HDFC Bank Ltd. – Quarterly Results Update

HDFC Bank Ltd. is one of India’s leading private banks and was among the first to receive approval from the Reserve Bank of India (RBI) to set up a private sector bank in 1994. 

As of June 30, 2023, the Bank’s distribution network was at 7,860 branches and 20,352 ATMs / Cash Deposit & Withdrawal Machines (CDMs) across 3,825 cities/towns.

Result Highlights

Net Interest Income stood at Rs. 23,599 crores in Q1FY24, showing a nominal growth of 1.1% QoQ / up 21.1% YoY. Pre-provision operating profit (PPOP) stood at Rs. 18,772 crores in Q1FY24, showing a marginal increase of 0.8% QoQ / up 22.2% YoY. Provisions rose to Rs. 2,860 crores in Q1FY24 from Rs. 2,685 crores in Q4FY23 and Rs. 3,188 crores in Q1FY23. The Bank’s quarterly net profit of Rs. 11,951 crores in Q1FY24 was down by 0.8% QoQ / up 30.0% YoY, surpassing market expectations of Rs. 11,700 crores. 

NIM stood at 4.1% in Q1FY24, down 20bps QoQ / down ten bps YoY, mainly because of a rise in the cost of funds. Gross NPA stood at 1.17% in Q1FY24, up 5bps QoQ / down 11 bps YoY. Net NPA stood at 0.30% in Q1FY24, up 3bps QoQ / down 5bps YoY. The Capital Adequacy Ratio decreased and stood at 18.93% in Q1FY24 compared to 19.26% in Q4FY23 and 17.52% in Q1FY23. Gross Deposits showed a decent growth at Rs. 19,13,096 crores in Q1FY24, up 1.6% QoQ / up 19.2% YoY. Gross Advances stood at Rs. 16,15,672 crores in Q1FY24, up 0.9% QoQ / up 15.8% YoY. CASA declined to 42.5% in Q1FY24 from 44.0% in Q4FY23 and 46.0% in Q1FY23.

Key Concall Highlights

• During Q1FY24, HDFC Bank’s retail issuing cards strength has shown robust growth of 30% year-on-year and 10% sequentially.

• Focusing on granular deposits, the Bank added retail deposits of Rs. 38,000 crores in Q1FY24, constituting about 83.5% of its total deposits.

• The Bank’s retail advances growth was robust. Domestic retail advances grew 20% year-on-year and 4% quarter-on-quarter, primarily driven by strong performance in home loans and personal loans.

• The cost-to-income ratio for Q1FY24 remains elevated at 42.8%, reflecting the cost of investments which, from a timing point of view, has been chosen during the benign credit environment to capture the market opportunity. As per the management, this will moderate and revert to below previous levels after the breakeven and payback from the investments start to flow through.

• There were no sales of any NPA accounts in the quarter.

• Total provisions, comprising specific, floating, contingent, and general provisions, were 171% of the gross non-performing loans, and the security was held as collateral in several cases.

• There was nominal growth of 1.6% in total deposits in Q1FY24. However, the Bank could sustain the growth after good deposit growth in Q4FY23. In addition, in the first quarter, the CASA deposits moderated as there was an increase in spending. The Bank’s card customer spending increased by 30% and 10% sequentially. Thus, the deposit growth could be faster. 

• Based on their initial assessments, the Bank’s management is confident that on a merged basis, they can sustain the current levels of RoA, which is broadly in the range of 1.9-2.2%.

• The management of the Bank expects slight volatility in NIMs after the merger with HDFC Ltd. However, the NIMs of HDFC Ltd. moved in a narrow band, as from a duration point of view, they were fairly hedged on the duration from an interest rate risk. So, in the up or down cycle, it’s a narrow change that will happen but cannot go off.

Valuation and Outlook

India’s largest private sector lender, HDFC Bank Ltd., reported decent Q1FY24 results, with net profit beating market estimates. However, there was some visibility of weak NII and asset quality wherein the Bank’s NII missed market estimates, and NPAs rose marginally sequentially. The profitability improvement was due to lower provisioning and growth in other income, which had trading and mark-to-market gain and recoveries. Though advances and deposits were marginally higher sequentially, we feel the merged entity will improve the performance going forward. 

We expect the subdued performance of NIMs in the current quarter not to continue going forward as there will be an improvement in NIMs due to the merger, which took effect from July 01, 2023. Also, the subsidiaries like HDFC Life, HDFC AMC and HDFC Ergo, which were erstwhile subsidiaries of HDFC Ltd., will have colossal distribution leverage as they are now the subsidiaries of HDFC Bank. 

These subsidiaries will benefit from the Bank’s 8,500 branches plus the addition of 1,500 branches every year, thereby increasing the SOTP value of HDFC Bank. In the last five years, earnings have grown at 17% CAGR while market cap growth is only 9%, implying a significant opportunity for valuation catch-up as the company continues its double-digit growth journey. Just to set the context, in many sectors like Capital Goods and Retail for 20% growth, the market is paying above 60 PE, while here, we are just giving 20x for 15% to 19% growth for a company that has more than 20 years of history of above 20% growth.