HDFC bank’s latest filings highlight the key points: (i) Encouraging rebound in the retail sector driven by a reduction in provisions, (ii) consistent strong performance in the corporate division, (iii) significant improvement in asset quality concerns, and (iv) a noticeable inclination towards long-term loans, particularly within the corporate sector. Short-term focus should be directed towards monitoring the merger’s advancement. We recommend maintaining a BUY stance.
Strong data series for FY2023: Our model updates, based on the 20F filings and annual report data, reveal the following key insights:
Within the segments, Retail PBT surged by 27% y-o-y, and the Wholesale business also witnessed substantial growth at 17% y-o-y. The retail business’s PBT growth was attributed to a remarkable 30% y-o-y decrease in provisions.
The reported net interest margin (NIM) remained relatively stable at 4.4%. However, there were differing trends in the retail and wholesale businesses. The retail business experienced a decrease in NIM due to the higher presence of fixed-rate loans, while the wholesale business saw an improvement. The retail portfolio’s loan yield held steady at 10%, while the corporate portfolio saw a noteworthy increase of 100 bps to reach 7%. The upward movement in the cost of funds primarily reflected in the borrowing portfolio, with potential increases still expected in the deposit portfolio. The cost ratio registered an increase, primarily attributed to elevated operating expenses growth in the retail segment. Notably, branch expansion and employee count both recorded a 22% y-o-y growth in FY2023.
A notable enhancement in the asset quality ratio was observed within the retail portfolio, and early warning signals continue to remain at a comfortable level. HDB Financial Services displayed robust improvement in performance, driven by lower credit costs and a revival in operating profit growth. This growth was fueled by strong loan expansion.
Near-term headwinds remain
on merger: Our main concern revolves around effectively managing the process of deposit mobilisation. This entails careful monitoring of the additional deposits required for the seamless transition of HDFC Ltd’s liabilities upon maturity. (ii) It’s essential to delve into the underlying dynamics of deposit growth across the system. This includes a comprehensive analysis of the disparities between loan and deposit growth rates. These disparities have far-reaching implications for the bank, affecting its ability to fulfill internal requisites (iii) Another pivotal aspect is the integration of financials resulting from the merger. We need to evaluate the combined revenue and operating profit margin mix.