HDFC Bank Q3 Review: Profit Meets Estimates But Slow Margin Growth Worries Analysts

While HDFC Bank Ltd.'s third-quarter net profit met estimates, its flat margin disappointed analysts.

Here’s what analysts have to say about HDFC Bank’s Q3 FY22 results:

Tad disappointed by weak growth in fees, but positively surprised by asset quality.
Omicron could impact business growth, but expect normalisation by first quarter of 2022-23.
Subsidiary profits improved as HDB Financial Services returned to profitability after reporting a loss last year owing to lower provisions.
Credit costs should stabilise around 1-2% of total loans as fresh retail and small and medium enterprise lending play into better asset quality metrics.
Maintains ‘buy’ with a target price of Rs 2,160 apiece.

Sector read is that asset quality issues have clearly passed.
Growth in retail and commercial banking loans should reverse muted net interest income and pre-provisioning operating profit trends in the next few quarters.
Expects core pre-provisioning operating profit to improve from 12% in FY22 to 17% over the next two years.
Factors in 100-basis-points credit costs this year. Current credit costs are at 60-70 basis points, coupled with large provisioning buffer should provide significant comfort to profit and loss account.
Maintains ‘buy’ with a target price of Rs 2,025 apiece.

Despite good momentum, overall loan growth was lower than the industry for Q3.
Retail, commercial banking, and rural portfolio disbursement momentum was strong.
Consumer durables, credit cards, personal loans and loans against property loan books rose sequentially, but two-wheeler financing portfolio contracted 4% quarter-on-quarter.
Repayments in the corporate portfolio also tempered Q3 loan growth.
Rates HDFC Bank as ‘outperform’ with a target price of Rs 1,890 apiece.

Profitability stood stronger, despite Rs 900 crore worth additional provisions during the quarter.
Restructured loans stood at 1.4% of total loans compared with 1.5% as on Sept. 30, 2021.
Core NIM stood flat quarter-on-quarter at 4.1%; expects trends to improve in coming quarters.
Other income rose 10% year-on-year due to robust growth in forex income and healthy treasury gains during the quarter. Fee income remained muted at 2% year-on-year on lower credit utilisation and lower revolve rate in card business.
Maintains ‘buy’ with a target price of Rs 2,000 apiece.

Retail credit growth remains sub-optimal, with its share at 47%, down from 53-54% two years ago, weighing partly on margins.
Within retail, vehicle finance continued to drag, partly due to slow car sales, hurt by the chip shortage; and partly due to the bank’s risk averseness in the high-margin commercial vehicle segment.
Card and personal loan growth has improved and should see further acceleration, unless impacted by a fresh Covid wave.
With growth trends improving and asset quality well under control with strong buffers in place, HDFC Bank is expected to report healthy return ratios.
Delay in growth or asset quality normalisation in case of an extended Covid wave and prolonged embargo on digital initiatives hampering business or fee growth are key risks.
Retains ‘buy’ with a target price of Rs 2,050 apiece.