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Better than expected NII growth offset by elevated opex; growth needs further push

HDFC Bank’s Q3FY23 earnings were broadly in line with I-Sec estimates. Advance growth of <20% (due to QoQ corporate advance decline) and Rs670bn of retail deposit accretion momentum needs further push. NII growth retraced better than expected to 24.6% YoY / 9.4% QoQ, partly supported by interest on income tax refund. This was offset by elevated opex being up 26.5% YoY / 11% QoQ. Continued investment in branches and employees led to an elevated opex-to-assets ratio of ~2.2%. Further supported by treasury gains of Rs2.6bn and credit cost at mere 74bps, PAT grew 18.5% YoY / 15.6% QoQ to Rs122.6bn. GNPAs stayed put at 1.23% despite seasonal stress flowing from agri. Core operating profit grew 19.3% YoY / 6.3% QoQ. HDB Financial Services’ earnings, too, reflected pick-up in growth traction and asset quality improvement. Maintain BUY with an unchanged target price of Rs1,874, assigning 3.2x FY24E book. Key risks: Regulatory costs attached with HDFC merger, and elevated opex

* How we read Q3FY23 earnings:

* With repricing benefit, NII growth retraced: Repricing impact was clearly visible in the 11% QoQ rise in interest on advances and 12% QoQ rise in interest expenses. Yield on advances improved 30bps QoQ while cost of funds has also risen >20bps. Further supported by a sharp rise in other interest income, calculated NIMs improved almost 15bps QoQ.

* Sequential growth supported by CRB and focused retail products: Growth was primarily led by commercial, rural banking (up 39% YoY / 5.2% QoQ) and retail (up 20% YoY / 4.5% QoQ). Wholesale banking growth was down 1% QoQ, registering 20% YoY growth. Sequential momentum in retail advances was led by personal loans (up 23.4% YoY / 6.3% QoQ), gold loans (22.5% YoY / 6.4% QoQ), home loans (23.5% YoY / 4.9% QoQ), and LAP (25.5% YoY / 4.5% QoQ). Payment products (predominantly credit card) growth of 1.6% QoQ / 13.7% YoY lagged industry-wide credit card portfolio growth

* GNPAs improved across business segments except seasonal agri stress: GNPAs were flat QoQ at 1.23%. This was supported by moderation in retail GNPA to 1.06% vs 1.13% QoQ, corporate GNPAs to 0.52% vs 0.56% QoQ, CRB (ex-agri) to 1.2% vs 1.23%. This was offset by a seasonal rise in agri GNPA.

* Treasury gain of Rs2.6bn: HDFC Bank has reported further treasury gain of Rs2.6bn mainly due to net trading and MTM write-back on corporate bonds and G-secs.

* Read-through for other banks with regards to some more aspects: 1) 10-year India G-sec yields fell by 7bps in Q3FY23 to 7.33% from 7.40% QoQ and 1-3 year India G-sec yields fell by 5-10bps. To that extent, there is a possibility of some write-back for other banks, too. 2) Loan repricing benefit from hikes in EBLR and MCLR rates will support NIMs. 3) Investment in franchise will keep opex elevated for peer banks, too.

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