This Large Cap Banking Stock May Rise 34%, QoQ Flat Margin at 4%, Motilal Oswal Suggests Buy

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HDFC Bank Stock Outlook

On Friday last week, it closed at Rs 1,362.05 per share. Today, it opened at Rs 1,348 per share. The current market price of the share is Rs 1348.15 per share. Its 52-week low is 1,271.60 per share, recorded on June 17, 2022, last month. The 52-week high for the stock was recorded on October 18, 2021 at Rs 1,725 ​​per share. The ROE is 15.38%.

Over the past week, negative returns of 3.8%. Over the past 1 and 3 months it has given mixed returns, both positive and negative, in 1 month it has given a positive return of 4.88% and in 3 months it has given negative returns of 3.07 % over the 3 months, respectively. Over the past year, it has given negative returns of 11.15%. The performed well for 3 and 5 years, in 3 years it gave positive returns of 12.16% and in 5 years it gave positive returns of 60.69%, respectively.

Asset quality is deteriorating slightly;  the restructured portfolio drops to 76 basis points

Asset quality is deteriorating slightly; the restructured portfolio drops to 76 basis points

HDFC Bank had a mixed first quarter of FY23, with NII/PAT in line (up 15%/19% YoY), supported by lower provisions. However, PPOP growth fell sharply to 1.5% year-on-year, impacted by a cash loss of Rs 13.1 billion. The core PPPO, however, saw healthy growth of around 15% over the previous year. Business growth remains modest, driven by good traction in retail and commercial and rural banking, while the corporate portfolio recorded stable growth. Asset quality ratios deteriorated due to higher slippages (due to seasonal agricultural NPAs), however, the restructured portfolio saw a sequential decline to ~76 basis points of loans (v/s 1.14% at 4QFY22). A healthy PCR of around 73% and a cushion of contingent provisions (69 bps of loans) provide comfort on the quality of assets.

“We estimate FY22-24 PAT CAGR of around 20%, with a FY24 RoA/RoE of 2%/17.5%. HDFC Bank remains one of our preferred picks while that clarity emerges on several aspects related to the merger with HDFC,” said Motilal Oswal.

Personal lending is gaining ground;  QoQ flat margin at 4%

Personal lending is gaining ground; QoQ flat margin at 4%

The NII increased by 14.5% YoY from ~10% YoY in 4Q22, with a flat margin QoQ at 4%. NII was supported by higher retail loan growth. We expect the margin to gradually recover over the next few quarters. Other income was stable year-on-year at Rs 63.9 billion, impacted by a cash loss of Rs 13 billion. Excluding trading revenue, other revenue was up 35.4% YoY (albeit on a benign basis), fueled by higher commission revenue (up 38% YoY and a three-year CAGR 15%). OPEX increased by around 29% year-on-year, with a C/I ratio of 40.6% (basic C/I ratio of 38.6%). The PPPO increased by 1.5% year-on-year. The PPPO core experienced healthy growth of around 15% over the previous year. Loans grew 21.6% year-on-year, driven by robust 29% growth in commercial and rural loans and a 22% increase in personal loans. Wholesale lending grew 16% year-over-year. Retail lending maintained its strong QoQ ~5% recovery. Deposits increased ~19% YoY, CASA increased ~20%. Moderate CASA ratio of 240bp QoQ at 45.8%. On the asset quality front, the GNPA/NNPA ratio rose 11bp/3bp QoQ to 1.28%/0.35%, with high slippages ~Rs 72b (2.1% of loans). The PCR remained stable at ~73%. The restructured portfolio fell to ~Rs 107.5 billion (76bps of loans) from 1.14% in 4QFY22. The bank carries contingent provisions of Rs 96.3 billion (69 basis points of lending) and further holds floating provisions of Rs 14.5 billion.

Subsidiary performances: Revenue / PAT for HDFC Securities fell 5% / 25% YoY to Rs 4.3 billion / Rs 1.9 billion in 1QFY23. HDB Financial saw marginal QoQ growth (~1%) in loans to Rs 618b, while revenue grew by 13% YoY. The PAT stood at Rs 4.4bv/s INR886m/Rs4.3b at 1Q/4QFY22. GS-3 assets were at 4.95% (down 5bps QoQ), while CAR/Tier I was at 20.3%/15.4%.

Highlights of Management Commentary

Highlights of Management Commentary

On wholesale advances, the bank dropped loans worth Rs 400-500 billion as rates were less attractive. Check bounce rates remain below pre-COVID levels for all retail products. The slippage stood at Rs 72 billion in 1QFY23 (50 bps non-annualized lending). Excluding Agri and one-offs, slippages amounted to 38bp of credits. The revolver rate is likely to gradually increase and return to pre-COVID levels over time.

The brokerage recommends buying shares of HDFC bank for a target price of Rs 18.00 per share

The brokerage recommends buying shares of HDFC bank for a target price of Rs 18.00 per share

HDFC Bank reported an in-line NII and PAT, while PPOP and asset quality saw some hiccups due to higher cash losses and slippages. Loan growth was driven by continued momentum in the retail segment, as well as steady growth in commercial and rural banking. The QoQ margin remained stable and should gradually improve. Asset quality ratios deteriorated slightly, while the restructured portfolio moderated to 76 bps of loans. A healthy PCR and conditional provisioning buffer provide reassurance of asset quality.

The brokerage in the report said, “We expect HDFC Bank to deliver ~20% PAT CAGR in FY22-24, with a RoA/RoE of 2%/17.5% during We maintain our Buy rating with a target price of Rs 1,800 per share (based on 3x FY24E ABV) HDFC Bank remains among our preferred picks We expect the stock to perform gradually as revenue and margin recover in FY23, while clarity will emerge on several aspects related to the merger with HDFC.”

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