HDFC Bank stock may have bottomed out

HDFC Bank had a muted Octoberdecember quarter (Q3) with the acceptable pre-provision operating profit (PPOP) and profit after tax (PAT).

The deposit growth, however, was modest at 1.9 per cent quarteron-quarter (Q-O-Q). The margin remained flat at 3.4 per cent despite a rise in the credit-deposit (CD) ratio.

The NII (net interest income) growth came in at 2 per cent, slightly lower than consensus but healthy other income boosted by treasury gains compensated.

The gross non-performing asset (NPA) ratio improved 8 bps Q-O-Q to 1.3 per cent, while the provision coverage ratio or PCR improved to 75 per cent.

Fresh slippages moderated to ~7,000 crore – about 1.2 per cent of loans. Analysts estimate HDFC Bank to report 17 per cent and 19 per cent compounded annual growth rate (CAGR) in loans and deposits during FY24-26, while earnings are seen clocking CAGR of 20 per cent, translating into estimated ROA and ROE of 1.9 per cent and 16.7 per cent by FY26.

ROA is return on asset and ROE is return on equity.

Other income stood higher at ~11,100 crore, aided by treasury gains coupled with good traction in core fees.

During 9MFY24, PAT grew 22 per cent year-on-year (Y-O-Y) to ~54,100 crore versus ~32,100 crore (ex-merger) over 9MFY23.

The operating expenditure was in line at ~16,000 crore, as the bank continued aggressive employee addition.

The cost /income ratio stood at 40.3 per cent.

The PPOP stood at the consensus estimate at ~22,700 crore during Q3FY24.

The loan growth was robust at 4.9 per cent Q-O-Q, led by growth in retail and also in commercial and rural banking, while the corporate segment saw slower growth.

Deposit growth lagged at 1.9 per cent Q-O-Q, while the CASA ratio was flat at 38 per cent.

The gross NPA and net NPA ratios improved to 1.3 per cent and 0.3 per cent respectively with slippages down to 1.2 per cent of loans supported by healthy recoveries.

The PCR stood at 75 per cent. The bank carried floating and contingent provisions at ~15,400 crore which is 0.6 per cent of loans.

The Capital Adequacy Ratio (CAR) was at 18.4 per cent with Tier-1 at 16.8 per cent.

Among subsidiaries, revenue growth for HDFC Securities was at 40 per cent Y-O-Y to ~700 crore, while PAT grew 13 per cent Y-O-Y to ~230 crore.

HDB Financial reported 29 per cent Y-O-Y and 8 per cent Q-O-Q growth in loans to ~84,000 crore, while PAT stood at ~640 crore (~500 crore in Q3FY23). The GS-3 assets reduced 13 bps at 2.3 per cent, while CAR stood at 18 per cent for the quarter.

The management guidance is that margins are currently at the lower end of the spectrum and should recover to 3.7 per cent in 18-24 months.

Contingent and floating provisions amounted to ~15,400 crore, and general provisions amounted to ~10,400 crore.

The HDFC BANK-HDFC Limited merger was effective from July 2023 onwards. HDFC Bank absorbed the balance sheet of HDFC Limited which, as a housing finance company, had comparatively lower NIMS (net interest margin) given the loan portfolio and moderate liability due to higher borrowing costs and less low-cost deposits.

So far investors have been disappointed at the outcomes the merger has delivered.

However, as the cost of financing comes down for HDFC, NIMS should rise.

The stock has underperformed – it has lost 10 per cent in the last 12 months, while the Bank Nifty is up 19 per cent and the Nifty 26 per cent in that period.

However, HDFC Bank seems to have bottomed out in midfebruary when it hit a 52-week low of ~1,363.

Since then it has recovered around 4 per cent. The negatives may be fully priced in, at around that ~1,365-1,400 level.

According to Bloomberg, 5 out of 40 analysts polled after the results on January 16 have hold/neutral on the stock, while the rest 35 have buy/accumulate/ outperform rating.

Their average on-year target price is ~1,906.20.