HDFC Bank Q3 Results Review - Margins Flat, Lower Tax Rate, Treasury Gains Boost Earnings: Systematix

Systematix Research Report

HDFC Bank Ltd. reported earnings of Rs 163 billion (+3% QoQ, +34% YoY) which was beat to estimates of Rs 157 billion led by lower tax rate on tax provision reversals and higher non-interest income. Key highlights for the quarter were:

1. Gross advances growth of 4.9% QoQ was led by strong growth in commercial and rural banking (+7.3% QoQ) and retail loans (+3.3% QoQ) and muted growth in wholesale loans (+0.8% QoQ) and agri (+2.8% QoQ).

2. While deposit growth was muted (+1.9% QoQ), quality of deposit accretion improved as retail deposit mix improved to 84% (+100 basis points QoQ) and current account and savings account ratio also remained stable at 37.7% (+10 bps qoq)

3. core net interest margin as % of IEA remained largely stable QoQ at 3.6% versus expectation of decline on muted deposit accretion. This was mainly due to utilisation of balance sheet liquidity to fund advances growth. With liquidity coverage ratio coming down to 110% from 120% QoQ, incremental growth will have to be deposit funded.

4. Other income was supported by higher treasury gains of Rs 15 billion (versus Rs 10 billion in Q2 FY24) mainly on the back of gain on stake sale in Bandhan bank

5. While CIR remained stable QoQ, HDFC Bank is now considering a more gradual roll-out in branches with expectation of 800-1000 new branch additions in FY24 versus earlier target of 1500 branches. In our view, while abundant liquidity and benign asset quality conditions hitherto enabled the bank to increase its investment outlay, this change of stance could be a sign of the pressures on return ratios in the face of competition for cheap sources of liquidity.

6. Gross non-performing /net- non-performing asset at 1.3%/0.31% was stable QoQ. The bank provided an additional Rs 12 billion, reflecting 100% provision for downstream AIF investments as per the new regulatory requirements.

7. Overall, the bank delivered return on asset of 1.9% versus FY24 guidance of 1.9-2.1% for the merged entity.

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