HDFC Banking & PSU Debt Fund (An open ended debt scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds) June 2019 This product is suitable for investors who are seeking*: • Income over short to medium term. • To generate income / capital appreciation through investments in debt and money market instruments consisting predominantly of securities issued by entities such as Scheduled Commercial Banks (SCBs), Public Sector undertakings (PSUs), Public Financial Institutions (PFIs), Municipal Corporations and such other bodies. 1
Current Fixed Income environment • Conflicting forces lead to a mixed outlook on interest rates • Near term challenges of NBFCs have diminished though select pockets still susceptible to stress; cautious approach needs to be maintained • In view of the above, HDFC Banking & PSU Debt Fund offers : Controlled duration Focus on yields Exposure to perpetual bonds with currently minimal exposure to NBFCs Investments must be tailored to investor’s individual situation and objectives and therefore, investors should consult their financial advisors to ascertain whether the products are suitable for them. 2
Interest Rates Outlook – Conflicting Forces at Play Positives Negatives • High real yields in India • Higher Credit growth vs Deposit growth • Healthy real rates differential between India & US • Excess SLR securities holding of PSU banks • Headline CPI outlook remains benign • Stable domestic growth supported by capex • RBI cuts rates; Revises stance to Accommodative • Concerns over fiscal slippages • OMO purchases by RBI likely to continue in FY20 • Reversal in food prices can take inflation higher • Concerns over Trade war and thus Global growth Yields likely to fall at the short end 3
Interest Rates Outlook:Forces favouring lower Interest rates India's Real Yields at near historic Spread between US and India Real • Real Yields in India at historical high 6.0 high Yields 4.0 4.0 • CPI outlook remains benign 2.0 2.0 - - % -2.0 % -2.0 -4.0 • Healthy Differential with US Real yields -4.0 -6.0 -6.0 -8.0 -8.0 -10.0 -12.0 -10.0 May/03 May/07 May/11 May/15 May/19 May/03 May/07 May/11 May/15 May/19 Real Yields = Month-end 10Y GSec Yield and CPI; Updated till 31 st May’19. CPI-IW is used to calculate real yields for period before 2012 • Outlook on headline inflation remains benign 7.00 Inflation outlook remains benign 6.00 • RBI has reduced policy rate by 75 bps in 2019 5.00 and has revised stance to Accommodative % 4.00 • RBI estimates Headline CPI to be below targeted 3.00 4% in FY20 2.00 • Susceptible to increase in food prices, which have 1.00 been unusually weak Mar/15 Oct/15 May/16 Dec/16 Jul/17 Feb/18 Sep/18 Apr/19 Nov/19 Data beyond May 2019 are RBI estimates as per Monetary Policy Statement – June 2019 % US 10 Year Yield • Dovish statement by US Federal Reserve along with 3.30 drop of the words “patient in raising rates” indicates 3.05 benign outlook for Fed rates 2.80 2.55 – US 10Y yields have come off materially from the high made in Nov’18 2.30 2.05 – Possibility of rate cut in 2019 has risen 1.80 Source: CMIE, Bloomberg, RBI, Kotak Institutional research Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 4
Interest Rates Outlook:Forces adversely impacting interest rate Credit Growth Vs. Deposit Growth 16.0% Bank credit growth remains healthy 14.0% Deposit growth % 12.7% 12.0% • Outpacing the deposit growth Credit growth % 10.0% • Recovery in capex cycle likely to accelerate credit growth 9.6% 8.0% 6.0% further 4.0% 2.0% Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Excess SLR holdings with PSU Banks Excess SLR Investments, especially with PSU banks 32.00% 28.1% • Incremental demand for G-sec could remain muted 27.00% 22.00% Adj SLR* 20.8% Regulatory Requirement # 17.00% Jun/15 Sep/15 Dec/15 Mar/16 Jun/16 Sep/16 Dec/16 Mar/17 Jun/17 Sep/17 Dec/17 Mar/18 Jun/18 Sep/18 Dec/18 Mar/19 USD bn Net FII Debt flows Debt FII Flows remain volatile on back of rising USD and 3.0 1.7 global liquidity unwinding 1.4 2.0 0.8 0.7 0.0 0.5 1.0 0.2 • Net FII Debt Outflows in FY19 stood at USD 6.1 bn - -1.0 -0.2 -0.7 -0.8 -2.0 -1.4 -1.3 -1.5 -1.6 -3.0 -2.9 -4.0 Apr18 May18 Jun18 Jul18 Aug18 Sep18 Oct18 Nov18 Dec18 Jan19 Feb19 Mar19 Apr19 May19 Jun19 * Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF # Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) – carve out allowed from SLR Source: RBI, Kotak Institutional research, NSDL. June19 figure updated till 14 th June 2019 5
