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Healthy credit offtake; however, margins remained flat

Moderation in topline growth: HDFC Bank reported net interest income growth of 4% QoQ to Rs 28,471 Cr as cost of funds remained elevated during the quarter. Interest earned during the quarter increased by 4.3% QoQ to Rs 67,908 Cr, however, interest expended saw an increase of 4.5% QoQ to Rs 40,313 Cr due to which the net interest income remained moderated.

Margins continued to remain flat: Net interest margin on core assets in Q3FY24 remained flat sequentially as expected at 3.4% while it declined by 70bps YoY post-merger. Yield on interest earning assets increased by 10bps QoQ to 8.3%, however, it was offset by the increase in cost of funds by 10bps to 4.9%. The management sees scope of decline in cost of funds going forward due to which the net interest margin is expected to improve.

Loan growth remained healthy: The bank saw healthy growth in credit demand which was led by its growing retail customers. Its loan book increased by 4.9% QoQ to Rs 24,693 Bn. It saw an increase in its secured lending book such as mortgage, auto and gold loans while growth in unsecured lending remained moderate. The bank intends to grow its loan book in a sustainable manner which healthy mix of both secured and unsecured loans. Its unsecured loans cater to high ticket size customers leading to lower delinquencies and high margins. The bank expects to see benefits merger through cross selling of its products from coming quarters.

Deposits continued to remain sluggish: Deposits mobilization remained slow during the quarter as it stood at Rs 22,140 Bn growing by 1.9% QoQ. The growth remained slow on both the fronts i.e, CASA and term deposits. It is yet to see the effect of its branch expansion drive which is expected to accumulate deposits as a faster pace as compared to its peers. Due to lag in deposits, its credit to deposits ratio stood at 111.5% as against 87.7% in Q3FY23.

Marginal improvement in asset quality: Asset quality for the bank saw an improvement as the GNPA/NNPA declined by 4bps/5bps QoQ to 1.3%/0.3%. However, provisions and contingencies increased by 45.2% QoQ to Rs 4,217 Cr. The asset quality is expected to decline going forward as the bank is seeing decline in slippages on both retail and corporate segment.

Conclusion: We remain positive on HDFC Bank as the bank is seeing healthy credit demand. The management expects margin to improve in the coming quarters as the deposits pace picks up and interest rates moderate. The bank continues to maintain healthy asset quality. The bank is also yet to see the synergies from merger which will enable in higher cross selling of products to existing customers. We maintain Buy rating on HDFC Bank and revise our target price to Rs 2,010 valuing the bank at 2.4x of its FY26E Adj. BV.

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