Why, despite a mixed Q2 performance, are analysts still positive on HDFC Bank?

 Why, despite a mixed Q2 performance, are analysts still positive on HDFC Bank?

Some of the variables that favor India's largest private sector lender are NIMs bottoming out, high loan growth, network development, and steady asset quality.

On October 17, the day after India's largest private lender beat analysts' estimates with a second-quarter net profit of Rs 15,976 crore, HDFC Bank shares finished a percent higher. However, the net interest margin slowed.

The data is not comparable to the prior quarters since this was HDFC Bank's first quarterly report after its merger with the parent Housing Development Finance Corporation. Analysts, though, were generally pleased with Q2 results.

The main elements supporting HDFC Bank are listed below:

NIMs bottoming out

While the net profit exceeded expectations, HDFC Bank fell short on net interest margins (NIMs), which measure the difference between the income a bank makes on loans and the interest it pays on deposits.

Core NIM was 3.65 percent on total assets and 3.85 percent on assets used to generate interest during the quarter. The NIM for HDFC Bank was 4.1 percent in the preceding quarter.

The Incremental Cash Reserve Ratio (I-CRR)'s effect and the excess liquidity were the major causes of the margins' contraction.

The rise in banks' net demand and time liabilities (NDTL) between May 19 and July 28 required them to maintain an I-CRR of 10% as of August 10, according to the Reserve Bank of India. The action was intended to drain the excess liquidity produced by a number of causes, including the reintroduction of Rs 2,000 notes into the banking system.

But analysts predict that NIMs will soon bottom out.

"Impact of ICRR (6-8 bps on NIMs) will go-away from 3Q onwards, but overall margins will start showing reasonable impact only from 4Q as the bank may like to carry some buffer liquidity and share of term deposits is still rising," said international brokerage company Jefferies in a note.

Investors should exercise cautious, advises ICICI Securities.

As a result, NIM seems to have bottomed out. However, we predict only slow recovery because of increased competition intensity and calibrated absorption of surplus liquidity, the report added.

The opinions were shared by domestic brokerage giant JM Financial.

While we anticipate that NIMs will continue to rise sequentially, it will be difficult to compare current levels to those from before the merger as lower-margin house loans from HDFC Ltd are added to the loan portfolio.

excellent loan growth

high retail growth and ongoing momentum in commercial and rural banking drove the high loan growth of 18 percent year over year and 5.3 percent quarter over quarter. Even in the business sector, there was an increase.

Given the rapid speed of capacity expansion, HDFC Bank has had a strong start, and we think there are levers in place to maintain this momentum in business growth. Margin recovery is projected to be modest, which could help return ratios combined with increased operational leverage, according to Motilal Oswal analysts.

Over the course of FY24–26, they anticipate HDFC Bank will provide a CAGR of 18 percent in loans and 21 percent in profits.

Also Read: According to CFO Vaidyanathan, HDFC Bank estimates a 5–10 basis point I–CRR effect on net interest margins.

deposits being mobilized

A significant accomplishment of the Q2 report card was the private lender's excellent deposit growth of 29.8%, which resulted in deposits totaling Rs. 1.1 lakh crore, with retail deposits accounting for 85% of the total. A shift toward retail in the mix will improve profitability.

"It was encouraging to observe that deposit mobilization increased to Rs 1.1 trillion...While the bank is still generating significant amounts of new deposits, securitizing loans, and holding excess cash, Jefferies said, "We expect these to normalize over the next 2-3 quarters with an uptick in loan growth and normalization of liquidity."

According to JM Financial, the bank continues to prioritize deposit acquisition and has plans to use branch banking to source deposits.

dependable retail franchise

The bank's branch count increased by 85 during the quarter to 7, 945. The rate of its growth, particularly in rural and semi-urban regions, excite analysts.

In comparison to the 634 branches built by the closest competitor ICICI Bank, HDFC Bank has added 2,213 branches throughout India in the last two years.

"This will provide HDFC Bank the first-mover edge in rural regions. According to our data, HDFC Bank's presence in eastern and central Indian regions, such as UP, Bihar, MP, and the Northeastern states, has greatly increased. These areas are seeing a strong increase of organized penetration, InCred Equities stated.

Fusion momentum 

According to InCred Equities' channel checks, HDFC Bank was more concerned with attracting new customers while ICICI Bank has been more involved in mining deeper into its current customer base.

"Post recent merger with HDFC Company Limited, we can visualise large and unused cross-sell opportunity to existing mortgage clients which can further aid HDFC Bank's retail business momentum (especially unsecured) in the coming term," the statement said.

consistent asset quality

A combined GNPA ratio of 1.3 percent in 2QFY24 (lower than the 1.4 percent as of July 1, post-merger) resulted from the bank's faster stress recognition from HDFC's corporate loan portfolio, including construction financing.

However, the bank previously built a contingent buffer on HDFC loans, raising this buffer for the combined business to 0.7 percent of loans, and it has a solid particular provision coverage ratio (PCR) of 73 percent.

The proportion of money raised for NPAs is referred to as PCR.

The increased specific-/contingent-provision buffer "provides comfort amid the rising noises around stress build-up in loans that are unprotected, where the bank has significant exposure," analysts at Emkay Research said.