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Result Highlights

* Asset quality: Annualized gross slippage ratio for 1QFY24 was 1.4% (Rs 58bn), with recoveries and upgrades amounting to Rs 26.5bn
* Margin picture: NIM at 4.1% was flat QoQ with several moving parts largely canceling each other out, for the quarter
* Asset growth: Advances grew 1.0%/15.7% QoQ/YoY, sequentially driven by Retail and Commercial and Rural Banking segment
* Opex control: Total opex rose 4.4%/33.9% QoQ/YoY, employee exp. grew 10.4%/36.6% QoQ/YoY and other exp. grew 1.6%/32.5% QoQ/YoY
* Fee income: Fees and commissions fell/rose -5.1%/17.3% QoQ/YoY, where retail fee income constitutes 93% of the total fee income

Our view – Unmerged bank growing relatively slower, merged entity more so

HDFC Limited’s entire loan book taken together with unmerged HDFC Bank, including the impact of IBPC, have delivered a growth of 13% YoY: Net of IBPC, loan growth for the unmerged bank was 15.7% YoY (0.9% QoQ) whereas, gross of IBPC, the loan growth was 20% YoY. For HDFC Limited, Individual loans have grown 14% YoY but Nonindividual loans have de-grown 18% YoY since the management is re-assessing these loans before they decide to grow this business again

Cost of funds has moved up ~30bps QoQ to 4.0%, which has outpaced the ~20bps rise in yield on assets to 8.1%: Apart from deposit book re-pricing, another key reason for the rise in cost of funds in the change in the composition of deposit book. While term deposits have grown 5.0% QoQ, SA deposits have de-grown -0.3% QoQ and CA deposits -7.7% QoQ. Management explained that HDFCB’s term deposits are not priced aggressively but rather at or just below competitor pricing

We maintain a less-than-bullish ADD rating with an unchanged price target of Rs 1950: We value the standalone bank at 2.5x FY25 P/BV for an FY24E/25E/26E RoE profile of 15.6/16.1/16.5%. We assign a value of Rs 203 per share to the subsidiaries, on SOTP. We had begun with an ADD rating for HDFCB in our in our Sector Initiation Report dated June 2021 before we upgraded it to BUY in our Sector Report dated May 2022 and then downgraded the stock back to ADD in the 4QFY23 result report.

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