HDFC Bank Ltd - Differentiated Summary

Brief Summary

Overview

HDFC Bank's Q1 FY25 performance demonstrates a stable financial standing with a strategic focus on long-term profitability and resilience. The bank faced a slight net attrition in deposits due to unexpected outflows in current accounts and a rundown of ₹160 billion in erstwhile HDFC non-retail deposits. Despite this, the bank has started disclosing average deposits to present a more stable and long-term view, showing a steady upward trend from Q1 FY22 to Q1 FY25.

Key financial metrics indicate stability and growth. Net Interest Margins (NIMs) remained stable between 3.4% and 3.5%, with an increasing bias. The CASA ratio was maintained between 36% and 38%, and the cost-to-income ratio was between 40% and 41% with a decreasing bias. Gross Non-Performing Assets (GNPA) showed a declining trend, excluding agricultural seasonality, falling between 1.2% and 1.4%. Return on Assets (ROAs) were in the region of 1.9% to 2.1%. The bank also added 2.2 million new customer relationships during the quarter, and its market share growth has been around 50 to 60 basis points annually, with a current market share slightly above 8% as of March 2020.

The bank made significant strides in reducing borrowings, with a reduction of ₹75,000 crores in the March quarter and about ₹60,000 crores in the June quarter. Non-interest income saw a sharp increase due to credit recoveries and dividends from subsidiaries, while fee income growth was driven by third-party products.

Looking ahead, HDFC Bank aims to prioritize profitability over growth, focusing on reducing the loan-deposit ratio by growing advances slower than deposits. Strategic investments in distribution and technology will continue, ensuring stability in key metrics and resilience in operations. The bank plans to enhance customer engagement and service delivery to increase CASA ratios, with new customer acquisitions expected to bring in higher savings account balances. A conservative approach to unsecured personal loans aligns with regulatory guidance and internal risk assessments. Margin management remains disciplined, focusing on customer engagement and service delivery over rate competition.

Key Metrics

1

HDFC Bank presentation

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2

Incred

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3

Arihant Capital

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4

IIFL securities

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Metric	Value	Management Commentary
Net Interest Margin (NIM)	3.47% 1 HDFC Bank presentation View Source 2 Arihant Capital View Source 3 Incred View Source	Management emphasized stability and resilience post-merger, maintaining NIM in the range of 3.4% to 3.5%, indicating effective interest rate spread management.
Return on Average Assets (ROAA) / Return on Average Equity (ROAE)	ROAA: 1.9%, ROAE: 15.0% 1 HDFC Bank presentation View Source 2 Incred View Source 3 Arihant Capital View Source	ROAA has been stable between 1.9% to 2.1%, reflecting operational efficiency. ROAE stability inferred from overall financial performance commentary.
Cost-to-Income Ratio	41.0% 1 HDFC Bank presentation View Source 2 Arihant Capital View Source 3 IIFL securities View Source	Maintained in the range of 40% to 41% with efforts to improve efficiency through strategic investments in distribution and technology.
Gross/Net Non-Performing Assets (NPA) Ratio	Gross NPA: 1.33%, Net NPA: 0.4% 1 HDFC Bank presentation View Source 2 IIFL securities View Source 3 Philip Capital View Source	Gross NPA ratio stable between 1.2% to 1.4%, reflecting effective asset quality management; Net NPA at 0.4% indicates low level of non-performing assets.
Deposit Growth	4.6% (QoQ) 1 HDFC Bank presentation View Source 2 IIFL securities View Source 3 Incred View Source	Average deposits grew by 4.6% QoQ; CASA ratio decreased to 36% from 38%. Management focused on profitable growth and mitigating seasonal fluctuations and merger impacts.
Advances Growth	0.8% (QoQ) 1 HDFC Bank presentation View Source	Average advances under management grew by 0.8% QoQ. Management adopted a cautious approach to prioritize profitable growth over sheer volume growth.
Net Profit (Standalone/Consolidated)	Standalone: ₹161.7 billion, Consolidated: ₹164.7 billion 1 HDFC Bank presentation View Source 2 Arihant Capital View Source 3 Philip Capital View Source	Despite slight QoQ decrease, significant YoY increase; Management highlighted stability in key metrics contributing to robust financial performance.
Capital Adequacy Ratio (CAR)	19.3% 1 HDFC Bank presentation View Source 2 IIFL securities View Source 3 Philip Capital View Source	Reflects strong capital position with CET1 at 16.8%. Management commentary focused on overall financial stability and resilience post-merger.

Market Reaction

1. "HDFC Bank's stock rose 3% to Rs 1650.7 on BSE."
2. "Shares of HDFC Bank jumped over 2% on Monday to contribute the most in Nifty's recovery."
3. "HDFC Bank surged nearly 3% to Rs 1,650.7 in Monday's trade on BSE after reporting a standalone net profit of Rs 16,175 crore for the quarter ended June 30, 2024."

Target Price

Key Consensus Areas Among Analysts

1. Performance Overview

• Arihant Capital: Highlights strong YoY growth across Net Interest Income (NII), Net Profit, and a YoY increase in asset quality metrics.
• IIFL: Focuses on in-line earnings with forecasts and highlights YoY and QoQ growth in NII.
• Incred: Reports a stable YoY increase in NII and stable margins, while noting a sequential stabilization in asset quality.
• Philip Capital: Reports significant YoY growth in NII and advances, despite some decline in asset quality metrics.

