASA improvement. Stress in SME is moderating given government guarantee schemes and pick-up in utilization. Management expects stress levels in SME at 3% (vs 9% expected earlier). Demand across retail segments is robust, though it remains cautious. It has reverted to pre-Covid policies for auto/2W segments and expects growth to pick up. Festive treats 2.0 is much bigger in terms of tie ups and volumes and will give further fillip to growth.

Phillip Capital maintains buy rating with a revised target price of Rs 1380 vs earlier target of Rs 1260.
 

Top takeaways from Q2 FY21:

NII at Rs 158bn (+17% YoY) was marginally below our expectations due to lower NIM at 4.1% (-20bp qoq). Fee income was lower by 2% YoY at Rs 45 bn, but grew 70% sequentially on higher economic activity compared to Q1 21.Impact of lower retail origination, lower credit and debit card usage on Fee income was Rs 8bn. Operating expenses increased to 8.8%. Pre provision profits at Rs 138 bn were better than our expectations due higher treasury income at Rs 102 bn (Rs 4.8 bn in Q2 20).

CASA ratio increased 150 bps QoQ to 41.6%, due to 32% yoy growth in Savings deposit, current account and term deposits grew by 19% and 16% respectively. Provisions at Rs 37 bn include contingent provision of Rs 23 bn and NPA provision of Rs 12.4 bn. As of Sep 2020, the bank has total contingent provision of Rs 63 bn. Loan growth of 16% YoY is driven by wholesale growth of 26.5%. Retail book grew by +5.3% yoy largely driven by personal loan and credit cards.

GNPA/NNPA (on a Proforma basis in absence of any SC injunction) was flat QoQ at 1.37% / 0.37%. Annualised credit cost on Proforma basis was 0.91% lower 17bps qoq. Slippage ratio for the quarter was 0.8% (1.98% on Proforma basis).               

Management comments/ concall takeaways:

1) Retail Collection: Demand resolution was 95% in Sep and is expected to reach 97% by Oct end. Pre covid it was 99% and Non moratorium already has 99%
2) Wholesale Credit Growth: Average score for incremental lending is 4.4 (internal) which corresponds to AA rating externally. Around 75% of externally rated disbursals are in AAA or AA rating category and 93% is towards AAA-A rated companies. Score for unsecured exposure is around 3.5(at much lower risk category) vs secured at 4.5
 3) Retail Business:  HDFC Bank expects unsecured book to reach at pre covid level by end of Oct. LAP (Loan against property) and Retail WC (working capital) already are at pre covid levels. Bank continues to remain cautious in MFI and expects full recovery in 90 days. Rural demand is showing robust recovery and two wheeler and tractor sales at its high.

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Emkay retain Buy/overweight stance and raise the target to Rs 1,500 (25% upside potential). They think despite low NIMs at 4.1% due to excess liquidity on Balance sheet and low loan yields, HDFC Bank reported healthy 18% yoy growth in PAT at Rs75 bn, mainly led by strong treasury gains. The stay on NPA tagging led to lower NPA formation, but the bank has still made adequate provisions on unrecognized NPAs and shored up the Covid-19-related provision buffer to 0.7% of loans.

Collection trends are better with demand resolutions at 95% in Sep’20 and 97% in Oct’20 due to its superior customer profile and collection mechanism. The bank expects delinquency rates to not exceed the last peak of 2%, with low restructuring. Overall asset quality trends at HDB Financial remain sub-par, reflecting weakness in the NBFC space.

The deal pipeline in corporate remains strong and the bank guides for a strong outlook on retail credit growth, led by healthy disbursement trends. Amid management transition, the bank is embarking on techno-banking to gain market share across business lines at a pace faster than the past 26 years at a far lower cost and thereby, deliver superior RoAs (Return on Assets).

(Authored by Rahul Kamdar)