Home >Markets >Stock Markets >Yes Securities sees 25% upside in HDFC Bank, retains 'Buy' rating

Yes Securities has retained its 'Buy' rating on the private sector lender, HDFC Bank with a target price of 1,500 in an year's time. The bank's share price went up by 2.92% in a single day to close at a price of 1,203 on Friday at NSE. Yes Securities has slightly upgraded the target price amid above expectations performance by the bank in the second quarter of the current financial year. "HDFC Bank, on stand-alone basis, delivered a stellar show with 6% core PPOP beat on our estimates, largely driven by robust recovery in core fee income. The bank was prudent to provide for impending slippages (from SC order + early recognition) and augment its Covid shield (now at 65 bps of Adv.), says Rajiv Mehta, Lead Analyst - Institutional Equities, Yes Securities.

Mehta expects loan growth to not decelerate substantially in H2 FY21, aided by festive treats program and acceleration in economic activity. "Similarly, NIM seems to have made a trough and should recover gradually from hereon. Basis encouraging collection efficiency trends and management’s expectation of full normalization in a few months, the credit cost may not spike as feared earlier," he says.

HDFC Bank on Saturday reported a 18.4% year-on-year (y-o-y) rise in net profit to 7,513 crore for the three months to September owing to a rise in total income and lower tax outgo.

Its profit was higher than 6,409 crore estimated by a Bloomberg poll of 15 analysts.

The bank’s net interest income grew 16.7% y-o-y to 15,776.4 crore. Its net interest margin—a key measure of profitability—stood at 4.1%. HDFC Bank’s other income rose 9% y-o-y to 6,092 crore.

Here are the key highlights of the report by Rajiv Mehta of Yes Securities:

> Retail Assets growth

· Recent traction has been positive - July to Sept saw double-digit volume improvement month-on-month

· Disbursals in Q2 at 80-85% of last year level – recent month was 90% of pre-covid run-rate - bank sees quarter-on-quarter growth from hereon

· Recent bureau trends indicating credit enquiry levels near pre-covid times - particularly in products like auto, 2w and home loans

· Unsecured loans traction should reach pre-covid level by October - robust traction experienced in gold loans - volumes in LAP and retail WC loans already at pre-Covid level - MFI will see full recovery in next 90 days

· Massive increase in 2w sales driven by rural demand – strong demand for tractor loans due to two consecutive good monsoon - Agri portfolio doing well due to bumper rabi crop and strong kharif sowing

· From on-ground engagement sensing capacity utilization improving for the Self-employed/Business segment in various business locations across India

· Step-up in cards business both in terms of spends and acquisition – hitting 97% of Sept 2019 run-rate – Q3 will be even better on yoy basis

· Growth across many retail products also driven by credit policy normalization after having tightened it significantly after Covid outbreak - the bank has reverted to pre-covid credit policies in Auto and 2w loans – remains conservative on customers selection in PL

· Festive treats (45-day program) will lift business traction in Q3 – the bank has aggregated offers from more vendors and enhanced reach/distribution

> Corporate Banking

· Growth in corporate portfolio continued despite churning by a couple of large accounts

· Remain optimistic about cyclical economic recovery – near-term driver would be festive season spending

· Q2 collections were higher yoy and jumped 41% qoq – it is improving month by month - Sept collections higher 14% yoy

· Normalization in NTB acquisition and disbursement in wholesale SME segment

· Growth in customers Assets (Adv + Inv) came from top half of the 10-point internal rating scale

· Asset tenor remains below 1-year

· Wholesale book NIM improved both qoq and yoy – not compromising margins for growth

· Quality of the book remains intact – delivering growth with no dilution in credit standards - incremental portfolio in Q2 FY21 came at 4.4 avg. internal rating (scale of 1-10 with 1 the safest), corresponding to AA external rating, which is same as for the stock for the last several quarters

· Unsecured exposure rated at 3.5 avg. on internal rating scale - so very safe and much lower risk category than aggregate secured

> NIM & Capital

· NIM decline in Q2 was largely driven by increase BS liquidity

· Historically have operated in 4-4.5% NIM range based on prudent ALM management. Would continue this range for coming months.

· Internal generation of capital adequate to manage growth and asset quality in the short term - net capital generated in Q2 was 22 bps and 56 bps in H1 FY21 – generated 140 bps in FY20

> HDB Financial continues to reel under pressure

· Loan growth decelerates to 2% yoy (book at 570 bn)

· NII declines 5% yoy with liquidity buffer raised substantially

· Profits slumps to 300 mn ( 2.1 bn in Q2 FY20) on higher provisioning

· Gross NPLs rise to 4.3% - Net NPLs elevated at 3.1% on lower coverage

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