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Robust growth in advances; outlook promising

Incorporated in August 1994, HDFC Bank provides corporate banking and custodial services and is also involved in treasury and capital markets. In addition, it offers project advisory services and capital market products, including GDR and currency bonds

* In Q3FY23, higher interest income (9.9% QoQ) was offset by increase in interest expenses (+12.0% QoQ). Resultantly, NIM remained flat at 4.3%.

* Advances up 1.8% QoQ and 19.5% YoY while deposits rose 3.6% QoQ and 19.9% YoY. GNPA (1.23%) and NNPA (0.33%) ratios remained stable.

* Higher retail loans coupled with pick up in commercial and rural banking would continue to support loan growth in near term. Deposits to remain healthy with healthy CASA mix. We may see marginal improvement in NIM in the near term, and is expected to largely remain stable from thereon owing to strong growth in retail portfolio, which would partially offset higher cost of funds. We therefore reiterate our BUY rating, with a rolled forward target price of Rs. 1,890 based on 2.9x FY25E BVPS

Strong double-digit growth in net profit QoQ In Q3FY23, interest income grew 9.9% QoQ

to Rs. 45,002cr, driven by growth in interest on advances. Interest expenses rose 12.0% QoQ to Rs. 20,505cr. Consequently, NII rose 8.3% QoQ to Rs. 24,497cr. NIM was flat QoQ and YoY at 4.3%. Opex increased 10.6% QoQ due to accelerated branch expansion and increased employee spends, partly offset by other income, which grew 10.5% QoQ due to higher fee and commission income. Pre-provisioning profit came in at Rs. 5,567cr (up 7.8% QoQ). Provisions decreased 13.8% QoQ to Rs. 3,244cr and credit cost improved to 0.74% (vs. 0.87% in Q2FY23). Subsequently, net profit rose 14.1% QoQ to Rs. 12,698cr.

Steady asset quality

Advances grew 1.8% QoQ and 19.5% YoY to Rs. 1,506,809cr, driven by strong growth momentum in retail loans and commercial and rural banking. Deposits grew 3.6% QoQ and 19.9% YoY to Rs. 1,733,204cr. However, CASA ratio shrank 100bps QoQ to 44.0%, owing to a shift in deposits from SA to FDs, with an increase in interest rates. Gross non-performing assets (GNPA) came in at Rs. 18,764cr (up 2.5% QoQ and 17.2% YoY). GNPA/NNPA ratios were stable at 1.23%/0.33%, respectively. The provision coverage ratio stood at 73.0%. The capital adequacy ratio was 19.4% and the Tier-I ratio was 17.2%, well above the regulatory requirements

Key quarter highlights

* HDFC Bank opened 684 new branches in Q3FY23, taking the total branch count to 7,183 (1,404 new branches YoY).

* The management expects healthy credit demand from NBFCs, telecom, PSU and infrastructure segments in the near term.

Outlook & valuation

We expect robust growth in advances, driven by sustained demand from commercial, and rural banking as well as from retail segment while deposits to remain healthy on favourable CASA mix. Rising interest rates and higher retail loan growth would continue to support NIM despite rising cost of funds. Meanwhile, merger related overhangs should also ease as it nears completion by Q1/Q2FY24. Steady asset quality, diversified loan portfolio, and financial prudence will remain key positives for the stock. We reiterate our BUY rating on the stock, with a rolled forward target price of Rs. 1,890 based on 2.9x FY25E BVPS.

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