Is HDFC Bank a Buy after Q2 earnings?

This has been a busy year for HDFC Bank as the country’s largest private lender announced merger with parent and mortgage lender Housing Development Finance Corp (HDFC) to create long-term value for all stakeholders, including customers, employees, and shareholders of both entities. The proposed merger between HDFC Bank and HDFC is expected to be completed in a few months or a quarter, says CFO Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, at a post-earnings analyst call on Saturday. The deal has been already approved by the National Company Law Tribunal (NCLT) and Competition Commission of India (CCI), while the bank is scheduled to hold a shareholders' meeting on November 25 for obtaining their approval for the scheme of amalgamation.

HDFC Bank on Saturday released its earnings for the July-September quarter, which showed that its consolidated net profit rose 22.3% to ₹11,125.21 crore during the period under review, supported by a reduction in money set aside for bad loans. Consolidated advances grew by 22.8% from ₹1,249,331 crore in Q2 FY22, to ₹1,533,945 crore in Q2 FY23.

The standalone net profit climbed 20.1% to ₹10,605.78 crore, as against ₹8,834.31 crore in the year-earlier period and ₹9,196 crore in the preceding June quarter. The net interest income, interest earned less interest expended, rose 18.9% to ₹21,021 crore, driven by 23% growth in advances, while the net interest margin was stable at 4.1%. The other income climbed marginally by 2.63% to ₹7,596 crore due to a loss of ₹253.1 crore on sale or revaluation of investments as against a gain of ₹675 crore in the year-earlier period.

Provisions and contingencies for the quarter stood at ₹3,240.1 crore (consisting of specific loan loss provisions of ₹3,000.4 crore and general and other provisions of ₹239.7 crore) as against ₹3,924.7 crore for the quarter ended September 30, 2021.

On the asset quality front, gross non-performing assets (GNPAs) dropped to 1.23%, as against 1.28% in Q1 FY23. Net non-performing assets (NNPAs) also improved to 0.33% of net advances, as compared to 0.35% in the June quarter of the current fiscal.

Analysts view on HDFC Bank’s Q2 results

According to market analysts, HDFC Bank September quarter was mostly in line with D-Street estimates. The lender’s higher interest income and other income were better than expected, while its asset quality also improved.

JM Financial Institutional Securities 

The brokerage has maintained a “Buy” call on the stock with a target price of ₹1,640. The agency in its report said that HDFC Bank reported a steady quarter with expansion in NIMs (higher than expected), healthy core PPOP growth (+17% YoY) and steady asset quality.

“Key positive, in our view, was strong liabilities growth (+4.3% QoQ) which continues to be retail-led (acquiring approx. 2mn liabilities relationships per quarter). Asset quality remains in good shape with slippages at 1.7% (annualised) and provision cover at 73% (2Q credit costs stood at 90bps (annualised), GNPL at 1.23%),” it said.

ICICI Direct

The agency remained positive and retained “Buy” rating on the stock, while it raised target price from ₹1,650 to ₹1,750 per share, citing that the bank is expected to deliver higher than industry growth along with return on asset (RoA) of around 2% in FY24E.

The key triggers for future price performance are continued focus on CRB & retail and further rate transmission to aid margins as well as deposits accretion supported by branch expansion and relationship building. The steady asset quality, adequate provision with contingent provision positive also augurs well for the stock.

Motilal Oswal

The brokerage has retained its “Buy” rating on HDFC Bank shares with a target price of ₹1,800 apiece. “HDFC Bank reported a steady quarter with recovery in core pre-provision operating profit (PPOP) growth and margins though treasury loss dragged down by PPoP. We estimate ~19% PAT CAGR over FY22-24, with an RoA/RoE of 2.0%/17.2%, respectively, in FY24. We expect the stock to perform gradually as revenue and margin revive further while the merger-related overhang ebbs as HDFCB looks to complete the merger by 1Q/2QFY24E."

Prabhudas Lilladher

The agency has maintained “Buy” on the stock with a target price of ₹1,800 per share. “HDFC Bank saw a good quarter with core earnings beating estimates by ~5% led by stronger NII and other income (excl. treasury) while asset quality was better. NIM was higher by 9bps due to superior yields driven by faster asset repricing, which is expected to outpace that of liabilities, suggesting that NIM would improve in near term.”

On Monday, HDFC Bank shares were trading 0.9% higher at ₹1,454.45, against the previous closing price of ₹1441.10 on the BSE. The banking heavyweight has fallen 14% over the last 12 months and underperformed the Bank Nifty by 15% during the period. The stock has risen 4% in the past six months, while it dropped 3.5% in a month.