HDFC Bank Q4 Review: Margin To Recover On Better Loan Growth, Say Analysts

Shares of HDFC Bank Ltd. fell the most in nearly two years even as analysts expect its margin to recover gradually in the ongoing fiscal as retail growth picks up and loan mix improves.

The private lender saw its profit rise 23% over the year earlier to Rs 10,055.18 crore in the quarter ended March, in line with the Bloomberg consensus analysts' estimates.

Its net interest margin, however, contracted to 4%.

Key Highlights

• Gross non-performing asset ratio fell to 1.17%, down 9 basis points sequentially.

• Net NPA ratio declined 5 basis points over the preceding three months to 0.37%.

• Total provisions fell 29% year-on-year to Rs 3,312.25 crore.

HDFC Bank saw loan growth across retail, wholesale, and commercial portfolios. The private lender saw its advances rise 20.9% over the year earlier to Rs 13.7 lakh crore.

Shares of the bank fell as much as 5.11%—the most since May 18, 2020—to Rs 1,414.1 apiece on Monday. The stock ended the day at Rs 1,395.45 apiece, down 4.7%.

Of the 45 analysts tracking the company, 41 recommend a ‘buy’ and four suggest a ‘hold’, according to Bloomberg data. The average of the 12-month price targets implies a 31.5% upside.

Here's what brokerages made of HDFC Bank's Q4 FY22 results:

• Maintains 'buy' rating.

• HDFC Bank’s Q4 was mixed with strong growth and low opex growth offset by a further margin decline.

• As retail growth picks up and its loan mix improves, its NIM will only gradually recover. The bank will upfront distribution expansion costs in FY23 but we still expect earnings resilience to remain high due to undershooting credit costs and the buffer created.

• CLSA prefers ICICI Bank, Axis Bank and SBI over HDFC Bank.

• Although core revenue missed estimates on lower margin, it was more than offset by lower costs and strong asset quality.

• Revenue growth should recover in FY23, owing to loan growth acceleration and rate hikes, thereby sustaining 18% EPS growth.

• Deposit composition and run-off rates remain unchanged, and stays relatively better than large private bank peers.

• Bank has sustained investments in distribution as well as improved loan coverage through the cycle. Q4 saw profit beat on lower opex growth and strong asset quality, but lower margins drove a miss in revenue estimates.

• Q4 results were healthy, with 23% profit growth led by contained credit costs and strong loan growth, even as NIMs contracted.

• Results saw strong pick up in loan growth as the bank continued to see strong market share gains.

• Restructured loan moderated sequentially now at 1.1% and management remains confident on asset quality trends.

• Capital levels remain strong, with CET at 16.7% and we expect deposit and loan growth to remain strong, as well as contained credit costs.

• Maintains 'buy' but cuts target price to Rs 1,850, still implying a potential upside of 26%.

• HDFC Bank continued to deliver strong business growth versus its peers, resulting in market share gains. This was propelled by a sustained momentum in retail segment along with robust growth in commercial and rural banking and a sharp pick-up in wholesale loans.

• NII and PPoP growth stood modest due to a decline in margins even as earnings were buoyant because of benign credit cost despite making additional contingent provisions.

• HDFC Bank remains one of our preferred buys and we expect the stock to recover gradually as revenue and margin revive over FY23, while clarity emerges on several aspects related to the merger with HDFC Ltd.

• Maintains ‘buy’ at a target price of Rs 2,042, implying a potential upside of 39%.

• Operating profit growth was subdued on account of multiple factors such as lower NII growth due to NIM compression, treasury losses (vs. gains in previous periods) due to increase in yields, investments in branches, human capital and technology.

• Loan book growth was strong at ~21% YoY, driven by commercial/rural and wholesale banking. Strong growth in wholesale banking has led to margin compression in recent quarters. However, the bank is confident about retail growth picking up pace, which should contribute positively towards margins.

• Overall asset quality outlook is positive.

• On a structural basis, Nirmal Bang expects branch expansion to continue as the bank focuses on garnering new liability relationships. Given this, the granular deposit inflow is expected to remain strong. However, it may be a drag on margins given that the on balance sheet liquidity is already elevated.

• Have also reduced valuation multiple on the stock to account for the systemic increase in interest rates. Impending merger with HDFC Ltd. will be value accretive for shareholders.

• Maintains ‘buy’, cuts target price to Rs 1,950 from Rs 2,050, implying a potential upside of 34%.

• Strong credit growth, but sub-par core profitability remains a drag.

• Rising share of mortgages/higher fixed-rate loan book could keep margins in check in the near term.

• Lifting of the RBI’s restrictions on card/digital initiatives, management’s guidance to reaccelerate retail credit growth and focus on risk-adjusted margins should be long-term positives.

• Retain long-term ‘buy’ on the stock given recent correction.