The bytes are uninitialized
The C standard (6.2.6.1-6) says that "padding bytes take unspecified values when a value is stored in a structure", but in this case I assume that the padding bytes of S are uninitialized.
That appears to be a quote from C 2018 or earlier. However, the current C standard is 2024, and it adds a parenthesized phrase:
When a value is stored in an object of structure or union type, including in a member object, the bytes of the object representation that correspond to any padding bytes take unspecified values (e.g. structure and union assignment can fail to copy any padding bits).
Given the added phrase, we see this sentence is entirely irrelevant to the code in the question, as the two memcpy calls explicitly copy specific bytes of the structure and therefore explicitly do not copy padding bytes. So the code explicitly performs what this paragraph tells us what could happen if we actually did a structure assignment instead of individual byte copying. (Also note the new phrase likely intended to refer to padding bytes rather than padding bits. Although the padding bytes are of course composed of bits, “padding bits” is otherwise used in the standard only for the unused bits that may be within an integer object, not the unused bytes that may be between structure elements.)
Therefore, the situation the code in the question presents us with is a structure whose member bytes have been initialized and whose padding bytes are uninitialized.
These uninitialized bytes do not cause undefined behavior
The question is if this may lead to undefined behavior?
This is vague, as anything could lead to undefined behavior. For example, having the value 1 in an int x could lead to undefined behavior in the code if (x == 1) RoutineWithUndefinedBehavior();. I will consider whether the fact that the padding bytes are uninitialized can be a specific cause of undefined behavior.
A particular concern about uninitialized data causing undefined behavior arises from this passage in C 2024 6.3.3.1, in the context of converting an lvalue to a value (that is, reading the stored value of an object to use it in an expression):
If the lvalue designates an object of automatic storage duration that could have been declared with the register storage class (never had its address taken), and that object is uninitialized (not declared with an initializer and no assignment to it has been performed prior to use), the behavior is undefined.
This does not apply to the code in the question because the memcpy calls take the addresses of structure members, and that means the structure could not have been declared register.
Unspecified bytes would not cause undefined behavior
We could instead initialize the structure members by direct assignment, S.a = x; S.b = y;. But then the sentence from 6.2.6.1 applies; it explicitly says the padding bytes take unspecified values, which is a different state than being uninitialized.
Given that the bytes of the structure would then have been initialized, even if to unspecified values, then the sentence about using an uninitialized lvalue would not apply. Further, whatever values the padding bytes do have, this sentence, which follows the one in 6.2.6.1 quoted in the question, applies:
The object representation of a structure or union object is never a non-value representation, even though the byte range corresponding to a member of the structure or union object can be a non-value representation for that member.
Thus, using the whole value of a structure (as in structure assignment) would not encounter a trap value, so undefined behavior would not arise from that.
Supplement
Consider replacing the two memcpy calls with the single assignment S.a = x;. Per the sentence in 6.2.6.1, this sets the padding bytes to unspecified values. However, it does not affect S.b. So S.b remains uninitialized, and S could have been declared register. That situation is considered in this question.