HDFC BANK-Quarterly Result Update

Sector Outlook: Positive

In Q2FY24, the bank’s Net Interest Income was Rs. 27,385 crores, slightly lower than market expectations of Rs. 28,000 crores. The Pre-provision operating profit (PPOP) for the same period stood at Rs. 22,694 crores. Provisions in Q2FY24 amounted to Rs. 2,904 crores. However, the bank’s quarterly net profit in Q2FY24 exceeded market expectations, reaching Rs. 15,976 crores, surpassing the anticipated Rs. 14,000 crores.

After accounting for the debt-funded cost related to additional liquidity and merger management, the Net Interest Margin (NIM) for Q2FY24 was 3.6%. Gross Non-Performing Assets (NPA) were at 1.34% in Q2FY24, down 7bps based on a proforma merged basis as of June 30, 2023. Net NPA stood at 0.35% in Q2FY24. The Capital Adequacy Ratio in Q2FY24 was 19.5%.

In terms of deposits, the bank had Gross Deposits totaling Rs. 21,72,858 crores in Q2FY24. This included savings account deposits of Rs. 5,69,956 crores, current account deposits of Rs. 2,47,749 crores, and time deposits of Rs. 13,55,153 crores. Gross Advances for the same period were Rs. 23,54,633 crores. The CASA (Current Account and Savings Account) ratio stood at 37.6% in Q2FY24.

Key Concall Highlights

The merger resulted in some one-time events related to debt-funded liquid assets to meet banking liquidity norms.
The bank had accumulated extra liquidity to adhere to liquidity coverage ratio norms and be prepared for unforeseen situations. The recent announcement of incremental Cash Reserve Ratio (CRR) was beneficial, but the excess liquidity and additional CRR affected the bank’s Net Interest Margin (NIM) by about 25 basis points.
The bank believes that one of the non-retail loan portfolios from the former HDFC Ltd., previously restricted by RBI norms, won’t lead to significant additional costs in the bank’s profit and loss statement going forward. However, there may still be some lingering issues with this portfolio.
The bank will now focus on the construction finance segment, which wasn’t a primary area of focus before the merger. They plan to develop strategies to grow this segment steadily, contributing to revenue and margins.
HDFC Bank intends to reduce its leasing, renting, and development (LRD) loan portfolio while continuing to grow the construction finance loan portfolio inherited from HDFC Ltd.
The management doesn’t foresee major changes in the bank’s fee income, which accounts for 65% of its Other Income

Valuation and Outlook

India’s largest private sector bank recently reported its Q2FY24 results following its merger with one of the largest housing finance lenders, HDFC Ltd., in July 2023. The bank delivered solid numbers, exceeding market expectations for net profit in Q2FY24. However, it’s important to note that the merger made it challenging to make direct comparisons with previous results.

Given the prevailing high-interest rate environment leading to NIM contraction across the banking sector this quarter, HDFC Bank also experienced a noticeable decline in NIMs due to the merger’s impact, which brought in extra liquidity, and the incremental Cash Reserve Ratio (CRR). Nevertheless, its profitability improved, primarily driven by treasury gains and robust business growth. Going forward, thanks to the bank’s strong credit profiling history, we do not foresee any significant deterioration in asset quality; it should remain stable. Moreover, prudent loan restructuring and adequate provisions should prevent a significant increase in non-performing assets.

With the bank’s strategic focus on expanding branches in semi-urban and rural areas, we expect it to perform well in the coming quarters. Additionally, the bank’s extensive branch network provides ample cross-selling opportunities for its subsidiaries, indirectly supporting revenue growth. Consequently, our long-term outlook for the bank remains positive.

Key Takeaways:

The management expects return ratios to improve going forward.
The bank’s management feels that the current retail account offers them a huge opportunity and are focused on encashing the opportunity.
The bank is confident that they will be able to recoup some of the margins due to the substitution of high-cost bonds with the bank’s deposits and restructuring of their business loans mix, which will be more focused on retail advances where the yields are higher.