HDFC Bank’s Q2 numbers show positive signs, analysts see 15-20% stock upside

HDFC Bank posted robust earnings growth for the second quarter, thanks to a rise in advances due to a pickup in retail lending as well as strong commercial and rural loans.

Improved asset quality and thereby lower provisioning costs also helped India’s most valued lender match street estimates for quarterly earnings.

HDFC Bank: Basic Numbers

HDFC Bank’s standalone net profit rose 17.6% to Rs 8,834 crore for the three months ended September 30 from Rs 7,513 crore a year earlier.

Some analysts had expected a slightly higher profit, but this was more or less in line with general consensus. The bank’s net interest margins stayed at 4.1%, which took away some sheen off the bottom line.

Net interest income at Rs 17,684.4 crore increased 12.1% year-on-year and 4% from the first quarter ended June 30.

HDFC Bank: Credit growth

HDFC Bank’s credit growth improved to 15.5% compared to the same quarter last year and 4.4% sequentially, backed by a pickup in retail loans that grew nearly 13% even as wholesale loan growth moderated to 6%. Retail credit growth was driven by advances in home, auto, personal loans and payment products (including cards).

This is a critical sign as it shows pickup in consumer sentiment and sets the right tone for the current quarter where retail advances could improve net interest margins for the bank, thereby shining the profit numbers. Since the Reserve Bank of India has lifted a ban on the company’s new credit card customer acquisition programme, it is also likely to provide a fillip for the bank.

The bank’s credit growth was in the 20% range before the pandemic hit the economy. But with two consecutive quarters of sequential improvement, HDFC Bank appears to have seen the worst and is set for better credit picture in the current quarter.

HDFC Bank: Asset quality and provisioning

The bank’s gross non-performing assets (GNPA) ratio improved to 1.35% in Q2 from 1.47% in Q1. The net NPA ratio declined to 0.4% from 0.48% in Q1 and 0.5% in the preceding quarter ended March 31, 2021.

Its NBFC arm, HDB Financial Services, also reported an improvement in the GNPA to 6.1% from 7.8% in Q1.

Provision and contingencies rose 6% year on year to Rs 3,924.7 crore, though the amount declined by nearly a fifth from Rs 4,830.8 crore in Q1.

Analysts’ view

As the most valued lender in the country, HDFC Bank is also seen a bellwether for the credit growth scenario for the economy and especially consumer sentiment due to its large presence in the retail loans space. Over the last year or so, banking sector stocks have underperformed as investors remain wary of asset quality as well as concerns about credit offtake. To that extent, the improving financial picture of HDFC Bank rings the right bells.

Most brokerage houses have a buy call on the stock with the average target price around Rs 1,950-2,050 a share. This leaves room for 15-20% upside on the stock.

Emkay: The brokerage has a buy rating with a target price of Rs 2,050 a share. “We believe that growth acceleration and the lifting of the embargo on the credit card business are positive. However, lower margins and higher restructuring in Q2 were a tad disappointing,” it said.

Nirmal Bang: It maintains a buy call on the stock with a target price of Rs 1,962 a share. The brokerage said the pick-up in the retail segment, where growth had been lacklustre in the last few quarters, was encouraging.

“Accordingly, we expect margins to improve progressively and NII should revert to 15% YoY growth level in a few quarters. We remain sanguine about the bank’s growth prospects given that it is taking multiple measures to capture emerging opportunities in commercial/rural and retail banking.”

ICICI Securities: The brokerage has also maintained a buy rating but has increased the target price from Rs 1,818 to Rs 1,955 a share.

Motilal Oswal: It has also maintained its buy call on the stock and revised the target price to Rs 2,000 per share. “High provision coverage and contingent provision buffer provide comfort on asset quality. A pickup in loan growth particularly retail would aid NII and margins, which would drive profitability,” it said.

IDBI: The brokerage has a buy rating with the new target price of Rs 2,020 compared with Rs 1,790 earlier.