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HDFC Bank makes higher provisions in Q4, surprises analysts; should you buy, sell or hold?

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HDFC BankHDFC BankHDFC Bank stock price fell as much as 3.9% during the day to hit a low of Rs 1,372 apiece, before recovering some losses.
(Image: REUTERS)

HDFC Bank share price slipped on Monday, mirroring the weak market sentiment, despite the strong quarterly results posted by the lender. HDFC Bank stock price fell as much as 3.9% during the day to hit a low of Rs 1,372 apiece, before recovering some losses. The largest private bank in the country posted strong business growth in the January-March quarter with net profit growing 18% on-year basis. But, analysts were positively surprised as the bank decided to make additional provisions during the quarter making it well-positioned to survive another wave of the coronavirus.

The bank informed that it has made additional provisions to deal with any slippages ahead. “We were positively surprised by its asset quality outcomes and the 65bps of contingent provisions provides a lot of P&L cushion for FY22 against a second wave of the virus and some SME slippage,” analysts at CLSA said in a note. HDFC Bank’s slippages moderated further in the January-March quarter. CLSA estimates that HDFC Bank had just 110bps of credit costs in the last five quarters. “While wave-2 will lead to some uncertainty, asset quality resilience through wave-1 and 65bps of buffer provides us confidence on stable asset quality outcome in FY22,” they added.

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Domestic brokerage firm Motilal Oswal highlighted that the total restructuring under the RBI resolution framework for COVID-19 stood at Rs 6,508 crore or ~0.6% of advances, on which the bank carries 10% provisions. “Furthermore, strong capitalization and liquidity levels should help HDFCB sustain its growth momentum over the next few years. This renders the bank better placed to tide over the crisis and gain incremental market share,” they said. The brokerage added that PCR stands at ~70%, which – along with a floating provision of Rs 1,450 crore and contingent provision of Rs 5,860 crore – would keep credit cost in check and limit the impact on profitability.

Meanwhile, holding a contrarian view, Ambit Capital believes HDFC Bank’s core earnings are under pressure and hence gives a ‘Sell’ call on the stock. “NII growth of 12.6% on-year strengthens our thesis that growth would come at the expense of NIMs,” a note by Ambit Capital said. NIMs are expected to compress further by 10 basis points in the financial year 2022. “We expect NII growth for the bank to come under pressure due to weak sector credit growth, increased competition from larger banks and ample liquidity in the wholesale market,’ they added. Further, the ban on issuing new credit card could also impact the bank as the card business contributes ~15% of core operating profit growth.

The ban on issuing cards is being as all brokerage firms as a factor that could impact HDFC bank and remain an overhang on the stock. Although the stock was down on Monday, it was outperforming peers such as ICICI Bank, SBI, Axis Bank, and Kotak Mahindra Bank.

CLSA has a ‘Buy’ call with a target price of Rs 1,825 per share. Meanwhile, Motilal Oswal has an unchanged target price of Rs 1,800 per share.ICICI Direct is also bullish on HDFC Bank, valuing the core bank at ~3.7x FY23E ABV and adding Rs 50 in lieu of subsidiaries to arrive at Rs 1,700 apiece target price. Ambit Capital with their ‘Sell’ rating have a target of Rs 1,406 per share.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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