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In-line earnings; Core PPoP growth improves

Asset quality robust; Restructured book declines to 42bp

* HDFCB reported an in-line quarter. PAT was up 19% YoY, supported by a pickup in NII growth and controlled provisions. NIMs stood stable QoQ. PPoP growth remained modest at 13% YoY. However, Core PPoP grew by a healthy ~19% YoY.

* Loan growth was driven by strong traction in Commercial and Rural Banking and Retail loans. The corporate book witnessed a marginal QoQ decline.

* Asset quality ratios remained stable even as slippages were high at INR66b due to high Agri slippages. The restructured book declined to ~42bp of loans (v/s 53bp in 2QFY23). Healthy PCR of ~73% and a contingent provision buffer (62bp of loans) should support asset quality.

* We estimate a ~19% PAT CAGR over FY22-25, with RoA/RoE at 2.0%/17.7% in FY25. We expect the stock to perform gradually as the margin profile revives and the merger-related overhang eases (bank aims to complete the merger by 1Q/2QFY24). Maintain Buy

Deposit growth steady; Margin remains stable QoQ at 4.1%

* NII rose 24.6% YoY to INR230b (in line) v/s 18.9% YoY in 2QFY23, with stable margin QoQ at 4.1%. PAT grew by 18.5% YoY to INR122.6b (in line). For 9MFY23, NII/PPoP/PAT grew 19%/9%/19% to INR635b/INR518b/INR321b.

* Other income rose 12% QoQ to INR85b (in line), aided by treasury gains of INR2.6b vs a loss of INR2.5b in 2QFY23. Excluding trading income, other income rose 15% YoY, with fee income up 19% YoY (+4% QoQ).

* Opex was high at 27% YoY and reflected continued investment in branches and employees and the increasing mix of retail assets. The C/I ratio stood at 39.6% (core C/I ratio at 39.9%). PPOP grew 13% YoY (in line); however, core PPOP grew by a healthy ~19% YoY vs 17% YoY /12% YoY in 2QFY23/3QFY22.

* Loans grew 19.5% YoY, led by robust 30% YoY growth in Commercial and Rural loans and 21% YoY in Retail loans. Wholesale loans grew 20% YoY but declined QoQ. Deposits rose ~20% YoY, while CASA grew ~12%. The CASA ratio moderated to 44%. Mix of retail deposits stood at 84% vs 83% QoQ.

* On the asset quality front, GNPA/NNPA ratios remained stable at 1.23%/ 0.33%, even as slippages were high at ~INR66b (1.9% of loans), hit by high Agri slippages. PCR was stable at ~73%. The restructured book fell to ~INR64b (42bp of loans) v/s 53bp in 2QFY23. The bank continues to carry contingent provisions of 62bp of loans and also holds floating provisions of INR14.5b.

 Subsidiary performance: Revenue/PAT for HDFC Securities fell 6%/21% YoY to INR5.0b/INR2.0b in 3QFY23. HDB Financial reported a 3% QoQ growth in loans to INR651b, while revenue grew 13% YoY. PAT stood at INR5.0b v/s INR3.0b/INR4.7b in 3QFY22/2QFY23. GS-3 assets stood at 3.73% (down 115bp QoQ), while CAR/Tier I stood healthy at 20.5%/16.0%.

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