HDFC Bank Q2 Preview: Margins Likely To Rise On Strong Advances, Asset Quality Seen Stable

Ahead of Q2 results, HDFC Bank witnessed stellar buying sentiment on markets. On Friday, the bank's shares closed at ₹1,441.10 apiece up by 3.4%. The bank's market valuation is at ₹8,02,686.80 crore. HDFC Bank is the third largest firm in terms of market cap.

HDFC Bank has already announced its deposits and advances performance for the quarter ending September 2022.

As of September 30, 2022, HDFC Bank's advances stood at ₹14,800 billion up by 23.5% from ₹11,988 billion in the same period last year. Meanwhile, deposits stood at ₹16,735 billion by end of Q2FY23, rising by 19% from ₹14,063 billion in Q2FY22.

During the Q2FY23, the bank posted a 20.5% yoy rise in retail deposits and a growth of 12.5% yoy in wholesale deposits. CASA deposits grew by 15.4% yoy to ₹7,595 billion. While the CASA ratio stood at 45% as of September 30, 2022.

In Q1FY23, HDFC Bank posted net interest income (NII) of ₹19,481.4 crore up by 14.5% yoy, while the core net interest margin stood at 4% on total assets. PAT rose by 18.2% yoy to ₹12,180.1 crore. Gross non-performing assets were at 1.28% of gross advances (1.06% excluding NPAs in the seasonal agricultural segment) compared to 1.47% of Q1FY22 (1.26% excluding NPAs in the seasonal agricultural segment).

What to expect from HDFC Bank's Q2 earnings?

In their Q2 preview report, Kajal Gandhi, Vishal Narnolia, and Pravin Mule Research Analysts at ICICI Direct on HDFC Bank said, "Credit growth remained strong at 23.5% YoY to ₹14,80,000 crore, up 6% QoQ with corporate segment growing faster. Retail book grew 21.5% YoY. Deposit growth came at 19% YoY and CASA grew 15.4% YoY. NII growth is seen at 16.5% YoY to ₹20,566 crore and expects margins stable to moderating at 4.2%. Other income may see improvement QoQ and asset quality expected to be stable. Hence, we expect provision at ₹3,256 crore with PAT growth expected to be ~14% YoY to ₹10,441 crore."

Meanwhile, in their Q2 report, analysts Kunal Shah, Renish Bhuva, and Chintan Shah at ICICI Securities said, "NII growth post moderation in Q4FY22 inched up to 14.5% YoY in Q1FY23 and is likely to rise further to 17-18% YoY."

According to the ICICI Securities analysts, the is chasing the best quality customers across product segments that comes at a lower yield, which will be offset by growth led by high-yielding payment products, rural and commercial.

Given higher advances growth and rise in lending rates, they added, "we believe margins are likely to be up ~10-15bps QoQ even after offsetting TD rate hike.

Further, ICICI Securities analysts note said, "containment of slippages, better recoveries, and improved collections will support asset quality trends. Bank carries cumulative credit-related contingency + floating buffer of 80bp and total provisions (comprising specific, floating, contingency, and general) of Rs307 billion is equivalent to 2.2% of advances or 170% of GNPA. We estimate credit cost to settle ~0.9%-1.0% (0.9% in Q1FY23)."

Unlike a treasury loss of Rs13 billion in Q1FY23, the note said that HDFC Bank is unlikely to post a treasury loss in Q2FY23 due to softening of yields QoQ.

Lastly, ICICI Securities note said, "Bank is strengthening its geographical footprint in terms of both reach and density which will result in higher operating expenses growth of ~20% YoY. As a result, operating profit is likely to grow in high-single teens. Given lower provisioning expectation and no requirement of new contingency bugger, PAT growth is expected at ~20% YoY in Q2FY23."

Whereas Prabhudas Lilladher analysts in their note stated that they expect an NII growth of 16% YoY/5.3% QoQ led by decent loan growth of 23.5% YoY, while the margin would see slow improvement as loan mix changes. HDFC Bank may continue to build in buffer provisions which would lead to steady earnings.

The brokerages have set a buy recommendation on HDFC Bank. ICICI Direct's target price for HDFC Bank stock is ₹1,650, while Prabhudas Lilladher sets a target of ₹1,800.