Q3FY24 Review: HDFC Bank: Margins weaker than expected; in-line PBT

17 Jan 2024 , 11:37 AM

HDFCB’s PBT was in line with consensus, adjusted for Rs12.2bn AIF provision. However, lower tax rate drove 6% PAT beat. Margins were weaker than expected (flat QoQ), despite the unwinding of ICRR drag and drawdown of LCR buffer (from 121% to 110% now). Improvement in margins is critical for the stock to re-rate, and that has to be led by faster growth in retail loans, as the COF benefit from replacing e-HDFC borrowings will be limited (only 6 bps of benefit in the next two years). Analysts of IIFL Capital Services cut FY25-26E est. by 4-6% as they trim loan growth (16% CAGR) and build only 10bps NIM expansion. Analysts of IIFL Capital Services roll-forward their SOTP-based TP to Rs1,960 based on 2.4x FY26E core P/B. Maintain BUY rating as HDFC has: (1) Market share gain potential over an extended period of time. (2) Best-in-class RoRWA. (3) Attractive valuations of 2.3x 1YF core P/B (1.5 S.D. below LTA). 

Loan growth robust; margin improvement to be gradual: 

HDFC reported robust credit growth of 5% QoQ led by CRB (+7% QoQ) and Retail segments, while Corporate growth (ex-HDFCL) was tepid at 2%. Deposit growth was muted as it de-grew bulk deposits and mobilised funds instead via infra bonds (cheaper and also aids statutory ratios). NIM was flat QoQ, despite the unwinding of ICRR drag and drawdown of LCR buffer (from 121% to 110% now). Analysts of IIFL Capital Services build deposit growth of 19% Cagr, but with the CD ratio now at 110%, they trim loan growth to 16% Cagr over FY25-26E.

Cost ratios and asset quality stable: 

CIR was flat at ~40%, and analysts of IIFL Capital Services expect it to improve to 38.5% by FY26E vs management guidance of 35% in the medium term. FY24 branch addition guidance was cut to 800-1,000, but the bank expects its network to expand to 13k branches over three to five years from the current 8k. Headline asset quality was stable with GNPA ratio improving 8bps QoQ and PCR improving ~1ppt. Bank recognised a provision of Rs12.2bn for AIF investments, based on the new RBI norms. 

Medium-term outlook remains positive driven by: (1) Pickup in the mortgage disbursements and scaling-up of higher-yielding affordable housing loans. (2) Cross-sell opportunity with only 2-20% of its retail customer base penetrated. (3) Existing interest rate swaps for e-HDFCL wholesale liabilities that can support margins as the rate cycle turns.