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Wholesale loans de-grow due to unattractive pricing, while HDFCB accelerates branch addition

Result Highlights

* Asset quality: Annualized gross slippage ratio for 3QFY23 was 1.7% (Rs 66bn), with recoveries and upgrades amounting to Rs 31bn

* Margin picture: NIM at 4.1% was flat QoQ and excludes an impact of 5-6 bps or about Rs 3bn due to interest on income tax refund

* Asset growth: Advances grew 1.8%/19.5% QoQ/YoY, sequentially driven by Retail Loans and Commercial and Rural loan segments

* Opex control: Total opex rose 11%/26.5% QoQ/YoY, employee exp. grew 17.1%/30.8% QoQ/YoY and other exp. grew 8.3%/24.5% QoQ/YoY

* Fee income: Fees and commissions rose 4.3%/19.3% QoQ/YoY, sequentially driven by higher card spends and other business activity

Our view – Wholesale loans de-grow due to unattractive pricing, while HDFCB accelerates branch addition

Overall loan growth was dragged lower owing to HDFCB not finding wholesale loan pricing inadequate during the quarter: Wholesale loans (excluding IBPC) de-grew -1.1% QoQ since the bank deliberately gave up about Rs 300-400bn worth of wholesale loan business due to unattractive pricing. Management averred that there is no problem with wholesale loan demand, which is coming in from the NBFC, PSU, retail and infra segments and weakness in wholesale loan growth for the bank may be transient

Opex ramped up materially driven by branch openings and employee addition, among other factors: 684 branches were added during the quarter, taking branch count to 7183. Also, 978 branches were activated for gold loans during the quarter, taking branches activated for gold loans to 3938. On the employee front, 5863 people were added during the quarter. There was a tranche of RSU and ESOP cost worth Rs 2.5-3bn.

Asset quality outcomes remained under control as the bank largely held on contingent provisions as a matter of abundant caution: Slippages for the quarter were Rs 66bn or 42 bps of advances (non-annualised). Covid-19 restructured book amounted to Rs 64bn or 42 bps of advances. Gross annualised credit cost for the quarter amounted to 74 bps. While there was a utilisation of contingent provisions worth Rs 2bn during the quarter, the bank is still monitoring the Covid situation and intends to keep the contingent provisions for now. All provisions taken together provide a 166% coverage on GNPA

We reiterate BUY rating on HDFCB with a revised price target of Rs 2020: We value the standalone bank at 2.9x FY24 P/BV for an FY23E/24E/25E RoE profile of 14.6/14.7/15.6%. We assign a value of Rs 249 per share to the subsidiaries, on SOTP.

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