HDFC Bank Q1 earnings: Brokerages cheer results; see up to 27% upside

Brokerages cheered the June quarter results of HDFC Bank with most retaining ‘buy’ calls and raising estimates. The lender beat estimates to post a 30 percent jump in its net profit at ₹11,951 crore in the April-June quarter versus ₹9,196 crore in the year-ago period.

Meanwhile, its net interest income also grew by 21.1 percent YoY to ₹23,599 crore in Q1FY24. Asset quality of the lender also improved as the lender's gross non-performing assets (GNPA) ratio came at 1.17 percent, improving from 1.28 percent in the corresponding period a year ago. Similarly, its net NPA stood at 0.30 percent from 0.35 percent in the year-ago period.

The stock also rose as much as 1.4 percent to its day's high of ₹1,704 after its June quarter earnings. It has gained almost 25 percent in the last one year but has underperformed in 2023 YTD, up just a little over 3 percent.

Meanwhile, the Nifty Bank has gained over 6 percent in 2023 YTD.

Brokerages cheered the June quarter results of HDFC Bank. At least six brokerages, Motilal Oswal, Prabhudas Lilladher, Phillip Capital, JM Financial, LKP Securities and Nirmal Bang have a 'buy' call on the stock with a maximum target price of ₹2,140, indicating a 27 percent upside. They are bullish on its long-term merger impact, good financial performance, robust asset quality, strong NII and loan growth and future growth opportunities.

Motilal Oswal: The brokerage retained its ‘buy’ call on the private sector lender with a target price of ₹2,070, indicating an upside of 23 percent.

"HDFC Bank reported a steady quarter with healthy growth in NII and PAT, driven by lower provisions, even as margins remained stable. Loan growth was driven by sustained momentum in Commercial and Rural Banking and a pick-up in the retail segment. Asset quality ratios remained stable, while the restructured book moderated to 27 bps of loans. Healthy PCR and a contingent provisioning buffer should support asset quality. We introduce forecasts for the merged entity and estimate net earnings of ₹65,400/79,800/95,700 over FY24-26, translating into an RoA of 1.9-2.1 percent. We thus estimate RoE for the merged entity to revert to pre-merger levels of 17 percent by FY26," said the brokerage.

Phillip Capital: The brokerage reiterated its ‘buy’ call on the stock with a target price of ₹1,960, indicating an upside of 17 percent.

"Results were in line with our expectation as higher operating expense was offset by better NIM and stable credit cost. Stable NIMs was a positive surprise as an increase in the cost of funds (due to strong growth in term deposit) was offset by higher yields on advances. It continues to focus on capacity build-up in the near term in a benign credit environment and hence opex to remain elevated. The bank expects to achieve the maturity of branches before credit costs start moving toward the long-term average. Smooth amalgamation will remain a key focus area and hence growth in deposit and retail loans including SME/Agri would take centre stage. We remain constructive on the bank with mid to long-term perspective," said PC.

It further noted that the merger strategically fit HDFC Bank’s product basket. As the benefits accrue over a period, the intermittent period will see merger-related costs in the form of pressure on margins and cost-to-income ratio, stated the brokerage. It expects the return on equity to moderate in near terms owing to the low leverage of the parent, however, RoA is likely to sustain at a 1.9 percent level.

Nirmal Bang: The brokerage has maintained its ‘buy’ call on the stock with a target price of ₹2,140, indicating an upside of over 27 percent.

The brokerage is positive on HDFC Bank from a long-term perspective due to its high growth potential on account of good capital position, revenue, and cost synergies arising out of HDFC merger, further aiding growth and profitability and best-in-class asset quality. However, in the near term, a successful merger transition, elevated operating costs (due to continued expansion), and margin trajectory will be the key monitorable, it added.

Prabhudas Lilladher: The brokerage has a ‘buy’ call on the stock with a target price of ₹2,025, indicating an upside of 20 percent.

HDFC Bank saw a mixed quarter. While core PAT at ₹11540 crore was 3.7 percent short of PL estimates due to higher opex, asset quality surprised positively with lower GNPA led by lesser slippages, despite Q1 being usually weak, noted PL. It further added that the bank sounded confident of achieving an 18 percent YoY loan growth (merged). A benign asset quality environment may keep opex elevated in the near term and for FY24/25E, the brokerage raised opex by 5 percent but reduced provisions by 15/9bps, which will not change PAT materially. NII and core PPoP trends compared to peers would be keenly watched, it added.

LKP Securities: The brokerage has a ‘buy’ call on the stock with a target price of ₹2,074, indicating an upside of 24 percent.

HDFC Bank is expected to outperform the sector led by 1) healthy balance sheet growth, 2) much higher provision than the regulatory requirement in the balance sheet, 3) best-in-class underwriting and risk management practices. Given these strengths, the brokerage expects HDFC Bank to remain one of the best among all the lending businesses.

JM Financial: The brokerage has a bullish outlook on the stock with a target price of ₹1,900, indicating an upside of 13 percent.

The brokerage believes HDFC Bank can reverse the underperformance driven by a) revival in growth momentum, b) strong profitability metrics and c) robust asset quality. It sees the trajectory of deposit accretion and NIM sustainability as a key monitorable for HDFCB as it onboards a large floating rate asset book and builds deposit and loan growth of 20 percent each for FY25E. RoE is likely to hit pre-merger levels only post FY25E, it predicted.