PL Stock Report: HDFC Bank (HDFCB IN) - Company Update - Negatives priced in; core earnings outlook better - BUY

HDFC Bank (HDFCB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs1,564 | TP: Rs2,025

Company Update - Negatives priced in; core earnings outlook better

Quick Pointers:

♦ Transitioning to IRAC would require equity adjustment of Rs203bn.

♦ BVPS as at Q1’24 at Rs520; we expect a 13% CAGR in BVPS over FY23-26E.

HDFCB at its analyst meet clarified certain aspects relating to merged financials. While transition to IRAC, credit policy harmonization and creation of DTL reserve would impact BVPS by 5%, gains emanating from stake sale of Credila could cushion capital by 1.2%. Creation of excess liquidity could affect Q2’24 NIM, although margins should bounce back in H2FY24E as credit growth picks up and liquidity is utilized. FY24 NIM could contract YoY from 3.8% to 3.6%, however, as higher cost liabilities of HDFCL are replaced, NIM could enhance over FY24-26E from 3.6% to 3.8%. Merged loans/deposits as at Q1’24 were Rs22.2/20.6trn suggesting a 13%/16% YoY growth. While core earnings growth would be muted for FY24E (5.2% YoY) as NIM and loan growth normalize, core PAT may witness a 19.4% CAGR over FY24-26E. Basis core RoA at 1.75% for FY26E (ICICIB 1.94%) we tweak multiple from 3.0x to 2.8x but roll forward to core Sep’25 ABV. Retain BUY with TP at Rs2,025.

♦ Net-worth impact of ~5% due to harmonization: Opening net worth would be Rs3914bn after effecting for the following adjustments totaling to Rs203bn (post-tax impact): (1) Rs118bn towards deferred acquisition costs, interest spreads on assigned loans, fair value adjustments on investments etc. (2) Rs76bn for adopting bank provisioning norms in-line with RBI requirements and (3) Rs49bn on account of DTL reserve so as to receive income tax benefit on profits from mortgage business. While impact of harmonization to IRAC seems to be higher at ~5% of BVPS, post-tax gain on 90% stake sale in Credila amounting to Rs50.2bn (may be recognized in Q2/Q3 FY24) would be capital accretive (1.2% of BV). Basis net worth of FY23, we expect a 13% CAGR in equity over FY23-26E from Rs3.79trn to Rs5.48trn.

♦ Excess liquidity to drag near term NIM; outlook for NIM better: Merged entity carries excess liquidity with LCR of 125%. Hence NIM of HDFC Ltd. on day-0 was 2.0% (vs 2.7% in Q1FY24) considering back-ended impact of surplus liquidity and ICRR. As per the management, impact on merged entity would be 25-30bps. Hence NIM for Q2FY24E can dip sharply by 40bps QoQ to 3.6%. However, as loan growth picks up and liquidity is utilized, NIM would normalize to 3.88% by Q4FY24E. FY24 performance would be muted, given sharp fall in NIM. As high cost liabilities of HDFCL are replaced over FY24-26E, NIM would improve from 3.60% to 3.76%.

♦ Merged balance sheet at Rs32.55trn as at Q1’24: HDFCL saw a QoQ blip in Q1FY24 GNPA from ~1.4% to ~2.0%, due to spike in non-individual GNPA from 2.9% to 6.7%. However, bank has adjusted the equity so as to align PCR to 74%. As at 1st Jul’23, merged loans/deposits stood at Rs22.2/20.6trn suggesting a 13%/16% YoY growth. We expect loan CAGR of 16% over FY24-26E which would translate to garnering (18-21%) market share in incremental system deposits, that may not be challenging.

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