HDFC Bank Q3 Preview: Asset Quality To Remain Stable; Higher Liquidity To Affect NIM

On Tuesday, January 16, private lender HDFC Bank will be announcing its financial results for the third quarter of the fiscal year 2024 (Q3FY24). The asset quality is anticipated to be steady during the quarter, and loan growth is probably going to continue to be robust. The bank is headed towards stable expansion and profitability; NIMs will progressively recover. Because of the festive season and the sales team's effective execution, the bank is expected to see strong business growth. Deposits are expected to grow healthily in Q3FY24 thanks to attractive interest rates and increased mobilisation of term deposits (TDs).

HDFC Bank is likely to record a double-digit year-on-year (YoY) growth in net profit for the quarter ended December, supported by the solid rise in net interest income expected to grow by Rs 29.371 Cr in Q3FY24E as stated by KRChoksey Research. According to the brokerage, the bank is predicted to have a net profit of Rs 16.180 Cr, an increase of 32.0%. Due to the high cost of funds, NIMs are projected to be range-bound between 3.4% and 3.6%. However, an increase in profitability and return ratios as a result of growing disbursements-primarily to construction finance-is anticipated.

Higher liquidity on the books is expected to result in a slight decrease in NIM on the operational front QoQ. The cost-to-income ratio is expected to be around 40.2%, as against 39.6% in Q3FY23. For the quarter, we expect the asset quality to remain stable, said KRChoksey Research in a note.

HDFC Bank Preview Q3FY24 By Shreyansh Shah, Research Analyst, StoxBox

We believe that all the one-offs and adjustments due to the merger have been reflected in the financials of HDFC Bank and expect the bank to post robust performance on all fronts from hereon. We believe that the bank will have strong business growth due to increased branches and effective execution from the sales team, which was aided by the festive season.

The deposits are likely to witness healthy growth in Q3FY24 due to attractive interest rates and increased mobilization of term deposits (TDs). However, its CASA may have a marginal impact due to increased traction in the TDs. NIMs are likely to be range-bound between 3.4% and 3.6% due to high cost of funds. We expect an improvement in profitability and return ratios due to increasing disbursements, mainly to construction finance.

As HDFC Bank has taken care of the non-retail book of erstwhile HDFC Ltd. in the previous quarter itself, we do not foresee further run down in asset quality in the current as well as upcoming quarters. Going ahead, we expect the bank to have healthy liquidity coverage ratio due to the merger effect, with return ratios aided by robust growth visibility in top line from various loan segments. Additionally, a better mix of loan originations, particularly focused on the retail shift, would help the bank to outperform its peers in the industry.

NIM Recovery Is Likely To Be Gradual

According to a report from Motilal Oswal, loan growth is likely to remain healthy, and the bank expects to double its balance sheet in the next ~4-5 years, which implies growth to remain closer to its historical run rate. HDFCB plans to continue with its aggressive branch expansion run rate of 1,400-1,500 branches in FY24 and aims to increase its total branch count to 13k-14k to sustain its growth trajectory over the medium term. The CASA mix has declined to 38% in 2QFY24, the bank has noted its overall market share in incremental CASA flows remains higher than the outstanding deposit market share.

HDFCB indicated that NIM recovery is likely to be gradual as deposit rates and competitive intensity in the industry remain high. Though, the bank said that margins are currently at the lower end of the spectrum and should recover to 3.7% in 18-24 months while recovery to ~4.1% will take further 2-3 years, said the brokerage.

HDFC Bank Q3 Business Updates

In Q3FY24E, HDFCB (on a standalone basis) achieved a provisional loan growth of 62.4% YoY/ 5.9% QoQ. Commercial and rural banking loans jumped by 31.5% YoY and 3.0% QoQ, while other wholesale loans climbed by 11.0% YoY and 2.0% QoQ. The retail loans category saw growth of 111.0% YoY and 3.0% QoQ. The bank's deposits climbed by 27.7% YoY/ 1.9% QoQ. As of December 31, 2023, the bank's CASA ratio was around 37.7%, down from 44.0% on December 31, 2022, and 37.6% on September 30, 2023.

HDFC Bank Valuation

According to a report from Prabhudas Lilladher, the creation of excess liquidity affected Q2'24 NIM, although margins should bounce back in H2FY24E as credit growth picks up and liquidity is utilized. While core earnings growth would be muted for FY24E (6.3% YoY), as NIM and loan growth normalize core PAT may witness an 18.3% CAGR over FY24-26E. The brokerage said, "Basis core RoA at 1.74% for FY26E (ICICIB 1.94%) we maintain multiple at 2.8x (3.0x for ICICIB) on Sep'25 core ABV. Retain BUY with TP at Rs2,025."

"HDFCB has everything in place to deliver strong profitability and growth trajectory over the coming years (similar to pre-merger levels) and the management believes that execution remains the most important factor for the bank. HDFCB is confident of sustaining the steady growth momentum and has highlighted that it has been able to maintain its incremental market share of ~16-20% despite an increase in its size. We maintain BUY with a TP of INR1,950 (premised on 2.7x FY25E ABV + INR209 from subs)," said Motilal Oswal in a note.

Disclaimer

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