HDFC Bank shares fall post Q3 as moderating loan, deposit growth weighs

Analysts expect HDFC Bank's stock to perform gradually until the margin profile revives, and the merger-related overhang eases

HDFC Bank Q3 result review: HDFC Bank shares declined around a per cent on Monday as focus shifted on the lender's moderating growth post the October-December quarter result for 2022-23 financial year (Q3FY23). In comparison, the benchmark S&P BSE Sensex settled 0.28 per cent lower.

India's biggest private sector lender's credit growth was up 19.5 per cent on a year-on-year (YoY) basis in Q3FY23 at Rs 15.07 trillion. This was, however, higher by just 1.8 per cent quarter-on-quarter (QoQ) due to de-growth in the corporate loan book.
 

Among loan categories, growth was primarily led by retail segment (21.5 per cent YoY/5 per cent QoQ) as well as commercial, and rural banking (up 30 per cent YoY/5 per cent QoQ).

Corporate advances, meanwhile, were lower by 1 per cent QoQ, reporting 20 per cent YoY growth. The bank gave up some lending opportunities, to the tune of Rs 30,000-40,000 crore in the corporate segment due to rate dislocation and competitive pricing by peers.

"Advance growth of 2 per cent QoQ needs further push. Payment products (predominantly credit card) growth of 1.6 per cent QoQ/13.7 per cent YoY seems to have lagged industry-wide credit card portfolio growth. Overall, we are building in 22 per cent CAGR in loan book over FY22-FY24," ICICI Securities said.
 

That apart, deposit growth of 3.6 per cent sequentially was lower than the sector’s 4.2 per cent as the bank did not mobilise bulk deposits while retail deposit mobilisation was slower than expected.

"We believe deposit mobilisation is now the key to monitor for HDFC Bank in the run-up to the merger. Otherwise, the bank may have to opt for slower growth or rely more on bulk deposits post-merger, which would lead to lower-than-expected net interest margin (NIM)," noted Nuvama Institutional Equities.

The management has guided for deposit accretion of Rs 1 trillion in Q4FY23 against Rs 67,000 crore in Q3FY23. Given this, the brokerage has cut its earnings for FY23 and FY24 very marginally, but have cut earnings for FY25 sharply by 12 per cent as it builds in higher PSL (priority sector lending) cost.

Nuvama said other large banks such as ICICI Bank and Axis Bank, and even banks like Bank of Baroda (BoB), could post higher NIM and better asset growth than HDFC Bank because they have the leeway of a higher share of variable loans or higher balance sheet liquidity.
 

Overall, HDFC Bank's net profit increased 18.5 per cent YoY to Rs 12,259 crore as NII was up 24.6 per cent on-year to Rs 22,987 crore. The bank’s core net interest margin was 4.1 per cent on total assets.

Management reiterated that HDFC Bank’s margins would Improve only when the proportion of retail loans improves. Currently, the retail share is 45 per cent pre-Covid level of 55 per cent.

The overall numbers were largely in-line with Street expectations. Asset quality ratios remained steady sequentially, while the restructured book moderated to 42bp of loans. Healthy provision coverage ratio (PCR), and a contingent provisioning buffer should support asset quality.

However, operating expenditure (opex) rose higher-than-expected by 27 per cent YoY/11 per cent QoQ on the back of high branch additions and increased hiring.
 

Due to focus on retail loans and with the upcoming merger, we expect opex to remain elevated and are factoring a 21 per cent CAGR over FY22-25E, said Prabhudas Lilladher.

Analysts expect the stock to perform gradually until the margin profile revives, and the merger-related overhang eases.

"We believe the stock is a long-term ‘BUY’, as the market will watch the deposit mobilization progress over the next few quarters. Till then, news flow on the merger could act as a trigger," Nuvama said.

Valuation-wise, JM Financial said downside risks are minimal given the strength of its liability franchise as well as its high quality asset book.