HDFC Banking & PSU Debt Fund (An open ended debt scheme - PowerPoint PPT Presentation

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) A portfolio of superior credit quality! * July 2020 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. Investors should consult their financial advisers, if in doubt about whether the product is suitable for them. *Please refer slide 3 for credit profile of the portfolio 1

HDFC Banking and PSU Debt Fund - A Differentiated Fund • Consistently maintained high credit quality – 94.3% of AUM invested in Sovereign/Banking / YTM as of end June'20 % 6.6 PSUs* / other AAAs as of end-June’20 6.41 6.4 6.2 6.0 5.8 5.57 5.6 5.4 • Attractive portfolio yield compared to peers# 5.2 – 5.0 Exposure to bank perpetual bonds (refer HDFC BPSU^ fund Others BPSU funds# slide 3) Modified duration relative to peers Years 2.88 3.00 2.58 • Lower volatility / Interest rate risk as the Fund 2.50 2.00 intends to maintain short to medium modified duration 1.50 1.00 HDFC BPSU fund Other BPSU funds# In the current environment, HDFC Banking and PSU Debt Fund offers a suitable investment opportunity in our opinion. Source: B&K Securities; ^ BPSU – Banking and PSU; # other BPSU funds- Funds with AUM over INR 200 crore as of end-June 2020 have been considered. YTM and Modified duration is calculated by taking simple average of 14 other Banking and PSU Debt Funds * Includes all other permitted securities as per Scheme Information document of HDFC Banking and PSU Debt Fund, like debt instruments of Public Financial Institutions, Municipal Corporations and such other bodies. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s) 2

HDFC Banking and PSU Debt fund – Portfolio composition Portfolio Classification (%) % of AUM Exposure as of June 30, 2020 Rating AAA/AAA(SO)/A1+ AA+ & Government Securities Soveriegn 3.4% /A1+(SO) & Total Below Equivalent Public Financial Institutions AAA 42.6% Sovereign, 66.7% 14.0% 80.7% Public Sector Undertakings AAA 16.2% Banking & PSU Others (incl. cash) 13.6% 5.6% 19.3% Banks Perpetual bonds A to AA+ 14.0% Total 80.3% 19.7% 100.0% Banks Non-perpetual bonds AAA / A1+ 4.5% AAA rated, Non PSU AAA 11.3% Others 5.6% Exposure to Banks Perpetual Bonds (% of AUM) Vedanta Ltd. AA 2.1% Total PSU Banks Greenko SPVs^ AA-(CE) 1.5% As on June 30, 2020 14.04% 14.04% The Tata Power Company Ltd. AA- 1.2% TMF Holdings Ltd. AA- 0.4% Shriram Transport Finance Co. Ltd. AA+ 0.3% Average Modified Hazaribagh Ranchi Expressway YTM D 0.1% Maturity Duration Ltd. Cash and equivalent 2.4% 3.33 years 2.58 years 6.41% Total 100.0% For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as on 30 st June, 2020 ^ 9 Operational solar power projects housed under subsidiaries of Greenko, which is held by GIC Singapore (63.6%), ADIA (16%) and rest by Indian promoters. All the projects have off take agreement with NTPC 3

HDFC Banking and PSU – Diversified exposures Diversified Group Exposure Diversified Sector Exposure Major Sector Exposures (%) Top 5 Non-GoI Group Exposures (%) 62.3 FINANCIAL SERVICES 4.5 L&T 8.5 POWER 7.8 CONSTRUCTION 3.1 LIC 4.4 SERVICES 2.5 Tata 3.9 CHEMICALS 3.3 TELECOM 2.1 Vedanta 2.1 METALS 2.0 RIL 2.1 OIL & GAS 14.2 Sub-Total Financial Services % 17.7 Total Non-GoI Groups Public Financial Institutions (PFIs) 36.5 18.6 Banks Investments in 9 different groups Housing Finance Companies (HFCs) 6.4 NBFCs 0.8 For complete portfolio details refer www.hdfcfund.com. Portfolio details provided as June 30, 2020. Portfolio holdings are as a percentage of total portfolio holdings. The instruments referred above are not recommended by HDFC Mutual Fund/AMC. The Fund may or may not have any present or future positions in these instruments. 4

