HDFC Bank shares: Where is the bank stock headed after in-line Q4 show?

HDFC Bank's March quarter results were in-line with Street estimates, with a 20 per cent rise in profit after tax and stable net interest margin (NIM) at 4.1 per cent, even as the core pre-provision operating profit (PPoP) moderated. A potential pick up in margins and progress on the merger would be the key monitorables, said a few analysts, as they kept their price target largely unchanged for the stock in the range of Rs 1,950-2,050 apiece.

Emkay Global said that despite the healthy net interest income (NII) growth, HDFC Bank reported a moderate core PPoP growth of 14 per cent YoY, mainly due to higher opex as the bank continues to invest heavily into franchisee network, customer acquisition and ESOP expenses).

The brokerage said it has slightly cut its FY24E earnings, by 1 per cent, factoring-in the elevated costs, but expect the standalone bank to deliver a superior return on asset (2 per cent) and return on equity of 17-18 per cent over FY24-26E.

ICICI Securities noted that NII growth for the four quarters of FY23 averaged 20.4 per cent against 11 per cent for FY22. Opex growth for the four quarters of FY23 averaged 27.2 per cent against 14.7 per cent for FY22.

It can be inferred that the bank utilised gains from higher NII to make investments for the future, which led to elevated opex, ICICI Securities said. Profitability thereby was stable with FY23 RoE at 17.4 per cent against FY22 RoE at 16.9 per cent, it said while suggesting a target of Rs 1,990. Emkay has a target of Rs 2,050 on the stock.

"HDFC Bank reported an in-line quarter with healthy growth in NII, even as margins remained stable, while core PPoP growth remained modest. Loan growth was driven by sustained momentum in the Retail segment and robust growth in Commercial and Rural Banking. Asset quality ratios remained robust, while the restructured book moderated to 31 bps of loans. Healthy PCR and a contingent provisioning buffer should support asset quality," said Motilal Oswal Securities.

This brokerage estimates HDFC Bank to deliver a 19 per cent PAT CAGR over FY23-25, with return on asset of 2 per cent and return on equity of 17.7 per cent as it maintained its target price of Rs 1,950 on the stock.

“We see HDFC Bank’s deposit franchise becoming more valuable in FY24E when deposit growth will be the key driver not margins. Banks other than HDFC have reported strong earnings on higher margins while HDFC’s was amongst the few banks that grew its balance sheet,” said Nuvama as it suggested a target of Rs 1,960 for the stock.

The bank expects the merger to close-down by July, once RBI approval is in place, that Emkay believes will be critical from the point of view of the merger's structure, including clarity on HDFC Life stake/merger of NBFC subsidiaries and regulatory dispensations, if any.

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