Motilal Oswal maintains Buy rating on HDFC Bank, with revised target of Rs 1500. They think business trends are undergoing swift normalization, margins will stabilize going further and collection trends are near pre-COVID levels.

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HDFC Bank has built an exceptional banking franchise, powered by flawless execution. It consistently challenges as reflected in its product and digital innovation and yet persistently adheres to the basics of banking with regard to underwriting standards. The bank has reported remarkable improvement in collection efficiency, to 97% of pre-COVID levels, and is well-placed to gain incremental market share on both the asset and liability fronts.

The bank is seeing improving trends across key business verticals, with some segments like Credit Cards showing strong buoyancy. The Credit Cards segment grew 6% QoQ, with spends also went back at pre-COVID levels. Corporate growth remains robust, and the bank continues to focus on high rated borrowers. HDFC Bank has prudently made contingent + floating provisions of Rs 77.6 bn, which would allow the bank to absorb any asset quality issues as business trends normalize fully.

Retail cycle holding well; strengthening distribution in rural/semi-urban markets to aid growth:

HDFC Bank is the largest private bank, with a market leadership position across various retail products (Vehicle, Personal Loans, Credit Cards, etc.). The bank has reported a 97% collection efficiency, which has assuage concerns not only on the asset quality outlook for the bank but also the broader retail cycle. HDFC Bank is well placed to gain incremental market share as recovery strengthens. Meanwhile, a strong geographical reach in the rural and semi urban markets which have proved to be more resilient amid the pandemic provides a strong growth engine for the bank.

Corporate segment continues to drive growth; expect balanced contribution as Retail makes a comeback:

 HDFC Bank has shown robust traction in the corporate portfolio, thus compensating for the softness in retail lending. The Corporate segment reported 26.5% YoY growth in Q2 FY21, while Retail loans grew at a tepid 5% YoY (7% YoY in Q1 FY21). In the first half of FY21, the corporate segment entirely contributed to overall loan growth, raising the segment’s share to 52% of total loans. As per strategy, the bank continues to focus on lending to high rated corporates.

Margins on the cusp of bottoming out; expect gradual recovery from FY22:

For the past two quarters, most private banks have reported decline in margins due to the slowing of credit growth, higher liquidity, and yield pressures from sharp monetary easing. As a result, HDFC Bank has reported 20 bps QoQ decline in margins to 4.1%. However, with the revival in retail disbursements, a healthy uptick in the CASA ratio and gradual repricing in the deposits portfolio, margins to stabilize at current levels and improve from FY22.

Asset quality seeing sharp recovery; contingent provisions offers comfort

Several banks have recently indicated a sharp recovery in collection trends. HDFC Bank has reported collection efficiencies of 95–97%; furthermore, numerous banks have suggested corporate restructuring would be significantly slower than anticipated. On the other hand, the stress in the Mid Corporate and SME segments has been significantly addressed by the credit guarantee scheme. HDFC Bank’s stress in the MSME segment also declined to 3% (v/s 9% in Q1 FY21). Overall, expect restructuring to be in the low single digits.

Earnings cycle showing signs of bottoming out; estimate steady growth rates after second half of FY21

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HDFC Bank delivered steady earnings in the first half of FY21, reporting the usual 19% YoY growth in net profit. Motilal Oswal expects HDFC Bank to maintain a steady growth trend from FY22.

Valuation and view:

HDFC Bank continues to deliver strong growth in a challenging macro environment and the business momentum has swiftly moved toward pre-COVID levels. Furthermore, the bank’s operating performance remains strong despite margin pressure and lower fee income trends. However, expect the margin trajectory to now stabilize and an uptick in unsecured retail would support fee income trends. Also, HDFC Bank continues to make healthy provisions to further strengthen the balance sheet. Thus, a higher provision buffer would limit the damage on asset quality and enable the bank to quickly recover to a normal growth run-rate.