IGI Logo

Treasury loss drags earnings, slippages elevated; operating performance stable

HDFC Bank’s (HDFCB) Q1FY23 earnings growth of 19% YoY lagged I-Sec expectations due to higher treasury loss of Rs13.1bn and elevated opex (up 3% QoQ / 29% YoY). Slippages, too, spiked to 2.5% on seasonal agri stress, corporate segment delinquency and slippages from restructured pool. Nonetheless, in the absence of contingency buffer creation, credit cost was managed at 91bps (better than expected). NIM was stable at 4%, as is yet to reflect in the repricing benefit of EBLR and MCLR hikes (reset happens with a lag of a quarter or two). NII growth of 14.5% was on the expected lines. Core fee income was up 38% YoY. Most retail and commercial products registered 4-6% QoQ growth; home loans and gold loans gained traction while personal loans and payment products sustained momentum. Continued investment in infra, employees and technology to scale up retail, reflected in elevated opex to assets of >2%. Maintain BUY with a revised target price of Rs1,874 (earlier: Rs1,955) now assigning 3.2x (earlier 3.35x) FY24E book given the merger transition). Key risks: i) Regulatory cost attached with HDFC merger; ii) elevated opex.

How we read Q1FY23 earnings:

Treasury loss of Rs13bn and elevated operating expenses resulted in lower operating profit growth of mere 1.5% YoY (down 6% QoQ). However, operating profit excluding treasury grew 14.7% YoY, up 1.7% QoQ.

Slippages were elevated at 2.5% (Rs73bn) with >20% of delinquencies flowing from seasonal agri stress, some corporate segment delinquency and slippages from restructuring. Both these segments witnessed deterioration QoQ. Else, retail NPAs were flat QoQ and also commercial (ex-agri) NPA was up mere 3bps QoQ to 1.23%. Despite this, credit cost was managed at 0.91%, no contingency buffer was created.

Advances growth of 21.5% YoY was primarily led by retail banking (21.5% YoY/5% QoQ) as well as commercial and rural banking (up 29% YoY/3% QoQ). Sequential loan growth momentum was dragged by agri, corporate and 2-wheeler. Else, all the other segments reported 4-6% QoQ growth. Home loan led the pack with 6.3% QoQ /22.2% YoY growth, followed by personal loans growing 5.6% QoQ/22.8% YoY and also momentum was sustained in payment products/LAP. Focus on gold loans, too, was visible with 5.5% QoQ growth.

Employee base grew >8% QoQ and 23% YoY to 152.5k. Employee cost, thereby, has risen 11% QoQ and 27% YoY.

Regulatory approval is with respect to the proposed scheme of amalgamation. Separate communication is on with regulators regarding phased compliance of regulatory requirement and stake in subsidiaries/associates (HDB Financial / HDFC Life).

Read-through for other banks with regards to some more aspects: 

1) With AFS portfolio of 34%, HDFC Bank had taken treasury hit of Rs13bn. Treasury loss may drag earnings for other banks, too.

2) Loan repricing benefit from hikes in EBLR and MCLR rates may come with a lag.

3) Investment in franchise will keep opex in Q1 elevated for peer banks, too. 4) Slippages from restructured pool will be key to watch for.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

SEBI Registration Number INZ000183631

Above views are of the author and not of the website kindly read disclaimer