HDFC Bank Q1 Review: Analysts Bet On Stable Growth, But Merger Is Key Overhang

While analysts bet on a decline in HDFC Bank Ltd.'s provisions, better retail loan mix and "positive" asset quality outlook after the first quarter, they await clarity on regulatory dispensation and liability-side transition as its merger with HDFC Ltd. takes final shape.

India's largest private sector lender saw its net profit rise to Rs 9,196 crore in the quarter ended June compared with Rs 7,730 crore a year ago and the Rs 8,197-crore estimate.

Analysts said HDFC Bank posted a "steady business performance" in Q1.

Key Highlights (Q1, YoY unless specified)

• Net interest income stood at Rs 19,481 crore, up 14.5%.

• Core net interest margin was at 4% of total assets.

• Other income rose a marginal 1.6% to Rs 6,388 crore. (low growth on account of a loss on sale and revaluation of investments of Rs 1,312 crore, according to the bank's press release).

• Other income, excluding trading and mark-to-market losses, grew 35.4%.

• Asset quality for the bank was stable with its gross non-performing asset ratio rising to 1.28% as of June 30, compared with 1.17% as on March 31.

• Net NPA ratio was at 0.35% as on June 30 against 0.32% in the preceding three months.

• Provisions during the quarter stood at Rs 3,188 crore, down 34%.

• Total advances at the end of the first quarter stood at Rs 13.95 lakh crore, up 21.6%.

Retail growth has been slowing strengthening, said Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, on a conference call. Excluding the vehicle segment, which has remained weak, retail loans grew 25% year-on-year, he said. "Credit cards are also seeing very strong growth in spends, driven by discretionary spends."

Shares of the bank fell as much as 1.5% on Monday, before paring some losses to end 1% lower.

Of the 45 analysts tracking the company, 41 maintain a 'buy' and four suggest a 'hold', according to Bloomberg data. The overall 12-month consensus price target implies an upside of 32.2%.

Here's what analysts have to say about HDFC Bank's Q1 FY23 results.

• Maintains 'buy' with a lower target price of Rs 1,690 apiece, implying a potential 24% upside.

• On a steady track, thrust on growth, decline in provisions aided bottom line.

• Retail loan mix improved 110 basis points with higher contributions from mortgage, personal and cards as well as loans against property.

• Non-performing loans at 2.5% was much higher than we had expected, primarily driven by agri slippages and a one-off corporate slippage. Nomura notes agri-slippages are seasonally higher in Q1 and Q3.

• Key risks: Slower core PPOP momentum, management bandwidth in managing balance sheet for future integration.

• Maintains 'buy' with a fair value of Rs 1,650, implying a potential 21.1% upside.

• High treasury losses were offset by healthy NII growth and solid fee income growth. Asset quality metrics were stable.

• Near-term overhang would be the merger as we seek clarity on regulatory dispensation and the liability-side transition as the merger takes its final shape.

• HDFC Bank stock’s underperformance versus its large bank peers like ICICI Bank or SBI has been a source of concern for investors. Probably at that phase of the bank’s journey where its superior business performance is not the driving factor for its re-rating.

• HDFC Bank is still delivering one of the best growths along with superior return ratios that some of the banks have struggled in recent years. Primarily focused on the merger issues today where we are unsure of its impact on the medium-term earnings as the liability transition has too many variables that make it harder to forecast.

• Clarity on regulatory dispensation becomes critical in this period to build conviction. Also, a premium multiple is perhaps justified when the ability to differentiate its underwriting to its peers is possible. This would take time if HDFC Bank has to regain its premium over peers. So far, this has not been the case given that the underwriting has been quite solid by its peers.

• Finally, HDFC Bank was able to build a relatively differentiated book (more unsecured for example), which backed by a solid liability franchise resulted in superior risk-adjusted returns. However, post-merger, the book is likely to be similar to its private bank peers, making it to justify the premiums that it experienced in the past.

