HDFC Bank Q3 Review: Credit Growth Moderates, Margins Remain Monitorable

HDFC Bank Ltd. reported third-quarter net profit in line with analysts' expectations, but the margin trajectory and timeline for the HDFC-HDFC Bank merger were flagged as key monitorable.

The country's largest private bank's credit growth moderated somewhat in the quarter, but improvements in margins and core income helped it deliver a good quarter.

HDFC Bank saw its net profit rise 18.5% year-on-year in the October-December quarter on account of higher core income, better margins, and lower provisions. 

The bank's third-quarter net profit stood at Rs 12,259 crore, as compared to Rs 10,342 crore during the same period a year ago. 

Net interest income for India’s largest private sector lender rose 24.6% from a year ago and stood at Rs 22,987 crore. The bank's reported net interest margin also jumped by 20 basis points sequentially and stood at 4.3% during the third quarter.

HDFC Bank's total advances rose 19.5% year-on-year and stood at Rs 15.1 lakh crore. In the previous quarter, though, advances rose by 23.4% year-on-year.

The gross non-performing asset ratio for the bank was flat sequentially at 1.23%. The net NPA ratio was also flat at 0.33%. HDFC Bank's provisions for the quarter stood at Rs 2,806 crore, compared with Rs 2,994 crore a year ago, a reduction of 6.3%.

Shares of HDFC Bank gained 1.48% to Rs 1,624.4 apiece as of 10:10 a.m., while the benchmark Nifty 50 rose 0.18%.

Out of the 45 analysts tracking the company, 40 maintain a 'buy' rating and five suggest to 'hold', according to Bloomberg data. The 12-month consensus price target implies an upside of 16.5%.

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

Motilal Oswal

• Loan growth was driven by traction in commercial, rural, and retail loans. Corporate books saw a marginal decline sequentially.

• Operating costs were high, with a 27% increase from the previous year. This was due to new branches, more employees, and a wider range of retail assets.

• Estimate HDFC Bank to deliver around a 19% compounded annual growth rate on net profit over FY22–25, with a return on assets of 2.0% and a return on equity of 17.7% in FY25.

• Maintain a 'buy' rating with a target price of Rs 1,930 per share

Emkay Global

• HDFC Bank continues to clock strong growth in the retail and small, and medium-sized business segment

• The brokerage believes HDFC Bank offers the best play on India's consumption story and is also a good defensive bet

• Unfavourable merger structures and moderation in growth remain key risks.

• Maintain 'buy' with a target price of Rs 1,925 per share

Nomura

• Lower credit costs drove a higher return on assets for HDFC Bank over the quarter.

• Within the wholesale segment, the bank expects growth to come from PLI schemes, supply chain finance, and infrastructure.

• Maintain a 'buy' rating with a target price of Rs 1,885 apiece.

Morgan Stanley

• Expect higher deposit rates to be more than offset by the repricing of the MCLR/fixed rate loan book.

• The brokerage believes the shift towards retail loans will accelerate further.

• Expect fee income to normalise to a 15% year-over-year run rate over the next few quarters.

• Expect NIM to improve further as retail volume growth accelerates and margins improve.

UBS

• HDFC Bank's management remains confident of growing loans at over 18% post-merger with HDFC Ltd.

• A significant decline in loan demand could be a key downside risk.

• Maintain a 'buy' rating with a target price of Rs 1,900