Credit Concerns: Build-up of risks in NBFC Sector • Rapid growth in NBFCs/HFCs asset book over past 3 years ~15% CAGR • NBFCs’ share in total credit has increased to 21% in FY18 from 18% in FY14 • Banks exposure to NBFCs/HFCs has also increased to 13.8% in FY18 from 11.7% in FY14 • Growth in retail asset book coincides with rise in Household financial liabilities • Net financial savings (as % of GDP) fallen to 7.2% in FY18 from 8.1% in FY16, despite stable gross savings • Sharp increase in share of CPs in the borrowing mix of NBFCs – from 4.2% in FY14 to 12.6% in Aug18 leading to ALM mismatch concerns Source: Nomura , Global Markets Research , Sept 2018 , RBI Stocks/Sectors referred in the presentation are illustrative and should not be construed as an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation 6
Liquidity concerns for NBFCs addressed, outlook is mixed Liquidity concerns post IL&FS default addressed by • Timely actions by RBI and Government bps NBFC Spread rises post IL&FS default* • Securitisation / asset sale, unutilised bank lines etc. 425 Average AAA Spread over 3Yr Gsec 375 Average AA Spread over 3Yr Gsec 325 275 Growth expected to moderate for NBFCs 225 175 • Cost of funds rising with widening of spreads 125 • Risk aversion amongst lenders 75 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Corporate bonds spreads widens^ bps Concern over NBFCs / HFCs with higher yielding real estate exposures. 225 AAA Rated Over 3Yr Gsec AA Rated Over 3Yr Gsec 175 Driven by widening of spreads for NBFCs, even corporate bond spreads 125 have widened 75 25 May/18 Jul/18 Sep/18 Nov/18 Jan/19 Mar/19 May/19 In our opinion, cautious approach towards credit needs to be maintained * AAA Average spread is average spread of 8 large AAA rated NBFCs’ in 2 to 3 Yr. Maturity bucket. Average spread is average spread of 5 large AA rated NBFCs in 2 to 3 Yr. in maturity bucket ^ AAA spread is monthly average spread of 3 Year AAA rated corporate bond yields over 3 Yr benchmark Gsec yields. AA spread is monthly average spread of 3 Year AA rated corporate bond yields over 3 Yr benchmark Gsec yields Source: Daily valuation provided by ICRA/CRISIL; Bloomberg; Data is updated till 15 th June 2019. Refer disclaimer on slide 15 7
HDFC MF’s conservative approach to credit (SLR framework) • Philosophy of SLR – Safety, Liquidity and Returns, generally prioritized in that order Month of HDFC MF MF Industry No. of MFs with downgrade/ Company Exposure (INR Exposure (INR Crs) exposures# Credit Stress Crs) Jun-12 Deccan Chronicle Group 100 2 NIL Aug-15 Amtek Auto Limited 200 1 NIL Dec-15 Jindal Steel & Power - Group 2,640 3 NIL Oct-16 Ballarpur (BILT) 565 5 NIL Apr-17 Reliance Comm. Group 600 1 NIL May-17 IDBI Bank 1,435 6 700* Oct-17 Religare Group 1,269 6 NIL Dec-17 Jana Small Finance Bank 1,131 11 200* Jul-18 Sintex Group 358 3 NIL Aug-18 Reliance Infrastructure 286 3 NIL Sep-18 IL&FS Group (Downgraded) 3,206 12 NIL Sep-18 Dewan Housing Group 18,760 29 NIL Jan-19 IL&FS Road SPVs 1,677 4 227 Jan-19 Zee Promoter Group Exposure 7,198 9 1,196 Feb-19 Reliance Capital Group 7,608 10 Nil Source: ICRA MFI Explorer; # - including HDFC MF, wherever applicable * In both the cases, the coupons/principal payments were fully realized HDFC MF prefers cautious approach to credits over yields With the focus on credit quality, HDFC MF has largely avoided above stress cases Historical indicators are no guarantee of future results 8
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