IGI Logo

Complex balance sheet jugglery lies ahead

Result Highlights (See “Our View” below for elaboration and insight)

* Asset quality: Annualized gross slippage ratio for 3QFY24 was 1.0% (Rs 70bn), with recoveries and upgrades amounting to Rs 45bn

* Margin picture: NIM at 3.4% was flat QoQ, as sequentially yield on assets and cost of funds have moved up in tandem

* Asset growth: Advances grew 4.9% QoQ on comparable basis, sequentially driven by Retail segment and Commercial and Rural Banking segment

* Opex control (QoQ Comparable): Total opex rose 3.6%/28% QoQ/YoY, employee exp. rose 3.5%/30% QoQ/YoY and otr. exp. rose 3.7%/27% QoQ/YoY

* Fee income: Fees and commissions were flat QoQ, where retail fee income constitutes 94% of the total fee income

Our view – Elevated loan to deposit ratio appears to be a challenge

Loan to deposit ratio stands at ~110% post the merger and management has acknowledged the need for it to decline: Management stated that the ratio would trend lower over the next several quarters. They further stated that deposits growth has to be 300-400 bps higher than loan growth to bring down loan to deposit ratio. As of now, sequential deposits growth of 1.9% materially lags loan growth of 4.9%. The bank’s intention of driving deposit growth through branch addition is tough to execute given slow pace of branch addition (270 branches in the financial year so far compared with the intended 1500 for the full year) and new branch locations being focused mainly outside Tier 1 centres (and hence, with low deposit potential). It is unsurprising that the bank has not found it easy to run down the erstwhile HDFC Limited’s high-cost borrowings, with total borrowings standing at a staggering Rs 7.37 trn compared with Rs 2.11 trn a year ago (prior to the merger).

Margin remaining stagnant at 3.4% on sequential basis is also indicative of the challenges for the bank: Despite enhancing loan to deposit ratio by 319 bps on sequential basis, NIM remained stagnant for the bank. Management has emphasized that loan mix change could be a tailwind for NIM, ceteris paribus but even this may not be straightforward to execute.

We maintain a less-than-bullish ADD rating with an unchanged price target of Rs 2000: We value the standalone bank at 2.7x FY25 P/BV for an FY24E/25E/26E RoE profile of 16.6/18.0/18.6%. We assign a value of Rs 209 per share to the subsidiaries, on SOTP. We had begun with a less-than-bullish ADD rating for HDFCB in our in our Sector Initiation Report dated June 2021 and the stock has been a relative under-performer.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632