2. Future Projections and Growth

• Arihant Capital: Forecasts robust growth in NII, Net Profit, Deposits, and Advances over the next few years.
• IIFL: Emphasizes a targeted CAGR for loans and deposits, projecting notable future earnings growth.
• Incred: Projects strong growth in NII, total non-interest income, and net profit by FY27, with an emphasis on robust deposit growth.
• Philip Capital: Projects moderate earnings growth for FY25 and FY26 with strong focus on balance sheet management.

3. Strategic Initiatives

• Arihant Capital: Notes HDFC Bank's expansion into Tier 2 and Tier 3 cities and the IPO of its subsidiary as key strategic moves.
• IIFL: Points out the bank’s prioritization of profitability over growth, with strategic investments in franchise and technology.
• Incred: Discusses the bank's strategic focus on CASA growth and controlled credit costs.
• Philip Capital: Emphasizes CASA ratio improvement and customer service initiatives to boost deposits.

4. Asset Quality

• All Brokers: Acknowledge a slight increase in Gross NPA and Net NPA ratios but remain optimistic due to overall stable or improving asset quality.

Key Disagreements Among Analysts

1. Loan and Deposit Strategies

• IIFL and Philip Capital: Cite a cautious approach to wholesale segment lending, with a focus on profitability.
• Incred: Expects an acceleration in both retail and wholesale segments, emphasizing growth in SME loans despite broader market challenges.

2. Valuation and Rating

• Arihant Capital: Recommends a "Buy" with a target price of INR 2,017, emphasizing long-term growth.
• IIFL: Sets a target price of INR 1,820, with a "Buy" rating, highlighting significant market share potential.
• Incred: Assigns an "Add" with a target price of INR 2,000, reflecting confidence in moderate gains and continued growth.
• Philip Capital: Also recommends a "Buy" but with a lower target price of INR 1,800, focusing on stable return ratios and balance sheet management.

Risks Identified

Future Projections

1. Strong Growth in Net Interest Income (NII)

All brokers forecast significant increases in NII, suggesting robust growth in core banking operations. Arihant Capital is particularly bullish, expecting NII to nearly double by FY27E, reflecting optimism about the bank's ability to manage interest-earning assets effectively.

2. Variance in Profitability and Returns

Brokers differ in their views on profitability metrics such as Return on Equity (RoE) and Net Profit. Arihant Capital predicts a steep rise in net profit and RoE, peaking at 23.5%, whereas Philip Capital forecasts a more moderate increase, maintaining RoE at around 14%. This indicates different expectations of the bank’s operational efficiency and risk management.

3. Divergent Valuation Metrics

The P/E and P/BV ratios indicate varying market expectations. Arihant’s projections suggest a significant re-rating of the stock as earnings increase, with P/E dropping sharply. In contrast, Philip Capital's estimates show a gentler decline, indicating a more conservative view of earnings growth or market valuation.

Analyst Estimates

Conference Call Highlights

Insights and Discussions from the Q&A Session:

1. Loan-Deposit Ratio and Loan Growth:
   • The bank aims to focus on profitable growth rather than market share expansion, adjusting its loan mix, particularly in the corporate sector, to meet pricing thresholds.
   • Despite a volatile environment for current account flows, deposit momentum is healthy.
2. Margins and Deposit Pricing:
   • HDFC Bank maintains disciplined deposit pricing, focusing on customer engagement over competing on rates, with lower term deposit costs compared to peers.
   • The CASA ratio, impacted by market dynamics and the merger, is expected to improve gradually.
3. Unsecured Personal Loans:
   • Growth in unsecured personal loans is lower due to a conservative approach aligned with regulatory caution.
4. Non-Interest and Miscellaneous Income:
   • Miscellaneous income is driven by seasonal factors like credit recoveries and dividends from subsidiaries, while a slowdown in fee income is also seasonal.
5. HDFC Limited Borrowings and Staff Costs:
   • The bank manages a mix of fixed and floating rate borrowings, with floating rates subject to periodic negotiations.
   • Staff costs have risen due to new hires and compensation adjustments, with quarterly variations noted.

Future Outlook:

1. Loan-Deposit Ratio (LDR):
   • HDFC Bank plans to align its LDR with industry averages more quickly than anticipated, ensuring a focus on profitable rather than volumetric growth.
2. Market Share and Distribution:
   • The bank continues to add approximately 50 to 60 basis points to its market share annually and sees significant potential for growth as newer branches mature.
3. Stability in Key Metrics:
   • Post-merger, critical metrics like NIMs, CASA ratios, cost-to-income ratios, GNPA, and ROAs have remained stable, supporting the bank's resilience and operational efficiency.
4. Unsecured Personal Loans:
   • The conservative approach in unsecured personal loans will continue, prioritizing early internal warning signals and regulatory guidance.
5. Non-Interest Income:
   • The bank expects the miscellaneous income line to continue benefiting from seasonal credit recoveries and dividends, although fee income growth has moderated.

References

• HDFC Investor Presentation
• Arihant Capital
• IIFL Securities
• Earning Call
• Incred Equity
• Philip Capital