Motilal Oswal has given a buy rating to HDFC Bank with target price of Rs 1,200, marking an upside of 32 per cent over the CMP of Rs 910. According to the brokerage, HDFC Bank reported healthy business growth in the fourth quarter of FY20, led by continued strength in its corporate portfolio while retail growth was soft.

Operating performance stood flat as margin expansion was offset by lower fee income due to the Covid-19 impact.

The bank has made contingent provisions of Rs 15.5 billion, which affected earnings.

The brokerage has fine-tuned its other income estimates factoring in the current trends and that has resulted in a 2 per cent cut each in FY21/FY22 earnings estimates.

Investment RationaleThe bank’s business growth remains robust despite economic activity getting impacted due to the Covid-19 outbreak.

Corporate loan growth remains strong and is driving overall loan growth while retail loan growth remains soft.

Although the RBI moratorium supports asset quality, credit cost is expected to stay elevated while provisioning buffers should limit the overall impact on earnings.

A strong liability franchise would support margins while higher liquidity levels would enable the bank to ride the current crisis and gain further market share.

We, thus, estimate loan book/PAT to deliver a CAGR of 16 per cent/17 per cent over FY20-22E.

Management succession remains a big event to watch for.

FinancialsThe bank reported a steady quarter with PAT growth of ~18 per cent YoY (-7 per cent QoQ), supported by NII growth of 16 per cent YoY (7 per cent QoQ) as margins increased 10bp QoQ to 4.3 per cent.

However, provisions spiked to Rs 37.8 billion (+24 per cent QoQ) as the bank made contingent provision of Rs 15.5 billion toward Covid-19.

For FY20, NII/ PPoP/PAT grew 16 per cent/23 per cent/25 per cent YoY to Rs 562 billion / Rs 487 billion/ Rs 263 billion.

Core fee income growth moderated to ~15 per cent YoY to Rs 42 billion affected by the lockdown, which resulted in loss of fees/other income of Rs 4.5 billion.

Opex grew ~16 per cent YoY led by employee expenses (+20 per cent YoY).

C/I ratio increased to 39 per cent (+110bp QoQ) while PPoP stood flat QoQ at Rs 129.6 billion (+20 per cent YoY).

Slippages for the bank stood at Rs 31.5 billion (1.3 per cent annualized) while some of the overdue accounts availed moratorium, which otherwise would have slipped during the quarter, resulting in ~6 per cent/21 per cent QoQ decline in GNPA/NNPA.

Thus, GNPA / NNPA ratios declined by 16 bp YoY/12bp QoQ (10bp/6bp benefit due to the moratorium). Promoter/FII HoldingsPromoters held 21.2 per cent stake in the company as of the financial year ending March 31, 2020, while FIIs held 48.6 per cent, DIIs 17.9 per cent and public - others 12.4 per cent