Buy HDFC Bank; target of Rs 1850: Emkay Global Financial

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Emkay Global Financial's report on HDFC Bank

Despite stable NIMs and higher fees leading to a beat on PPoP, the bank reported slightly lower PAT at Rs81.8bn (up 18% yoy) vs. est. of Rs83bn, mainly due to additional contingent provisions of Rs8bn amid raging second Covid wave and Rs5bn for interest-on-interest waiver. Retail credit growth remained subdued at 8% yoy due to the bank’s cautious stance and the RBI’s suspension of new card acquisition. Corporate growth remains very strong, leading to retail share slipping to 47%. As a strategy, the bank would continue to capture market share in corporate loans and has built a strong SME portfolio (20% of the total portfolio). It expects this to be a strong earnings driver, going forward. Reported NPAs were lower qoq at 1.3% vs. 1.4% (pro forma) in Q3, but the bank sees rising incidence of EMI bounces in the system due to localized lockdowns implemented after Covid19 second wave. The bank remains confident of its superior portfolio quality but as a matter of prudency, it carries a reasonable contingent buffer (Rs68bn; 0.6% of loans) after consuming Rs36bn in Q4, as NPA recognition has begun.

Outlook

We maintain Buy on the bank with a TP of Rs1,850 given its cross-cycle best asset-quality, strong franchisee/capital profile, better growth outlook and superior return profile. However, the RBI’s suspension of new card acquisition due to continued tech outages remains an overhang on the stock.

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