HDFC Bank Q2 Review: Numbers In Line, Merger Timeline Is Key Positive

India's largest private lender HDFC Bank Ltd. reported a 20% year-on-year rise in net profit for the quarter ended Sept. 30. Standalone quarterly net profit crossed the Rs 10,000 crore mark for the first time and stood at Rs 10,606 crore, with improved net interest income and lower provisions.

Net interest income for the quarter rose 19% from a year ago and stood at over Rs 21,000 crore. Similarly, provisions dropped 17% year-on-year to Rs 3,240 crore.

Net interest margin improved 10 basis points on a quarter-on-quarter basis to 4.1%.

Gross non-performing asset ratio for the quarter stood at 1.23%, only 5 basis points better than the 1.28% reported in the June quarter. Net NPA ratio remained largely unchanged.

The lender continues to hold contingent provisions representing 0.65% of the loan book, while the restructuring book stood at 0.53%. Additionally, floating provisions worth Rs 1,450 crore continue to remain on the lender's book.

While the bank reported strong numbers, analysts see the shorter timeline for the completion of the HDFC Bank and Housing Development Finance Corporation Ltd. merger to be a key positive.

The lender's Chief Financial Officer Srinivasan Vaidyanathan, on Saturday, told analysts that the merger could be concluded before September 2024, which is one quarter ahead of the previous guidance.

Here's what the analysts had to say about HDFC Bank's financial performance in the July-September quarter:

Motilal Oswal

• Business growth remained healthy led by strong traction in commercial and rural banking as well as corporate book, while retail too grew strongly.

• Healthy provision coverage ratio of 73% and a contingent provision buffer at 0.65% provided comfort on asset quality.

• Expect the stock to perform gradually as revenue and margin revive further.

• Estimate HDFC Bank to deliver 19% net profit compounded annual growth rate over FY22-24, with return on assets of 2.0% and return on equity of 17.2% in FY24.

• Merger-related overhang ebbs as HDFC Bank looks to complete the merger by first or second quarter of FY24.

• Maintain 'Buy' with a target price of Rs 1,800 per share.

Emkay Global

• HDFC Bank offers the best play on India's consumption story and is also a good defensive bet in the topical turbulent markets.

• The merger process is on the fast track and the bank is hopeful of it being completed a quarter earlier then guided.

• Currently, NCLT has given approval for a shareholders meet in late November 2022, after which it may take up to another seven or eight months to complete.

• That said, clarity on the HDFC Life stake and the merger structure from the RBI remains elusive.

• The stock currently trades at reasonable valuations, at 2.3 times FY24 adjusted book value.

• Retain long-term 'Buy' rating, with a target price of Rs 1,800 per share, valuing the core bank at 2.7 times September 2024 ABV and a subsidiaries valuation of Rs 78 per share.

Systematix Institutional Equities

• The bank’s margin expansion was driven mainly by a rise in commercial & rural banking loans and a lower gross delinquency rate.

• HDFC Bank’s core operating performance remained stable with core pre-provisioning operating profit at 3.1% of average assets as compared to 3.14% in 1QFY23.

• The bank's management discussed cash reserve ratio, statutory liquidity ratio, and priority sector lending mandatory requirements issues with the RBI and sought the glide paths.

• The bank would also utilize opportunities like affordable housing bonds issuances post-merger as such bonds provide dispensation on CRR, SLR, and PSL fronts.

• Maintain 'Hold' rating on the stock with a revised target price of Rs 1,536 per share, compared with Rs 1,498 earlier.

Axis Securities

• Wholesale growth was driven by sectors like telecom, energy, and public sector units despite the bank let go of some lending opportunities due to pricing pressure.

• Higher domestic demand and festive-season-related discretionary spending are fueling growth in retail.

• Credit card spends are holding up well, however, revolve rate is still at 70-75% of pre-Covid level.

• Q2FY23 results demonstrate the strong deposit franchise of the bank, which will aid in raising adequate liabilities ahead of the merger.

• Favorable loan mix and faster repricing of lending yield to support NIM.

• Raise FY23 and FY24 net profit estimates by 2% and 3%, respectively, to factor in higher loan growth.

• Maintain 'Buy' with a target price of Rs 1,800 per share.