HDFC Bank Q3 Review - Margin Expansion, Lower Credit Cost Aid Profitability: Nirmal Bang
Reported NIM expanded by 20 bps to 430 bps, driven by change in asset mix, partially aided by interest on income tax refund.
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Nirmal Bang Report
HDFC Bank Ltd.’s Q3 FY23 results were largely inline with our estimates, with net profit increasing by 18.5% YoY, driven by margin expansion and lower provisions.
Reported net interest margin expanded by 20 basis points QoQ and YoY to 430 bps, driven by change in asset mix and partially aided by interest on income tax refund.
As a result, net interest income grew by a strong 24.6% YoY to Rs 229.8 billion. Operating profit growth was lower at 13.4% YoY, impacted by lower treasury income on YoY basis and higher opex.
Aggressive branch expansion is leading to higher opex cost and is likely to remain elevated in the short term as the focus is to expand the branch network.
Moreover, core profitability (excluding treasury income) grew by 6.3% QoQ (19.3% YoY) to Rs 187.6 billion. The bank utilised contingent provision to the tune of Rs 2 billion, resulting in lower provisions.
Credit cost stood at 74 bps versus 94 bps in Q3 FY22 (87 bps in Q2 FY23) and is expected to remain rangebound given that the bank continues to carry excess provisions.
Asset quality remained stable on a sequential basis despite cyclicality in the agri segment, driven by higher recoveries and write-offs.
We expect earnings growth to remain strong and estimate FY25E return on asset/return on equity at 2.0%/17.6%. However, we remain cautious about merger transition, which along with elevated opex and margin trajectory would be key monitorables going forward.
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