Buy HDFC Bank Ltd For Target Rs.1,800 - Motilal Oswal Financial
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Earnings in line; Core PPoP growth and margin improve
Asset quality robust; restructured book declines to 53bp
* HDFC Bank (HDFCB) reported an in-line quarter, with PAT up 20% YoY, aided by a pick-up in NII growth due to 10bp QoQ expansion in margin. PPoP growth remained modest at 10% YoY, adversely impacted by a treasury loss of INR2.5b. However, Core PPoP growth was healthy at ~17% YoY in 2QFY23.
* Business growth remained healthy led by strong traction in Commercial and Rural Banking as well as Corporate book while Retail too grew strongly.
* HDFCB’s asset quality ratios remained robust and witnessed a sequential decline led by moderation in slippages and healthy recoveries and upgrades. Restructured book too declined to ~53bp of loans in 2QFY23 (from 76bp in 1QFY23). Healthy PCR of ~73% and a contingent provision buffer (at 65bp of loans) provided comfort on asset quality.
* We estimate ~19% PAT CAGR over FY22-24, with an RoA/RoE of 2.0%/ 17.2%, respectively, in FY24. We expect the stock to perform gradually as revenue and margin revive further while the merger-related overhang ebbs as HDFCB looks to complete the merger by 1Q/2QFY24E. We maintain our BUY rating with a TP of INR1,800 (premised on 3x FY24E ABV).
Margin improves 10bp QoQ to 4.1%
* HDFCB’s NII grew 18.9% YoY to INR210b (3% beat) v/s ~14.5% YoY in 1QFY23, with margin expanding 10bp QoQ to 4.1% in 2QFY23. PAT grew 20% YoY to INR106b (in line). For 1HFY23, NII/PPoP/PAT grew 17%/6%/20% to INR405b/INR328b/INR198b, respectively.
* Other income grew marginally to INR76b (10% miss), adversely impacted by treasury loss of INR2.5b. Excluding trading income, other income rose 17% YoY, supported by fee income growth at 17% YoY (+8% QoQ) in 2QFY23.
* OPEX rose ~21% YoY, with C/I ratio at 39.2% (core C/I ratio at 38.9%). PPOP rose 10% YoY (in line), however, Core PPOP grew at a healthy ~17% YoY.
* Loans grew 23.4% YoY, led by a robust 31% growth in Commercial and Rural loans and 27% growth in Wholesale loans. Retail loans jumped 20% YoY. Deposits rose ~19% YoY while CASA grew ~15% YoY. CASA ratio moderated to 45.4% in 2QFY23. The mix of retail deposits was at 83% v/s 82% in 1QFY23.
* On the asset quality front, the GNPA/NNPA ratio declined 5bp/2bp QoQ to 1.23%/0.33%, with slippages moderating to ~INR57b (1.6% of loans). PCR was stable at ~73%. Restructured book too fell to ~INR78.5b (53bp of loans in 2QFY23 v/s 76bp in 1Q). HDFCB continued to carry contingent provisions of 65bp of loans and additionally held floating provisions of INR14.5b.
* Subsidiary performance: Revenue/PAT for HDFC Securities dipped 4%/20% YoY to INR4.7b/INR1.9b, respectively, in 2QFY23. HDB Financial posted a 2% QoQ growth in loans to INR631b, while revenue rose 15% YoY. PAT stood at INR4.7b v/s INR1.9b/INR4.4b in 2QFY22/1QFY23. GS-3 assets were at 4.88% (down 7bp QoQ), while CAR/Tier I stood healthy at 20.8%/16.0%.
Highlights from the management commentary.
* Earlier the merger was expected to get completed by 2Q/3Q of FY24, which could now get concluded by 1Q/2Q of FY24.
* Margin trajectory will depend on the loan mix; however, the bank expects margins to witness a positive bias.
* HDFCB has added 2.9m new liability relations in 2QFY23 (+22% YoY/+11% QoQ). It garnered retail deposits worth INR710b in 2Q (+INR2.35t in the past one year).
* Revolve rate in 2QFY23 was similar to 1Q and is taking time to increase.
Valuation and view
HDFCB reported a steady quarter with recovery in Core PPoP growth and margins though treasury loss dragged PPoP. Loan growth was driven by a sustained momentum in Retail segment, along with robust growth in Commercial and Rural Banking as well as Wholesale loans. Asset quality ratios remained robust, while the restructured book moderated to 53bp of loans. Healthy PCR and a contingent provisioning buffer provided comfort on asset quality. We estimate HDFCB to deliver ~19% PAT CAGR over FY22-24, with an RoA/RoE of 2.0%/17.2% in FY24. Maintain BUY with a TP of INR1,800 (premised on 3x FY24E ABV). We expect the stock to perform gradually as revenue and margin revive further while the merger-related overhang ebbs as HDFCB looks to complete the merger by 1Q/2QFY24E.
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