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Steady topline; retail loans make a turnaround

HDFC Bank was incorporated in August 1994. It provides corporate banking and custodial services and is also involved in treasury and capital markets. In addition, it offers project advisory services and capital market products, including GDR and currency bonds.

• Gross interest income saw a growth of 4.8% QoQ (+15.6% YoY) to Rs. 37,273cr, while interest expenses grew 7.4% QoQ (+15.0% YoY). Net interest margin (NIM) remained stable sequentially at 4.0%.

• Restructuring of stressed assets under the RBI Resolution Framework for Covid-19 stood at Rs. 10,750cr.

• The bank delivered a steady performance during the quarter. The merger with HDFC Limited remains on track and, post completion, will further strengthen its position in the banking space. We remain positive on the stock and retain our BUY rating, with a lower target price of Rs. 1,705, based on 2.9x FY24E BVPS.

Positive growth in NII

During Q1FY23, the bank’s NIM remained stable at 4.0% vis-à-vis Q4FY22. NII grew 2.8% sequentially to Rs. 20,915cr (+16.0% YoY), due to an increase in advances (+1.9% QoQ). Cost-to-income ratio (excluding trading and mark-to-market gains/losses) went up by 70bps QoQ to 39.0%, led by the ongoing expansion of its branch network, leading to 3.1% QoQ growth in operating expenses at Rs. 11,355cr. Of this, employee costs stood at Rs. 4,607cr (+9.7% QoQ, +26.4% YoY), due to the onboarding of new employees. Provisioning fell further to Rs. 3,665cr (-9.1% QoQ, -31.7% YoY). Due to higher expenditure, PAT fell -8.2% QoQ to Rs. 9,616cr, but was up +21.1% YoY.

Balance sheet strengthens further; seasonality impacts asset quality

The bank’s advances grew 1.9% sequentially to Rs. 1,448,111cr. Asset quality, however, declined marginally due to seasonality in the agri-loans portfolio, with GNPAs / NNPAs declining to 1.28%/0.35% (vs. 1.14%/0.31% in Q4FY22). PCR reached 72.9% (vs. 71.0%). Domestic auto-loan book inched up 3.5% QoQ, personal loans by 5.6%, home loans by 6.3%, and gold loans by 5.5%. Deposits went up by 2.9% QoQ to Rs. 1,603,629cr, with CASA ratio at 45.8% (vs. 48.2%). CAR stood at 18.1%.

Key concall highlights

• HDFC bank opened 36 new branches in Q1FY23, taking the total branch count to 6,378, with another 250 branches under various stages of implementation.

• The cards business grew 47% YoY, with 1.2mn new cards being issued, taking the total cards base to 17.6mn. The bank now commands a 22.4% market share in cards, with a share of 48.9% in card receivables and 27.7% in card spending.

• Loan mix as of Q1FY23 was: retail – 39%, CRB – 35%, and corporate – 26%.

Outlook & valuation

HDFC Bank’s earnings trajectory remains on track with continued growth in retail. Excluding the seasonal impact, a gradual improvement could be seen in NPAs, with lower slippage. The ongoing expansion of branch network and cards business, coupled with the merger, is expected to aid long-term growth. In the near term however, the recent hiring spree and investments towards setting up branches may put pressure on bank’s pre-provision operating profit margins and the bottomline. Nevertheless, the bank’s long-term outlook remains positive. We thereby retain our BUY rating on the stock, with a lower target price of Rs. 1,705 based on 2.9x FY24E BVPS.

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