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Earnings in line; treasury losses weigh on PPOP growth

Asset quality deteriorates slightly; restructured book declines to 76bp

* HDFCB reported a mixed 1QFY23, with an in line NII/PAT (up 15%/19% YoY), supported by lower provisions. However, PPOP growth fell sharply to 1.5% YoY, impacted by a treasury loss of INR13.1b. Core PPOP though grew healthy ~15% YoY.

* Business growth remains modest led by healthy traction in Retail and Commercial and Rural Banking while Corporate book saw flattish growth.

& Asset quality ratios deteriorated led by higher slippages (due to seasonal Agri NPAs), however, restructured book saw a sequential decline to ~76bp of loans (v/s 1.14% in 4QFY22). Healthy PCR of ~73% and a contingent provision buffer (69bp of loans) provides comfort on asset quality.

& We estimate ~20% PAT CAGR over FY22-24, with RoA/RoE at 2%/17.5% in FY24. HDFCB remains one of our preferred picks. We expect the stock to recover gradually as revenue and margin revives over FY23, while clarity emerges on several aspects related to the merger with HDFC.

Retail loans gain traction; margin flat QoQ at 4%

* NII grew 14.5% YoY v/s ~10% YoY in 4QFY22, with margin flat QoQ at 4%. NII was supported by higher growth in Retail loans. We expect margin to revive gradually in coming quarters.

* Other income was flat YoY at INR63.9b, impacted by a treasury loss of INR13b. Excluding trading income, other income rose 35.4% YoY (albeit on a benign base), fueled by higher fee income (up 38% YoY and a three-year CAGR of 15%).

* OPEX grew by ~29% YoY, with C/I ratio at 40.6% (core C/I ratio at 38.6%). PPOP grew 1.5% YoY. Core PPOP grew healthy ~15% YoY.

* Loans grew 21.6% YoY, led by robust 29% growth in Commercial and Rural loans and 22% jump in Retail loans. Wholesale loans grew 16% YoY. Retail loans sustained its strong recovery QoQ ~5%. Deposits rose by ~19% YoY, CASA grew by ~20%. CASA ratio moderated by 240bp QoQ to 45.8%.

* On the asset quality front, the GNPA/NNPA ratio increased by 11bp/3bp QoQ to 1.28%/0.35%, with slippages elevated ~INR72b (2.1% of loans). PCR stood stable ~73%. Restructured book fell to ~INR107.5b (76bp of loans) v/s 1.14% in 4QFY22. The bank carries contingent provisions of INR96.3b (69bp of loans) and additionally holds floating provisions of INR14.5b.

* Subsidiary performance: Revenue/PAT for HDFC Securities fell 5%/25% YoY to INR4.3b/INR1.9b in 1QFY23. HDB Financial reported a marginal QoQ growth (~1%) in loans to INR618b, while revenue grew 13% YoY. PAT stood at INR4.4b v/s INR886m/INR4.3b in 1Q/4QFY22. GS-3 assets stood at 4.95% (down 5bp QoQ), while CAR/Tier I stood healthy at 20.3%/15.4%.

Highlights from the management commentary

* On Wholesale advances, the bank let go of loans worth INR400-500b as the rates were less attractive.

* Cheque bounce rates remain lower than pre-COVID levels across all Retail products.

* Slippage stood at INR72b in 1QFY23 (50bp of loans not annualized). Excluding Agri and one-offs, slippages stood at 38bp of loans.

* Revolver rate is likely to increase gradually and revert back to pre-COVID levels over the course of time.

Valuation and view

HDFCB reported an in line NII and PAT, while PPOP and asset quality saw some blips due to higher treasury losses and slippages. Loan growth was driven by a sustained momentum in Retail segment, along with steady growth in Commercial and Rural Banking. Margin stood flat QoQ and is expected to improve gradually. Asset quality ratios have deteriorated marginally, while the restructured book moderated to 76bp of loans. Healthy PCR and a contingent provisioning buffer provide comfort on asset quality. We expect HDFCB to deliver ~20% PAT CAGR over FY22-24, with a RoA/RoE of 2%/17.5% in FY24. We maintain our Buy rating with a TP of INR1,800 per share (premised on 3x FY24E ABV). HDFCB remains among our preferred picks. We expect the stock to perform gradually as revenue and margin revive over FY23, while clarity emerges on several aspects related to the merger with HDFC.

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