Analysts see 23% upside in HDFC Bank but caution against loan restructuring

Topics HDFC Bank | Markets | Q2 results

Shares of HDFC Bank retreated from record high levels of Rs 1,725 apiece, hit in the intra-day trade on Monday, and fell to a low of Rs 1,667, as higher-than-expected restructuring of loans in the July-September quarter of FY22 (Q2FY22) clouded sentiment. Going-forward, analysts believe investors should keep an eye on restructured loan book even as long-term growth drivers remain intact. “Restructured book was higher at 1.7 per cent (versus 0.68 per cent in Q1FY22) with a large chunk coming in from personal loans (Rs 14,100 crore). Also, experience of one-time restructuring (.....
Shares of HDFC Bank retreated from record high levels of Rs 1,725 apiece, hit in the intra-day trade on Monday, and fell to a low of Rs 1,667, as higher-than-expected restructuring of loans in the July-September quarter of FY22 (Q2FY22) clouded sentiment.

Going-forward, analysts believe investors should keep an eye on restructured loan book even as long-term growth drivers remain intact.

“Restructured book was higher at 1.7 per cent (versus 0.68 per cent in Q1FY22) with a large chunk coming in from personal loans (Rs 14,100 crore). Also, experience of one-time restructuring (OTR 1.0), wherein pool saw 20 per cent slippages and over 10 per cent write-offs, keeps us on guard on potential behaviour of restructured book going forward,” says Prakhar Agarwal, research analyst at Edelweiss Securities, in a co-authored note with Vinayak Agarwal and Parth Sanghvi.

M B Mahesh, analyst at Kotak Institutional Equities, adds that future trajectory of restructured loans would be difficult to forecast given that these are small-ticket loans (mostly retail).

ALSO READ: HDFC Bank Q2 net up 18% to Rs 8,834 cr, steady rise in interest, fee income

“We note that 23 per cent of personal loans restructured in first-package slipped into NPL (non-performing loan) and the bank has already written off 63 per cent of such NPLs. While management sees only 10-20bps of loans as peak-potential impact on NPLs, we watch out for trends here,” say Prakhar Sharma and Bhaskar Basu, equity analysts at Jefferies.

That said, HDFC Bank has added to its contingent provisions in this quarter taking the outstanding contingent, including floating provisions, to approximately 0.8 per cent (Rs 9,200 crore) of gross loans. At the same time, provision coverage ratio (PCR) has improved by 300 bps sequentially to 71 per cent in Q2FY22, which, analysts say, should cushion any unfavourable impact.

“On slippages of Rs 5,300 crore, HDFC Bank made specific provisions of Rs 2,300 crore. On incremental restructuring and to further strengthen the balance sheet, it created a further contingency buffer of Rs 1,200 crore. This was contrary to our expectations of a pause or utilisation of buffers for the industry as a whole,” points out Kunal Shah, research analyst at ICICI Securities, in a co-authored note with Renish Bhuva, Chintan Shah, and Piyush Kherdikar.

Despite the above, credit cost at 1.3 per cent was in-line with our expectations of the trend moderating from 1.7 per cent in Q1FY22. Thus, with sustained recovery momentum and confidence in the bank’s inherent portfolio quality, we estimate credit cost to settle at 1.3 per cent/1.2 per cent for FY22/FY23, respectively, they say.

Overall, the bank has strong long-term growth drivers which should support core earnings, analysts suggest.

HDFC Bank witnessed strong bounce back in retail disbursements during Q2 (up 13 per cent on year), driven by healthy growth in home, auto, personal loans and payment products (including cards). Further, the management sounded extremely hopeful about gaining market share in small ticket advances across the product.

ALSO READ: HDFC Bank says it will double retail loans, sees 'robust demand' in economy

“The bank continues to invest in physical / digital footprint; expand its presence in the rural segment and expand product offerings to target segments like (buy now, pay later) BNPL, small retail stores etc. The improvement in bounce rate, collection efficiency and sequential growth in disbursement in small ticket loans provides confidence of strong momentum in business activity and recovery in overdue portfolio going-forward,” noted Phillip Capital in its post-result report.

Motilal Oswal Financial Services concurs and believes that pick-up in loan growth, particularly retail, would aid net interest income (NII) and margins and drive profitability.

“Our estimates remain unchanged at 20 per cent PAT CAGR over FY21-24E, with a return on assets (RoA) and return on equity (RoE) at 2.1 per cent and 18.3 per cent, respectively, in FY24, it said.

Additionally, shift towards high yielding loans (and fixed nature) coupled with favourable saving account (SA) traction (30 per cent YoY) to support margins and better core revenue growth in FY23, said Antique Stock Broking in its report.

“While lower margins and higher restructuring in Q2 were a tad disappointing, forcing us to trim our earnings estimates for FY22/FY23 by 1 per cent, factoring in softness in the margin and higher opex. We believe the bank should still be able to deliver superior 2 per cent RoA and 17- 18 per cent RoE over FY22-24,” Emkay Global said.

BULLISH CALLS
BROKERAGE RECOMMENDATION TARGET PRICE UPSIDE POTENTIAL
Jefferies Buy 2070 22.7
Macquarie Outperform 2005 18.8
CLSA Buy 2025 20
Nomura Buy 1955 18.25
Credit Suisse Outperform 1950 15.5
Morgan Stanley Overweight 2050 21.5
Motilal Oswal Financial Services Buy 2000 19
Elara Capital Buy 1960 16
Emkay Global Buy 2050 21.5
Phillip Capital Buy 2032 20.4
Antique Stock Broking Buy 1925 14
Edelweiss Securities Buy 1970 16.77
Kotak Securities Add 1740 3.14
ICICI Securities Buy 1955 18.25
IDBI Capital Buy 2020 20
LKP Securities Buy 2058 22
Source: Brokerages; Target price in Rs; Upside potential in %



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