India’s biggest private sector lender HDFC Bank is expected to report a robust 26 percent growth in net profit for the first quarter of this fiscal amid stable asset quality, though margins may see some pressure, analysts said.
HDFC Bank – which has completed its merger with HDFC with effect from July 1 – is likely to report a net profit of Rs 11,584 crore, representing a 26 percent jump YoY, as per the average of a poll of estimates of four brokerages.
The bank had posted a standalone net profit of Rs 9,196 crore in Q1 FY23.
However, when compared sequentially, net profit is seen declining from Rs 12,047.45 crore in Q4 FY23.
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Analysts expect its net interest income (NII) — the difference between interest earned and interest paid — to climb 21 per cent to Rs 23,553 crore, as against Rs 19,481 crore in the year-ago period.
However, the net interest margins (NIMs) – a key measure of profitability – can slip up to 10 bps from 4.1 percent in Q1 FY23.
This is because domestic banks’ funding costs are elevated while lending yields may not have material repricing benefits, analysts said.
Q1 Update
“The Indian banking sector continued to see y-o-y credit growth momentum at mid-teens through 1Q FY24, which should translate into high-teens credit growth for most large banks, especially in sticky loan segments like retail and SME. However, the fact that a highly motivated HDFC Bank could deliver only 10.7 percent CASA growth y-o-y suggests to us that system CASA growth still remains weak,” BNP Paribas analyst Santanu Chakrabarti said in a note.
HDFC Bank had disappointed the Street earlier this month with a lacklustre Q1 business update.
Its advances aggregated to approximately Rs 16.15 lakh crore for the quarter ended June 30, up nearly 15.8 percent year on year (YoY) from Rs 13.95 lakh crore a year ago. The bank's advances grew around 0.9 percent on quarter over quarter (QoQ) basis against Rs 16 lakh crore in Q4FY23.
Deposits jumped 19.2 percent YoY for the said quarter to Rs 19.13 lakh crore, from Rs 16.04 lakh crore in Q1FY23. They were up 1.6 percent QoQ from Rs 18.83 lakh crore in the quarter ended March 31, 2023.
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CASA (current accounts and savings accounts) deposits -- a cheap source of funds which helps boost banks’ NIMs – aggregated to Rs 8.13 lakh crore, growing 10 percent on-year but down 2.7 percent over Rs 8.36 lakh crore at March end.
Results Matrix
HDFC Bank’s earnings expectations have already been rebased after the release of the business update, Nuvama Research said.
“The bank has posted a disappointing business update with deposit growth of 1.6% QoQ and loan growth of 0.9% QoQ versus expectations of 4% QoQ. Even on a consolidated basis, loan growth of 15% YoY and 0.7% QoQ is lower than the guidance of 18% YoY. Standalone NIM will likely remain stable QoQ. Slippage will rise QoQ due to seasonally high agri slippage,” it added.
Concerns on the agri front have been voiced by other experts as well.
“Asset quality is expected to see a slight blip and slippage ratio could rise from 1.26% to 1.46%, driven by agri slippages especially in case of SBI and HDFC Bank,” Prabhudas Lilladher said, adding Q1 usually sees agri delinquencies.
As per Emkay Research, slower business growth, moderating NIMs and slightly higher opex and provisions can keep Q1 profit growth in check for HDFC Bank.
The domestic brokerage sees slippages inching up QoQ due to seasonally high NPAs from the agri portfolio.
“The banking sector has bounced back over the past three months (Nifty Banking index up 10%) due to its inherent resiliency amid bank failures somewhere else, healthy credit growth belying expectations of a slowdown and a stabilizing policy/interest rate environment,” it said.
Though the sharp margin improvement story is largely behind, earnings momentum is expected to remain strong in Q1 and, thus should support the current banking rally with PSBs and small-midcap banks benefiting more.
“Notwithstanding near-term business dislocation due to the merger, we believe HDFC Bank should be back in the game from H2,” it added.
Analysts expect the lender’s asset quality to be steady. HDFC Bank had reported gross NPAs at 1.12 percent in the previous quarter, with net NPAs at 0.27 percent.
This is in line with the improving asset quality of the overall Indian banking system over the past few years.
As per RBI data, Indian banks’ gross NPA ratio declined to 3.9 percent in March 2023 – a 10-year low. The net NPA ratio of the scheduled commercial banks also improved to 1.0 percent, a level last observed in June 2011.
HDFC Bank's total Capital Adequacy Ratio (CAR) as per Basel Ill guidelines was at 19.3 percent as on March 31, 2023, as against a regulatory requirement of 11.7 percent.
Provisions and contingencies for the quarter ended March 31, 2023 were Rs 2,685.4 crore.
Merged Entity Q1 Update
Some key takeaways about HDFC Bank and HDFC’s merged balance sheet:
-Gross advances were up 13.1 YoY and 0.7 percent QoQ basis, reaching Rs 22.45 lakh crore.
- Deposits aggregated to approximately Rs 20.63 lakh crore in Q1FY24, up 16.2 percent YoY and 1.2 percent QoQ.
- The merged entity's average liquidity coverage ratio for the Q1 stood at around 120 percent on a proforma basis.
Shares of HDFC Bank are up 1 percent on YTD basis, though the 1-year return stands at 21 percent.
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