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MOSL : . HDFC BANK: Earnings in line; Core PPoP growth and margin improve

HDFC Bank: Earnings in line; Core PPoP growth and margin improve

(HDFCB IN, Mkt Cap USD97.5b, CMP INR1441, TP INR1800, 25% Upside, Buy)

Asset quality robust; restructured book declines to 53bp

• HDFC Bank (HDFCB) reported an in-line quarter, with PAT up 20% YoY, aided by a pick-up in NII growth due to 10bp QoQ expansion in margin. PPoP growth remained modest at 10% YoY, adversely impacted by a treasury loss of INR2.5b. However, Core PPoP growth was healthy at ~17% YoY in 2QFY23.
• Business growth remained healthy led by strong traction in Commercial and Rural Banking as well as Corporate book while Retail too grew strongly.
• HDFCB's asset quality ratios remained robust and witnessed a sequential decline led by moderation in slippages and healthy recoveries and upgrades. Restructured book too declined to ~53bp of loans in 2QFY23 (from 76bp in 1QFY23). Healthy PCR of ~73% and a contingent provision buffer (at 65bp of loans) provided comfort on asset quality.
• We estimate ~19% PAT CAGR over FY22-24, with an RoA/RoE of 2.0%/ 17.2%, respectively, in FY24. We expect the stock to perform gradually as revenue and margin revive further while the merger-related overhang ebbs as HDFCB looks to complete the merger by 1Q/2QFY24E. We maintain our BUY rating with a TP of INR1,800 (premised on 3x FY24E ABV).

Margin improves 10bp QoQ to 4.1%

• HDFCB's NII grew 18.9% YoY to INR210b (3% beat) v/s ~14.5% YoY in 1QFY23, with margin expanding 10bp QoQ to 4.1% in 2QFY23. PAT grew 20% YoY to INR106b (in line). For 1HFY23, NII/PPoP/PAT grew 17%/6%/20% to INR405b/INR328b/INR198b, respectively.
• Other income grew marginally to INR76b (10% miss), adversely impacted by treasury loss of INR2.5b. Excluding trading income, other income rose 17% YoY, supported by fee income growth at 17% YoY (+8% QoQ) in 2QFY23.
• OPEX rose ~21% YoY, with C/I ratio at 39.2% (core C/I ratio at 38.9%). PPOP rose 10% YoY (in line), however, Core PPOP grew at a healthy ~17% YoY.
• Loans grew 23.4% YoY, led by a robust 31% growth in Commercial and Rural loans and 27% growth in Wholesale loans. Retail loans jumped 20% YoY. Deposits rose ~19% YoY while CASA grew ~15% YoY. CASA ratio moderated to 45.4% in 2QFY23. The mix of retail deposits was at 83% v/s 82% in 1QFY23.
• On the asset quality front, the GNPA/NNPA ratio declined 5bp/2bp QoQ to 1.23%/0.33%, with slippages moderating to ~INR57b (1.6% of loans). PCR was stable at ~73%. Restructured book too fell to ~INR78.5b (53bp of loans in 2QFY23 v/s 76bp in 1Q). HDFCB continued to carry contingent provisions of 65bp of loans and additionally held floating provisions of INR14.5b.
• Subsidiary performance: Revenue/PAT for HDFC Securities dipped 4%/20% YoY to INR4.7b/INR1.9b, respectively, in 2QFY23. HDB Financial posted a 2% QoQ growth in loans to INR631b, while revenue rose 15% YoY. PAT stood at INR4.7b v/s INR1.9b/INR4.4b in 2QFY22/1QFY23. GS-3 assets were at 4.88% (down 7bp QoQ), while CAR/Tier I stood healthy at 20.8%/16.0%.

Highlights from the management commentary

• Earlier the merger was expected to get completed by 2Q/3Q of FY24, which could now get concluded by 1Q/2Q of FY24.
• Margin trajectory will depend on the loan mix; however, the bank expects margins to witness a positive bias.
• HDFCB has added 2.9m new liability relations in 2QFY23 (+22% YoY/+11% QoQ). It garnered retail deposits worth INR710b in 2Q (+INR2.35t in the past one year).

Revolve rate in 2QFY23 was similar to 1Q and is taking time to increase