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Strong quarter on all fronts; deposit momentum a positive

HDFC Bank reported a steady quarter with expansion in NIMs (higher than expected), healthy core PPOP growth (+17% YoY) and steady asset quality. Key positive, in our view, was strong liabilities growth (+4.3% QoQ) which continues to be retail-led (acquiring approx. 2mn liabilities relationships per quarter). Asset quality remains in good shape with slippages at 1.7% (annualised) and provision cover at 73% (2Q credit costs stood at 90bps (annualised), GNPL at 1.23%). HDFC Bank’s balance sheet momentum has begun to reflect in its top-line growth and core PPOP performance after almost 5 quarters and we believe this should drive incremental outperformance on the stock. HDFC bank underperformed the Banknifty/ Nifty by 15%/8% over last 12M and we see the stock recouping some of its valuation premium vs peers. Maintain BUY with target price of 1,640.

* Asset quality remains ‘best-in-class’; restructuring quantum comes down: GNPA/NNPA improved to 1.23%/0.33% (-6bps/-2bps QoQ) as slippages moderated sequentially to INR 57bn (1.7% annualised, vs. 2.3% in 1Q23) and recoveries/upgrades and write-offs stood at INR 25bn and INR 30bn respectively. Total restructuring quantum stood at 0.53% of loans (vs 0.89% as of Jun’22) of which 0.09% was on account of borrower level classification. Credit cost for the quarter stood at 0.9% and HDFCB’s non-specific provision buffer stands at 0.75% of loans which should provide comfort against future contingencies. We build in credit costs of 0.80%/0.82% for FY23E/FY24E

* Robust loan growth; deposits remains a key focus area: Loan growth was strong and broad-based at +23% YoY/+6% QoQ - wholesale (+27% YoY/+9% QoQ), CRB (+32% YoY/+9% QoQ) and retail (+20% YoY/+4% QoQ). Deposits grew at 19% YoY/4% QoQ (meaningfully higher than system deposit growth of 9% YoY) with CASA at 45.4% (- 40bps QoQ). Acquisition of deposits remains a key focus area for the bank and it plans to leverage the power of branch banking to source deposits. HDFCB plans to add 1,500- 2,000 branches every year in order to double its branches in 3-4 years. Management highlighted that addition of branches (+157) in 1HFY22 has been a tad slow and is expected to pick up pace in 2HFY22 (>500 branches in pipeline and are at various stages of completion).

* Reported NIMs expand by 10bps QoQ; opex to remain elevated: NIMs improved to 4.1% in 2Q23 (+10bps QoQ) on account of upward re-pricing of loans while deposits get repriced with a lag. HDFCB reported a PAT of INR 106bn (+20% YoY/+15% QoQ) driven by NII growth of 19% YoY/+8% QOQ and lower provisions (-17% YoY/+2% QoQ). In 2Q23, MTM losses amounted to INR 2.5bn mainly from investments in shorter tenure corporate bonds and PTCs. Opex growth stood at +21% YoY/+7% QoQ and we expect it to remain elevated in the near to medium term as the bank continues to expand its branch network, increase its employee base, focus on driving retail growth and invest in enhancing its digital offerings. We build in cost-to-assets of 2.0%/1.9% for FY23E/FY24E.

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