• The risk of de-rating on a standalone basis appears to be quite low given that the business performance is holding up well. Investors in the bank would need a long-term view as we work through the medium-term uncertainty of the merger.

• Maintains 'buy' with a target price of Rs 1,999, implying a potential 47% upside.

• Current expectation is that the 5% QoQ growth momentum in retail loan assets should sustain and start translating into NIM improvement.

• Revolving rates on credit cards are currently below pre-Covid levels, but improving, which should aid margin expansion. Further, increasing spends should improve fee income prospects. CRB portfolio growth will be led by distribution expansion. Overall, the demand environment is favourable for retail and CRB.

• Overall, the bank’s asset quality outlook is positive. Current stock of provisions is healthy, with PCR at 73%.

• Watch for growth sustenance in the retail portfolio, especially in light of consumption demand being affected by the current high inflationary environment.

• Monitoring the NIM trajectory as the momentum in retail loans over the last few quarters is expected to translate into margin expansion.

• Maintains ‘buy’ rating at a target price of Rs 1,800, implying a potential upside of 32%.

• Business growth remains modest led by healthy traction in retail and commercial and rural banking while corporate book saw flattish growth.

• HDFC Bank remains one of our preferred picks. Expects the stock to recover gradually as revenue and margin revives over FY23, while clarity emerges on several aspects related to the merger with HDFC.

• Maintains ‘buy’ rating, cuts target price from Rs 1,955 to Rs 1,874, implying a potential upside of 37.6%.

• With an available-for-sale portfolio of 34%, HDFC Bank had taken a treasury hit of Rs 1,300 crore. Treasury loss may drag earnings for other banks, too.

• Loan repricing benefits from hikes in EBLR and MCLR rates may come with a lag.

• Investment in franchise will keep opex in Q1 elevated for peer banks, too.

• Slippages from restructured pools will be key to watch for.

• Key risks include regulatory cost attached with HDFC merger and elevated opex.

• Maintains ‘buy’ rating, cuts target price from Rs 2,020 to Rs 1,860, implying a potential upside of 36%.

• Need to watch for merger impact on the HDFC bank’s regulatory requirements if RBI does not allow dispensation. However, banks focus on liability and PSL requirements could get through.

• Remain structurally positive on HDFC Bank given its superior credit underwriting, structurally better NIM and the ability to maintain higher RoA among its peers.

• Maintains ‘buy’ rating at a target price of Rs 1,800, implying a potential upside of 32.2%.

• Bank clarified that the RBI has given in-principle approval for its merger with HDFC Ltd, but clarity regarding regulatory forbearance, stakes/subsidiarization of HDFC Life and NBFCs, etc. will emerge later. Believes this will prolong investor concerns around the merger structure, weighing on the stock in the near term.

• Though the lack of clarity about the merger structure remains a near-term overhang, the mortgage business should be long-term RoE-accretive for the bank.

• Key risks include slower than-expected retail/SME credit growth amid weakening macros due to the Ukraine-Russia conflict; delay in margin improvement due to rising CoF/liability built up in the run up to the merger; and unfavourable merger conditions by the RBI (including NOFHC structure and regulatory forbearances).

• Maintains ‘buy’ rating at a target price of Rs 1,830, implying a potential upside of 34%.

• Build in slightly lower NIM at 4% for FY23 as the increased deposit mobilisation and rise in share of term deposits will likely offset the benefits of change in loan mix (in favour of retail/CRB) and gains from repricing of floating rate loans are higher rates.

• Believes the merger aids long-term growth prospects for the bank. However, the massive deposit mobilisation and large branch expansion plan will have near-term impact on core profitability metrics even as we expect the bank to deliver ~1.9-2% RoA on a sustained basis.

• Impact on return ratios from regulatory requirements upon amalgamation is likely to be very limited. Earnings profile continues to benefit from low credit costs despite pressures on core profitability metrics owing to the merger.