How we Found out HDFC Bank is Ready for Growth Opportunities

The latest quarterly results of HDFC Bank were keenly awaited since this is the first time it would include that of the erstwhile HDFC.

Most of the operational parameters of HDFC Bank are not broadly comparable on a year-on-year and quarter-on-quarter basis given the merger that took effect on 1 July 2023.

The street has been keenly awaiting the impact of the merger on NIMs (net interest margins) and NPAs (non-performing assets), given that the bank has one of the best ratios in the banking sector.

For the September 2023 quarter, HDFC Bank reported NIMs of 3.6% on interest earning assets, vis-a-vis 4.3% in the June 2023 quarter and 4.1% during the year ended 31 March 2023.

Experts pointed out that NIMs were lower in the September 2023 quarter for HDFC Bank largely to meet the regulatory CRR and SLR requirements in the merger process.

Senior company management of HDFC Bank in the conference call highlighted that the NIMs would gradually improve over a period of time, given greater role of lower cost of bank deposits in the lending process.

Nearest rival ICICI Bank, has not yet reported results for the September 2023 quarter, however, in the June 2023 quarter this bank reported NIMs of 4.8%.

Meanwhile, the management of NPAs by HDFC Bank also appears satisfactory even after the merger. The percentage of net NPAs to net advances of HDFC Bank at 0.35% for the September 2023 quarter. It was broadly in tune with 0.3% in the June 2023 quarter and 0.27% in the year ended 31 March 2023.

For ICICI Bank it was 0.48% at the end of the June 2023 quarter.

Dalal Street Cautious

The quarterly results were declared after the close of trading yesterday, nevertheless the stock was down 0.5% to close at Rs 1,529.5.

Over the past one year, shares of HDFC Bank have been broadly flat in contrast to an 8.5% rise in the share price of rival ICICI Bank.

Investors have been keenly awaiting to understand the strategy of HDFC Bank management to deal with lower NIMs and any rise in NPAs in the merged entity.

HDFC Bank has an impeccable track record for more than two decades with regard to growing its loan book, both retail and corporate, and at the same time keeping its NPA ratios to one of the lowest in the banking sector.

It will take a few quarters before HDFC Bank will be able to return to its enviable operating ratios.

The stock trades at 17.8 times on standalone estimated earnings for the year ended 31 March 2024 vis-a-vis 17.3 times for ICICI Bank on a standalone basis.

While HDFC Bank is jittery about its near term performance, it remains optimistic about robust growth over the long-term. This explains the heavy buying among the FIIs in the past quarter.

FIIs have raised their stake in the bank from a total of 33.4% in the quarter ending June 2023 to 52.1% in September 2023.

Equitymaster's Take on HDFC Bank

In one of her editorials, Tanushree Banerjee explained why the bank does not deserve to trade at historic low valuations due to worries over short term underperformance.

Going by HDFC Bank's history of mergers, the temporary dip in margins and return ratios are unlikely to dent long term fundamentals.

Tune in to the below video for more:

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