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Asset quality improves further; restructured book declines to 31bp

* HDFCB reported an in-line quarter. PAT was up 20% YoY, supported by a healthy NII growth and lower provisions. NIMs stood stable QoQ. PPoP and Core PPoP growth remained modest at ~14% YoY each.

* Strong demand for Commercial and Rural Banking, and Agriculture, Corporate and retail loans led to a healthy QoQ growth in the loan portfolio. Deposits also showed strong traction.

* Asset quality ratios improved as slippages moderated to INR49b. The restructured book declined to 31bp of loans (v/s 42bp in 3QFY23). PCR improved to ~76%, which coupled with a contingent provision buffer (61bp of loans) should support asset quality.

* We uphold our earnings projection and estimate a ~19% PAT CAGR over FY23-25, with RoA/RoE at 2.0%/17.7% in FY25. A potential pick up in margins and progress on the merger would be the key monitorables. We reiterate our Buy on the stock.

Deposit growth strong; margin remains stable QoQ at 4.1%

* NII rose 23.7% YoY to INR234b (in line) v/s 24.6% YoY in 3QFY23. The QoQ margin remained stable at 4.1%. PAT grew 19.8% YoY to INR120.5b (in line). For FY23, NII/PPoP/PAT grew 21%/10%/19% to INR868b/INR704b/INR441b.

* Other income grew 3% QoQ to INR87b (in line), aided by healthy fee income (up 10% QoQ) even as bank reported a treasury loss of INR377m v/s a gain of INR2.6b in 3QFY23. Excluding trading income, other income rose 15.5% YoY.

* Opex increased 33% YoY, primarily due to ongoing investments in branches, staff and the growing proportion of retail assets. The C/I ratio stood at 42.0% (core C/I ratio at 41.9%). PPOP grew 14% YoY (5% miss); while core PPOP grew ~14% YoY v/s 19% YoY/10% YoY in 3QFY23/4QFY22.

* Loans grew 17% YoY, led by robust 30% YoY growth in Commercial and Rural loans and 27% YoY in Agri loans. Retail loans grew 19% YoY, while Wholesale loans grew 13% YoY. Deposits rose ~21% YoY, while CASA grew ~11%. The CASA ratio increased to 44.4%. The share of retail deposits in the overall deposit mix stood at 83%, slightly lower than the previous quarter’s 84%.

* On the asset quality front, GNPA/NNPA ratios improved to 1.12%/ 0.27%, as slippages moderated to ~INR49b (1.3% of loans). PCR improved to ~76%. The restructured book fell to ~INR50b (31bp of loans) v/s 42bp in 3QFY23. The bank maintains contingent provisions equivalent to 61bp of loans and also holds floating provisions of INR14.5b.

* Subsidiary performance: Revenue/PAT for HDFC Securities fell 5%/18% YoY to INR4.9b/INR1.9b in 4QFY23. HDB Financial reported an 8% QoQ growth in loans to INR700b, while revenue grew 6% YoY. PAT stood at INR5.5b v/s INR4.3b/INR5.0b in 4QFY22/3QFY23. GS-3 assets stood at 2.73% (down 100bp QoQ), while CAR/Tier I stood healthy at 20.1%/15.9%.

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