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

HDFC Bank Q2 analysis: Analysts believe investors should keep an eye on restructured loan book even as long-term growth drivers remain intact.

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).

“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.

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“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 %