HDFC Bank’s runway is huge; it can potentially add a new HDFC Bank every 5 years. Buy for 47% gain: ICICI Securities

HDFC Bank’s (HDFCB) FY22 annual report is once again themed on ‘Leading Responsibly’, focusing on reimagining the future with technology and a servicefirst culture. The CEO’s (Sashidhar Jagdishan) message is similar to what was articulated during the analyst day on 31st May’22 highlighting why this is an opportune time to fructify the merger given housing loan growth opportunity with deeper penetration, regulatory convergence, conducive market development, pricing convergence, portfolio rebalancing, enhanced cross-sell, etc. Annual report states: 1) Growth runway is huge; potentially add HDFC Bank every five years. Proposed merger adds an entirely different dimension to the future. 2) There may not be any need to raise further funds to meet reserve requirements. 3) Plans to nearly double its network in next 3-5 years by opening 1,500 to 2,000 branches every year. 4) Bank will continue to invest in modern technology and talent. Maintain ‘BUY’.

Incremental financial data points from annual report worth highlighting:

► Segmental result analysis reflects 13% YoY decline in earnings from retail segment (over and above 18% decline in FY21). Bank’s (pretax) earnings growth of 17% was buoyed by wholesale segment where earnings were up 44% in FY22 (over and above 23% growth in FY21). Treasury profits were stable at Rs90bn.

► Priority sector lending: Bank has bought Rs1trn of PSL certificates (PSLC) in FY22 (vs Rs843bn in FY22) with incremental certificates skewed more towards micro enterprise and general category. Besides, deposits with NABARD/SIDBI/NHB for PSL shortfall have spiked to Rs447bn (vs Rs93bn in FY22). Of the overall advances, priority sector advances stood at Rs3.9trn (30% of domestic advances).

► Attrition rate was relatively higher in FY22 at 25% – 36k employees (vs 18.3k in FY21). It was more pronounced in frontline staff/sales officers (43%) and nonsupervisory staff (22%) and in <30 years’ age category (35% attrition). Hiring runrate too was high in FY22 at 40% – 57.3k employees (vs 21.5k in FY21).  FY22 slippages of Rs268.6bn (2.3% run-rate) were offset by better recoveries / upgrades and write-offs of Rs94.3bn. GNPAs down to 1.17% (vs 1.32% in FY21). ► Restructured portfolio – of the gross restructured pool of Rs159bn as of Sep’21 under covid resolution framework, in H2FY22, 13% slipped into NPAs, 4% was written-off and 3% was repaid. Besides, Rs68.7bn was restructured under MSME guidelines taking cumulative net restructured pool to 1.5% of advances. HDB Financials gross restructured pool was <60bps of which 13% slipped into NPAs. ► Provision for reward points in FY22 was managed well (despite higher spends post covid) at Rs4.65bn (vs Rs3.75bn in FY21). ► Compared to working capital and short-term financing, proportion of term lending inched up a percentage point to 66.2%