On January 17, HDFC Bank's shares witnessed a substantial fall of more than 8%, marking their steepest decline since March 2020. This downward trend followed a 7% fall in the US-listed ADRs. Despite meeting headline expectations, the bank's financial results for the October-December quarter revealed underlying issues that disappointed investors.
Q3 FY24 Overview: A Mixed Bag
India's leading private sector bank displayed a mixed financial performance in Q3 FY24. The bank achieved a 2.3% sequential rise in net profit, and a notable 39% increase compared to the previous year, totalling Rs 17,718 crore. This figure was in line with market projections, yet it included a one-off write-back of Rs 1,500 crore of tax provisions pursuant to a favourable court decision. However, the bank's Net Interest Income (NII) fell short of expectations, recording Rs 28,470 crore.
Regarding asset quality, the bank reported a decrease in gross non-performing assets (NPAs), which stood at 1.26% of gross advances, down from 1.34% in the preceding quarter. Similarly, net NPAs were stable at 0.31%, supported by healthy recoveries and accelerated write-offs.
The bank's Total Capital Adequacy Ratio (CAR) under BASEL III norms was robust at 18.4%, significantly exceeding the regulatory requirement of 11.7%.
Challenges in the Financials
HDFC Bank saw a 50% year-on-year increase in provisions to Rs 4,216 crore, which included contingent provisions of Rs 1,220 crore towards AIF investments.
Additionally, there was a noticeable dip in the bank's core net interest margin (NIM) on total assets, which decreased to 3.4% from the previous quarter's 3.65%. Prior to its merger with Housing Development Finance Corp (HDFC) in July last year, the bank consistently maintained NIMs above 4%.
The merged entity, post-merger, faced pressure on its margins, primarily due to HDFC's elevated borrowing costs and the lower yields from its loan book, affecting the financial outcomes in the subsequent two quarters.
Valuation & Investment Outlook
Going by today’s share price reaction, the street’s sentiment towards this stock is certainly bearish. This outlook, however, is short-term. HDFC Bank continues to be a primary choice for both domestic and international brokerages for their long-term portfolios. Notably, the bank has seen a nearly 23% increase in institutional investments over the past two quarters.
Currently, HDFC Bank's stock trades at a Price-to-Earnings (P/E) ratio of 23x. The bank's management is optimistic, believing that they are on the lower end of potential margin declines and anticipating a rebound to 3.7% within the next 18 to 24 months.
Acknowledging short-term challenges, we maintain a positive outlook for HDFC Bank. The benefits from its recent merger have yet to be realized. With the Net Interest Margin (NIM) appearing to stabilize at 3.4% and expected improvements in operational efficiency, the bank is geared towards a steady increase in earnings. Taking these elements into account, we view this bank as an attractive investment opportunity for long-term investors.
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