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In-line earnings; Core PPoP growth improves

Asset quality robust; Restructured book declines to 42bp

* HDFCB reported an in-line quarter. PAT was up 19% YoY, supported by a pickup in NII growth and controlled provisions. NIMs stood stable QoQ. PPoP growth remained modest at 13% YoY. However, Core PPoP grew by a healthy ~19% YoY.

* Loan growth was driven by strong traction in Commercial and Rural Banking and Retail loans. The corporate book witnessed a marginal QoQ decline.

* Asset quality ratios remained stable even as slippages were high at INR66b due to high Agri slippages. The restructured book declined to ~42bp of loans (v/s 53bp in 2QFY23). Healthy PCR of ~73% and a contingent provision buffer (62bp of loans) should support asset quality.

* We estimate a ~19% PAT CAGR over FY22-25, with RoA/RoE at 2.0%/17.7% in FY25. We expect the stock to perform gradually as the margin profile revives and the merger-related overhang eases (bank aims to complete the merger by 1Q/2QFY24). Maintain Buy.

Deposit growth steady; Margin remains stable QoQ at 4.1%

* NII rose 24.6% YoY to INR230b (in line) v/s 18.9% YoY in 2QFY23, with stable margin QoQ at 4.1%. PAT grew by 18.5% YoY to INR122.6b (in line). For 9MFY23, NII/PPoP/PAT grew 19%/9%/19% to INR635b/INR518b/INR321b.

* Other income rose 12% QoQ to INR85b (in line), aided by treasury gains of INR2.6b vs a loss of INR2.5b in 2QFY23. Excluding trading income, other income rose 15% YoY, with fee income up 19% YoY (+4% QoQ).

* Opex was high at 27% YoY and reflected continued investment in branches and employees and the increasing mix of retail assets. The C/I ratio stood at 39.6% (core C/I ratio at 39.9%). PPOP grew 13% YoY (in line); however, core PPOP grew by a healthy ~19% YoY vs 17% YoY /12% YoY in 2QFY23/3QFY22. ? Loans grew 19.5% YoY, led by robust 30% YoY growth in Commercial and Rural loans and 21% YoY in Retail loans. Wholesale loans grew 20% YoY but declined QoQ. Deposits rose ~20% YoY, while CASA grew ~12%. The CASA ratio moderated to 44%. Mix of retail deposits stood at 84% vs 83% QoQ.

* On the asset quality front, GNPA/NNPA ratios remained stable at 1.23%/ 0.33%, even as slippages were high at ~INR66b (1.9% of loans), hit by high Agri slippages. PCR was stable at ~73%. The restructured book fell to ~INR64b (42bp of loans) v/s 53bp in 2QFY23. The bank continues to carry contingent provisions of 62bp of loans and also holds floating provisions of INR14.5b.

* Subsidiary performance: Revenue/PAT for HDFC Securities fell 6%/21% YoY to INR5.0b/INR2.0b in 3QFY23. HDB Financial reported a 3% QoQ growth in loans to INR651b, while revenue grew 13% YoY. PAT stood at INR5.0b v/s INR3.0b/INR4.7b in 3QFY22/2QFY23. GS-3 assets stood at 3.73% (down 115bp QoQ), while CAR/Tier I stood healthy at 20.5%/16.0%.

Highlights from management commentary

* The bank focuses on garnering granular deposits – received INR670b in retail deposits in 3Q and INR2.58t in past one year.

* The margin trajectory will depend on the loan mix; however, the bank expects margins to witness a positive bias.

* The bank added 2.6m new liability relations in 3Q (+12% YoY).

* The bank opened 684 branches in 3Q and plans to add 600 branches in the short term

Valuation and view

HDFCB reported an in-line quarter with increased traction in Core PPoP and NII growth, even as margins remained stable. Loan growth was driven by sustained momentum in the Retail segment and robust growth in Commercial and Rural Banking. Asset quality ratios remained robust, while the restructured book moderated to 42bp of loans. Healthy PCR and a contingent provisioning buffer should support asset quality. We estimate HDFCB to deliver a ~19% PAT CAGR over FY22-25, with RoA/RoE of 2.0%/17.7% in FY25. We maintain our Buy rating with a TP of INR1,930 (premised on 3.0x Sep’24E ABV). We expect the stock to perform gradually as the margin profile revives and the merger related overhang eases (bank aims to complete the merger by 1Q/2QFY24).

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