HDFC Bank Limited Q3 FY24 Earnings Analysis

1. Summary of Quarterly Results

Key Financial Metrics and KPIs

| Metric | Q3 FY24 | QoQ Change | YoY Change | |---------------------------------|----------------------|----------------|-----------------| | Gross Advances | INR 24.7 trillion | +4.9% | - | | Retail Advances | - | +3.3% | - | | Retail Mortgage Disbursements | INR 460 billion | +18% | - | | CRB Business Growth | - | +6.7% | - | | Wholesale Segment Growth | - | +1.9% | - | | Non-Individual Loans | INR 0.99 trillion | - | - | | Total Deposits | INR 22.1 trillion | +1.9% | - | | Retail Deposits | INR 530 billion | +2.9% | - | | Non-Retail Deposits | INR -118 billion | -3.3% | - | | CASA Deposits | INR 8.4 trillion | - | - | | Term Deposits | INR 13.8 trillion | +1.7% | - | | Net Revenues | INR 396 billion | - | +25.8% | | Net Interest Income | INR 285 billion | - | +23.9% | | Core Net Interest Margin | 3.4% | - | - | | Net Interest Margin (Asset Basis) | 3.6% | Flat | - | | Other Income | INR 111 billion | - | - | | Fees & Commission Income | INR 69 billion | - | +15% | | FX & Derivatives Income | INR 12 billion | - | +12% | | Operating Expenses | INR 160 billion | - | +28% | | Cost-to-Income Ratio | 40.3% | - | - | | Gross NPA Ratio | 1.26% | ↓0.08% | +0.03% | | Net NPA Ratio | 0.31% | ↓0.04% | - | | Profit Before Tax | INR 194 billion | - | +19.8% | | Net Profit After Tax | INR 164 billion | - | +33.5% | | ROA | 3.1% | - | - | | ROE | 19.9% | - | - | | Earnings Per Share (EPS) | INR 8.04 | - | - | | Book Value Per Share | INR 164.6 | - | - |

Operational Highlights

• Branch Network: Increased to 8,091 outlets, adding 908 branches over the last 12 months and 146 branches during the quarter.
• Payment Acceptance Points: Reached 4.8 million, a 25% YoY growth.
• Customer Base: Expanded to 93 million customers with 2.2 million new customer relationships added in the quarter.
• Card Issuance: Issued 1.6 million new cards, totaling 19.9 million cards.
• Asset Quality:
  • Gross NPA improved to 1.26% from 1.34% QoQ.
  • Net NPA decreased to 0.31% from 0.35% QoQ.
  • Slippage ratio reduced to 26 basis points from 78 basis points QoQ.
• Provisions:
  • Total provisions at INR 42 billion, up from INR 29 billion QoQ.
  • Core specific loan-loss provisions at INR 26 billion, up from INR 25 billion QoQ.
  • Provision coverage ratio at 75%.

2. Management Guidance and Outlook

Future Projections and Strategies

• Branch Expansion:

  • Pipeline: Approximately 500-550 branches in the pipeline.
  • Target: Aiming for 800-1,000 branches by March 2025.
  • Long-Term Goal: Ultimately targeting around 13,000-14,000 branches to enhance geographical presence.

• Deposit Growth and LDR Management:

  • Current LDR: 110%.
  • Target Range: Operating between 110% to 120% LCR.
  • Strategy:
    • Focus on increasing retail deposit growth to outpace loan growth.
    • Enhance CASA ratio through customer spending patterns and acquisition of new customers.
    • Introduce long-term affordable housing bonds as an alternative funding source.

• Cost-to-Income Ratio Improvement:

  • Goal: Reduce from 40% to mid-30% range over the next five years.
  • Approaches:
    • Enhance digital offerings and technology rationalization.
    • Optimize asset and deposit mix.
    • Improve operational efficiencies.

• Product Mix Enhancement:

  • Retail Mix: Focus on increasing the share of retail loans, particularly non-mortgage assets.
  • CASA Ratio: Aiming to restore CASA ratio to historical levels (~42%).

Historical Performance on Guidance

• Previous Guidance: Targeting a cost-to-income ratio reduction from 40% to 35%.
• Current Status: Cost-to-income ratio remains around 40.3%, indicating ongoing efforts to achieve the target.

3. Key Analyst Concerns

Primary Questions and Management Responses

| Analyst Concern | Management Response | |-------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------| | Deposit Growth and LDR Management | Emphasized focus on retail deposit growth, avoiding aggressive participation in price-sensitive non-retail deposits. Highlighted the importance of outpacing loan growth with deposit growth to manage LDR effectively. | | Branch Expansion Pace | Acknowledged slower branch expansion against the 1,500 target, highlighted ongoing pipeline of 500+ branches, and adjusted expectations to target 800-1,000 branches by March 2025. | | Margin Improvement Strategies | Identified enhancing retail mix, increasing yield on non-mortgage assets, and leveraging mortgage opportunities as key drivers for future margin improvements. | | Replacement of eHDFC Limited Borrowings | Discussed issuance of infrastructure bonds and maintaining borrowings while gradually shifting towards deposit funding. | | Cost-to-Income Ratio Reduction | Outlined plans for digital transformation, technology rationalization, and optimizing product and deposit mix to achieve cost-to-income ratio targets. | | Cross-Sell Metrics and Customer Acquisition | Announced initiatives to track and publish cross-sell metrics, including savings account penetration and credit card issuance among new customers. | | Impact of Competitive Deposit Rates | Maintained that deposit pricing is competitive and aligned with peers, focusing on product differentiation rather than rate competition. Emphasized ongoing market share gains despite competitive pressures. | | Contingent Provisions and Regulatory Compliance | Explained contingent provisions related to AIF investment prudence, without committing to specific targets, ensuring compliance with RBI regulations. | | Consumer Behavior and Deposit Accretion | Addressed improvements in customer deposit balances and highlighted market share growth to counteract competitive deposit rate challenges. |

4. Management Tone Analysis

• Overall Tone: Cautiously optimistic with a focus on sustainable and profitable growth. Management acknowledges current challenges but emphasizes strategic initiatives to address them.
• Confidence Indicators:
  • Highlighted achievements in deposit growth and asset quality improvements.
  • Discussed proactive measures in branch expansion and digital transformation.
  • Emphasized ongoing market share gains and profitable lending practices.
• Caution Indicators:
  • Recognized constraints in deposit growth and the need to manage LDR.
  • Adjusted branch expansion targets in response to current pipeline and regulatory considerations.
  • Addressed competitive pressures in deposit pricing without committing to aggressive rate changes.

Conclusion

HDFC Bank Limited demonstrated robust financial performance in Q3 FY24 with significant growth in net revenues, net interest income, and net profit after tax. The bank continues to expand its operational footprint and customer base while maintaining strong asset quality. Management remains focused on achieving sustainable growth through strategic deposit management, branch expansion, and cost optimization. Analysts' concerns regarding deposit growth, LDR, and margin improvement are being addressed through targeted strategies, indicating a balanced approach between growth and profitability.