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HDFC Bank: Great results but merger overhang keeps stock muted

ICICIdirect Research 19 Oct 2022 DISCLAIMER

What's Buzzing 

HDFC Bank reported a strong set of numbers as business growth continued its healthy traction in Q2FY23 led by 23.4% YoY growth in advances. Lower credit cost at ~87 bps aided earnings growth of ~20% YoY. Asset quality also showed improvement both QoQ and YoY basis. 

Context 

NII grew 18.9% YoY driven by strong loan growth and uptick in margins. Margins improved 10 bps QoQ at 4.1%. Other income growth was driven by fee & commission income. C/I ratio moderated marginally to 39.2% led by higher income levels. Credit cost came in at ~87 bps, lower than earlier trend of more than 100 bps, aiding earnings growth at 20% YoY. GNPA and NNPA ratio were down by 5 bps and 2 bps at 1.23% and 0.33%, respectively. Restructured book also declined to ~50 bps of total loan book. 

Our Perspective 

HDFC Bank has delivered a strong performance in terms of growth and asset quality. Its continued focus on CRB and retail segment and further rate transmission is seen aiding margins. Deposits accretion will be supported by branch expansion and relationship building, though it will keep opex elevated in the near term. Steady asset quality, adequate provision with contingent provisions is positive. We believe there will be no substantial impact of regularisation of moratorium book. Building of distribution capabilities and business growth to remain buoyant while merger related activities are moving ahead with NCLT approval for shareholders meeting to be held in November 2022. We believe that the dominance of HDFC Bank in banking space will continue with profit growth at 19% CAGR in FY22-24 and superior return ratios (~2% RoA and ~18% RoE). Thus, we remain positive on the stock.

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