Case for AT-1 bonds • AT-1 Bonds are quasi debt instruments • Do not have a fixed maturity date but generally have a call option after 5 years and annually thereafter • Rated one or two notches lower than issuer credit rating • HDFC Banking and PSU Debt Fund has invested in PSU Banks and/or large private sector banks Table : 1-Capital Cushions of Banks as on 31-Mar-20 • PSU Banks are less risky as historically, the government Issuer CET-1 (a) CET-1 Cushion (a)-(b) has infused equity to maintain capital adequacy in these State Bank of India 9.77% 2.40% banks. Union Bank Of India Ltd. 9.40% 2.03% Punjab National Bank 10.69% 3.32% • Historically, PSU banks have called AT-1 bonds despite Bank of Baroda 9.44% 2.07% being placed under Prompt correction Action framework Canara Bank Ltd 9.39% 2.02% RBI Mandated Requirement 7.375% (b) Table : 2 – Spreads over 3 year Gsec yields • Rationale for Investments by HDFC Banking & PSU Debt Fund Gap between Spread over 3 year 3 Yr current in AT-1 Bonds 31-Mar-20 30-Apr-20 31-May-20 30-Jun-20 Gsec yield (%) average spread and LTA Healthy capital level of the issuing banks ( refer table 1 ) • Axis Bank 2.71 4.11 6.54 4.92 4.17 1.46 Bank of Baroda 2.59 3.98 5.8 4.11 3.86 1.27 • Demonstrated track record of support by GoI Canara Bank 3.14 4.12 7.47 5.63 5.13 1.99 EXIM Bank 2.21 3.48 4.36 3.71 3.49 1.28 • Spreads over 3 year Gsec yield higher than long term HDFC Bank 2.14 3.61 4.43 3.47 3.07 0.93 average, might ease as situation normalises (refer table 2) ICICI Bank 2.58 4.12 5.89 4.31 4.04 1.46 Punjab National • High spreads over securities like Fixed deposits, Tier-2 3.49 4.68 7.88 6.77 6.25 2.75 Bank bonds, infrastructure bonds, etc. issued by same bank State Bank of India 2.10 3.38 4.44 3.47 3.19 1.09 Union Bank of India 3.25 4.48 7.93 5.6 5.31 2.06 5

Why HDFC Banking and PSU Fund ? • Short to medium end of the yield curve looks attractive considering the risk-reward (refer slide 8) • Longer end yield likely to trade range bound given the large supply of dated Gsec • Quality portfolio with low credit risk, preferable in current credit environment • Liquidity concerns remain for select NBFCs (especially with high yield real estate exposure); cautious approach reduces risk 5.0 Spread between Month-end YTMs and 91-Tbills yield* • In view of the above, HDFC Banking & PSU Debt Fund offers: 4.0  Large exposure to GoI owned entities 3.0 3.2 %  Healthy Spread over 91 days T-bill yields* 2.0  Controlled duration 1.0  Exposure to perpetual bonds, mainly to PSU banks - -1.0 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. * Spread between month-end YTMs and cut off yield of 91 days T-bill in last auction of the month 6

Analysis of Distribution of Returns since inception 1 Year Daily Rolling Returns 3 Year Daily Rolling Returns Annual Returns (%) % of times Annual Returns (%) % of times More than 6% More than 6% 82.9% 100% More than 7.5% More than 7.5% 71.1% 75.7% More than 9% More than 9% 64.6% 23.3% Annual Rolling - Since inception, the fund has given 6% 3 year Rolling - Since inception, the fund has given or higher returns ~83% of the times. more than 7.5% returns – 76% of the times. 1 year and 3 year Rolling returns are calculated since inception of the fund based on daily frequency. For Detailed performance refer Slide no 11 Past performance may or may not be sustained in the future. HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteeing returns on investments made in the scheme. Inception date: March 26, 2014 . Data is updated till July 8, 2020. 7

Interest Rates Outlook Factors supporting lower yields Factors opposing lower yields • Sharp rate cuts by RBI and major central banks; easing bias • Excess SLR securities holding of PSU banks likely to continue • Large supply of dated securities by Central and State • Accommodative stance to remain till “it is necessary to revive Governments growth & mitigate the impact of COVID-19 on the economy” - RBI • Food prices may keep near term inflation over RBI’s target of 4% • Concerns over global growth due to disruption caused by • Sharp reductions in oil production might lead to higher spread of coronavirus oil prices over a year • Weak growth and soft commodity prices likely to result in lower inflation in medium term • Unconventional tools used by RBI to improve transmission of rate cuts (Operation TWIST, LTROs, Targeted LTROs) • Muted credit growth vs. deposit growth; Ample global and domestic liquidity Short to medium end of the yield curve offers better risk adjusted returns, in our judgement 8