HDFC Bank Strong earnings growth in Q1FY23 with healthy loan book growth

HDFC Bank Limited is an Indian banking and financial services company headquartered in Mumbai. HDFC was among the first financial institutions in India to receive an “in principle” approval from the RBI to set up a bank in the private sector. This was done as part of RBI’s policy for liberalisation of the Indian banking industry in 1994.

The Bank had a nationwide distribution network of 6,342 branches and 18,130 ATMs in 3,188 cities and towns as of March 31, 2022. On July 16, HDFC Bank released its first quarter earnings report, which showed excellent performance with double-digit increase in the bottom line due to decreased provisions and stable asset growth.

A merger between HDFC Bank and its parent firm, the housing finance company HDFC, was recently announced in Q1FY23 on April 4. The RBI has expressed “no objection” to the proposed merger of HDFC and HDFC Bank as long as certain requirements are met. Along with the stock exchanges, the BSE and the NSE, the Pension Fund Regulatory and Development Authority (PFRDA) has also given its approval to the merger. Now let’s look more deeply at the HDFC Bank Q1FY23 results and understand the future direction of Indian banking sector in FY23.

Key Highlights:

1. NII (Net Interest Income) up 14.5% YoY with Consistently growing total revenue
2. NIM (Net Interest Margin) stable QoQ at 0%, with 20.1% YoY CASA growth
3. PAT up 20% YoY at 9617 crore with 28% in operating expenses
4. Core Pre-provision Operating Profit (PPOP) was at 15,367.8 crore, up 14.7% YoY
5. Loans were up 6% YoY at Rs 13.9 lakh crore; deposits up 19.2% YoY
6. Business growth remains modest led by healthy traction in Retail and Commercial and Rural Banking while Corporate book saw flat growth
7. Added highest ever 2m new Credit Cards in 1QFY23, up 47% YoY
8. Asset quality deteriorates slightly due to seasonal Agri NPAs

HDFC Bank results Q1FY23: Net Interest Income (Core Revenue) grew 14.5%

The Bank’s core net revenue (excluding trading and Mark to Market losses), grew by 19.8% to 27,181.4 crore for the Q1FY23 from 22,696.5 crore for the Q1FY22. The total net revenues (not interest Income plus other income) were 25,869.6 crore for the Q1FY23. While reported NIM stood flat QoQ at 4%.

Net interest income (interest earned less interest expended) for the Q1FY23 grew by 14.5% to Rs 19,481.4 crore from Rs 17,009.0 crore for the Q1FY22, driven by advances growth of 22.5%, deposits growth of 19.2% and total balance sheet growth of 20.3%. Core net interest margin was at 4.0% on total assets, and 4.2% based on interest earning assets. Moreover, they continued to add new liability relationships at a robust pace of 2.6 million during the quarter.

Srinivasan Vaidyanathan, CFO, HDFC Bank said in a call with analysts that the bank wants to be competitively priced and not be price leaders in the market, in response to a question regarding deposit rates going forward and how much hike bank will be taking.

HDFC Bank results Q1FY23: Lower capital adequacy & Stable Margins

HDFC Bank’s capital adequacy ratio (CAR) stood at 17.5% as on Q1FY23, as against 18.9% in Q4FY22 and 19.1% in Q1FY22. Even as 17.5% CAR remains comfortably above the regulatory mandate, the downward trajectory points that the lender will soon raise capital to support growth, analysts said.

During Q1FY23, HDFC Bank’s core net interest margin stood at 4.1 % on total assets, and

• % on interest earnings The trends are broadline stable in comparison with previous quarter. While during Q1FY23, HDFC Bank added 2.6 million new liabilities accounts, as per the statement. Their total deposits grew 19.2 % to Rs 16.04 lakh crore as on Q1FY23. CASA deposits grew by 20.1 % YoY with savings account deposits at Rs 5,14,063 crore and current account deposits at Rs 2,20,584 crore as on Q1FY23.

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Break-Up of Interest Revenue & Other Income

Other income, excluding trading and Mark to Market losses, grow by 35.4% YoY over the Q1FY22. The four components of other income for the Q1FY23 were fees & commissions, foreign exchange & derivatives, loss on sale/revaluation of investments and miscellaneous income, including recoveries and dividend.

HDFC Bank results Q1FY23: Profits grew 20.9% YoY with 28.7% YoY growth in Operating Expenses

HDFC Bank’s net profit for Q1FY23 stood at Rs 9,617 crore, up 20.9% YoY. This was on the back of lower provisions and higher asset growth. While Operating expenses for the Q1FY23, were Rs 10,501.8 crore, an increase of 28.7% YoY over Rs 8,160.4 crore during the Q1FY22. The cost-to-income ratio, excluding trading and Mark to Market losses for the Q1FY23 was at 38.6%.

