PL Stock Report - HDFC Bank (HDFCB IN) - Q1FY24 Result Update - Higher opex to offset healthy asset quality - BUY

HDFC Bank (HDFCB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs1,679 | TP: Rs2,025

Q1FY24 Result Update - Higher opex to offset healthy asset quality

Quick Pointers:

♦ Core earnings miss led by more opex; asset quality was better.

♦ Opex to remain elevated as stress formation to remain muted.

HDFCB saw a mixed quarter. While core PAT at Rs115.4bn was 3.7% short of PLe due to higher opex, asset quality surprised positively with lower GNPA led by lesser slippages, despite Q1 being usually weak. Loan growth was softer at 0.5% QoQ driven by IBPC sell-down since bank would like to manage its PSL requirement in a calibrated manner. Quality of growth was superior as credit offtake QoQ was led by retail and CRB. Bank sounded confident of achieving a 18% YoY loan growth (merged) over medium term though we are factoring 16% due to likely deposit need. Benign asset quality environment may keep opex elevated in near term and for FY24/25E we raise opex by 5% but reduce provisions by 15/9bps, which will not change PAT materially. NII and core PPoP trend compared to peers would be keenly watched. We maintain multiple at 3.0x on FY25E core ABV and TP at Rs2,025. Retain ‘BUY’.

♦ Core PAT miss led by higher opex: NII was largely in-line at Rs236bn (PLe Rs235bn). NIM too came in as expected at 4.34% (PLe 4.33%); yield on loans was 10.1% (PLe 9.9%) whereas cost of funds was 5.12% (PLe: 4.85%). Credit growth was 15.8% YoY while deposits grew 20.8% YoY. Other income was a beat at Rs92bn (PLe Rs87bn) due to higher treasury at Rs5.5bn. Opex was a miss at Rs140.6bn (PLe Rs137bn) led by both employee costs and other expenses. PPoP was in-line at Rs187.7bn (PLe Rs187.3bn) while core PPoP at Rs182.2bn was 2.2% below PLe. GNPA deteriorated by 5bps QoQ to 1.17% but was better than PLe while PCR dipped slightly QoQ to 74.9%. Provisions were largely in-line at Rs28.6bn. PAT came in at Rs119.5bn (PLe Rs120.5bn) while core PAT at Rs115.4bn was a miss to PLe by 3.7%.

♦ Retail/CRB drive credit offtake; deposit growth to pick-up: Sequential loan growth was soft at 0.5% as corporate and agri declined slightly while retail and CRB grew by 3.7%/2.5%. Retail accretion was led by HL, PL/CC, LAP and auto while CRB growth too was broad-based. Loan growth was muted as IBPC sell-down spiked to Rs750bn as bank would like keep its PSL need controlled. On unsecured lending, bank suggested that growth is lower to system since it is taking a cautious stance. While deposit growth was muted at 1.6% QoQ (9.9% market share in incremental system deposits), bank sounded confident of garnering additional retail deposits of Rs1trn per quarter. 2.5-3mn customers of HDFC Ltd. (overall ~5mn) can also be added to its liability franchise.

♦ Opex to be elevated due to benign asset quality environment: Despite Q1 being generally weak, GNPA surprised positively (lesser to PLe by 4bps) as slippages were lower at Rs58bn (PLe 69bn) while recoveries were stable leading to lesser net slippages. Opex remains elevated (+34% YoY) as HDFCB added 8,503 employees and 39 branches in Q1’24. Bank expects asset quality environment to remain benign in near term which would translate into higher opex. Hence for FY24/25E, we raise opex by ~5% while reducing provisions by 18%/10%. We see provisions of 67bps in FY24E (75bps in FY23.

(Click on the Link for Detailed Report)