PL Stock Report: HDFC Bank (HDFCB IN) - Q2FY24 Result Update - Margin trajectory to improve - BUY

HDFC Bank (HDFCB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs1,530 | TP: Rs2,025

Q2FY24 Result Update - Margin trajectory to improve

Quick Pointers:

§ NII mainly in-line though NIM beat due to better investment yields.

§ Core earnings beat of 12% due to lower credit costs and taxes.

HDFCB saw good quarter; NIM was 4bps higher to PLe at 3.66% and core PPoP was a 2.9% beat owing to better fees. Loan growth at 5.0% QoQ was broad based led by CRB/agri/retail/corporate. Asset quality was stable with GNPA at 1.34% (-6bps QoQ) and controlled net slippages. While NIM was affected (-37bps QoQ) by surplus liquidity, we believe margins have bottomed out as excess cash has already been drawn down which should normalize NIM in H2FY24E. Moreover, as high cost liabilities of HDFCL are replaced, NIM should enhance over FY24-26E from 3.57% to 3.72%. Due to higher fees/lower taxes we raise FY24E core PAT by ~3%, although FY25/26E earnings remain unchanged. With core RoA of 1.74% and likely core PAT CAGR of ~19% over FY24-26E, HDFCB remains our preferred pick among large-caps. We maintain multiple at 2.8x on Sep’25E core ABV and TP at Rs2,025. Retain ‘BUY’.

§ Better fees; core PAT beat led by lower provisions/tax rate: NII was largely in-line at Rs273.85bn (PLe Rs273.58bn). NIM was a tad better at 3.66% (PLe 3.62%); yield on IEA was higher at 9.05% (PLe 8.93%) while cost of funds at 5.77% was 3bps more. Credit growth was 13.1% YoY while deposits grew 18.3% YoY. Other income was higher at Rs107bn (PLe Rs94bn) due to fees and treasury. Opex was a bit lower at Rs154bn (PLe Rs155.7bn). PPoP was Rs226.9bn (PLe Rs211.98bn) and while core PPoP at Rs201.4bn was 2.9% above PLe. GNPA/NNPA was in-line at 1.34%/0.35% as net slippages came in as expected; PCR was stable at 74.4%. Provisions were lesser at Rs29bn (PLe Rs32.5bn). Tax rate was lower at 19.3% (last quarter 24%). PAT came in at Rs159.8bn while core PAT at Rs139.17bn was 12% ahead of PLe.

§ Credit offtake QoQ was broad based: Sequential loan growth was broad based and healthy at 5.0% led by CRB (+9.7%), agri (+13.6%), corporate (ex-HDFCL, +5.8%) and retail (+3.1%). Retail accretion was led by mortgages, auto, gold and 2W. Unsecured growth was softer to system (+0.9%) since bank is taking a more calibrated stance however, it remains a focus segment. With the merger being concluded, there are no downside risks to loan growth and we expect existing credit momentum to sustain (+4.5-5.0% QoQ) which would translate to ~15% YoY loan growth in FY24E. Deposit accretion was strong this quarter (+5.3% QoQ) largely led by TD growth (+8.3%). Share of retail deposits as per LCR was 56.5% pre-merger which inched up to 59.7% in Q2’24.

§ NIM to normalize in H2FY24: NIM declined by 37bps QoQ which was largely attributable to liquidity build-up and ICRR requirements. However, liquidity has been drawn down towards the end of the quarter suggesting that margins should normalize in H2FY24. We are factoring NIM to improve from 3.66% in Q2’24 to 3.77% in Q4’24. FY24 performance would be muted, given sharp fall in NIM, however, as per our calculations ~43% of HDFCL liabilities (high-cost) are expected to be replaced from FY23 to FY26E which should translate to NIM improvement from 3.57% to 3.72% over FY24-26E.

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