Pre-provision Operating Profit (PPOP) was at 15,367.8 crore. PPOP, excluding trading and Mark to Market losses, grew by 14.7% over the Q1FY22. Provisions and contingencies for the Q1FY23, were Rs 3,187.7 crore (which were comprised of specific loan loss provisions) as against total provisions of Rs 4,830.8 crore for the Q1FY22.

Moreover, the Bank added 725 branches and 29,038 employees over the last twelve months and 36 branches and 10,932 employees during the Q1FY23. Srinivasan Vaidyanathan, CFO of HDFC Bank in a call with analysts said “Hiring depends on productivity and people addition the bank does as necessary. The tech spend is 8-9% or so and that’s stable over a longer period of time.”

HDFC Bank results Q1FY23: Robust Credit Growth

The HDFC Bank’s total loans stood at Rs 13.95 lakh crore as on June 30, up 21.6% YoY. Retail loans, which accounted for 39% of the bank’s advances, grew by 21.7% YoY, while commercial and rural banking loans, accounting for 35% of loans, grew by 28.9% YoY. Corporate and other wholesale loans grow by 15.7% YoY during the Q1FY23.

Moreover, double digit credit growth, with corporate loan growth returning to healthy levels, suggests the credit offtake in India is on rise post 2 years of slump during Covid-19.

While Srinivasan Vaidyanathan, CFO, HDFC Bank clarified that “Retail growth has been good for past couple of quarters. The bank is seeing good demand across products. However spend translating to loans still to a large extent will take some more time.” in an analyst call.

HDFC Bank added 1.2m new Credit Cards in 1QFY23 – the highest ever and up 47% YoY. Home loans/LAP grew 6.3%/4.6% QoQ. Personal loans/Credit Card book rose 5.6%/4.4% and Gold loans grew 5.5% QoQ. While Auto loans grew 13.2% YoY and 3.5% QoQ. 2W loans fell 3.5% YoY and 1% QoQ.

HDFC Bank’s Asset quality deteriorates sequentially due to seasonal Agri NPAs

HDFC Bank’s asset quality deteriorated in the Q1FY23 with gross non-performing assets (GNPAs) ratio rising to 1.28%, up 11 basis points (bps) from the Q4FY22, but lower 19 bps on a YoY basis from Q1FY22. While the net NPAs stood at 0.35% as on June end, 3 bps higher sequentially and 15 bps lower on YoY basis. Agri saw a seasonal impact in Jun’22, and thus GNPA stood elevated in 1QFY23.

The Bank held floating provisions of 1,451 crore and contingent provisions of 9,630 crore as on Q1FY23. Total provisions (comprising specific, floating, contingent, and general provisions) were 170% of the gross non-performing loans as on Q1FY23.

Conference Call Highlights

6. The bank added 36 branches during the quarter and 250 more would be Gold loans now processed at over 2000 branches
7. New liability acquisition healthy with 6 million new relationships. Issued 1.2 million new cards
8. About 18 bps of the 28% GNPA (Gross Non Performing Assests) are standard. Thus, core GNPA is at 1.1%, GNPA excluding agri and one-off was at 1.03%
9. Target to double book in next three years through geographic expansion and engaging in relationship with prospective customers
10. They said resetting of rates takes three to six months for majority of Of loans, ~45% is fixed and 55% is floating
11. Modified duration of AFS (Alternative financial services) portfolio at two years. Not utilised investment fluctuation reserve in Q1FY23 that is tad higher than regulatory requirement (2%)
12. Total ~75% of PSL (priority sector lending) requirement accomplished organically

Technical Analysis of HDFC Bank share Price

HDFC Bank is currently trading near it’s 52 weeks low and is taking a strong support at 1271. The 50 EMA is below 100 & 200 EMA for past several months. The stock is taking a long term support at 1271 and resistance at 1420.

Motilal Oswal has a ‘Buy’ rating on HDFC Bank stock with a target price of Rs 1,800 per share. While ICICI Direct has a ‘Buy’ call on HDFC Bank with a target price of Rs 1,650 per share with target period of 12 months.

Our View

The merging of two important financial institutions, HDFC Bank and HDFC Ltd., would expand the size of their balance sheets, provide them access to a wider clientele, and create cross- selling opportunities. The combined company would also be able to attract more deposits, satisfy regulatory requirements, and increase profitability.

In addition, the Bank plans to double its book in the following 4–5 years, which would have been the plan regardless of the merger announcement. HDFC bank also aims to concentrate on expanding its presence in tier-3, tier-4 cities and engage in a variety of government business ventures. Currently, PSU or Co-op banks provide services to 60% of these localities. Moreover, they also plan to add 1500-200 branches p.a. to keep infrastructure ready for future growth.

There is a lot of investor interest in HDFC Bank considering its past stellar performance. The approval for the merger by regulatory authorities is a big positive for HDFC Bank this quarter.

Given that the stock is in a downtrend for past few months, the current levels are a buying opportunity for investors planning to enter the stock. The medium term outlook points to the stock moving higher. Existing investors also need to stay invested to reap the benefits of the financial behemoth that would be created post completion of the merger.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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