HDB - HDFC Bank: A Mixed Picture

2023-04-10 10:40:59 ET

Summary

• HDFC Bank's Q4 FY 2023 loan growth was a reasonably good +16.9% YoY, but its loan growth has moderated significantly as compared to earlier quarters.
• HDB's total deposits grew strongly by +20.8% YoY in the recent quarter, but its deposit mix was less favorable as the share of CASA deposits declined.
• HDFC Bank's branch network expansion plans positions it for continued deposit growth in the future, but this will naturally come at the expense of higher operating costs.
• The most recent Q4 FY 2023 operational update provided by HDB shows a mixed picture, which provides support for my Hold rating assigned to the stock.

Elevator Pitch

I continue to have a Hold rating awarded to HDFC Bank Limited's ( HDB ) stock.

In my prior update for HDB written on January 9, 2023, I touched on HDFC Bank's planned merger with HDFC Limited. I turn my attention to HDFC Bank's most recent Q4 FY 2023 (YE March 31) business update with the current article. HDB's recent operating metrics point to a mixed picture for the bank in terms of loan growth, deposit base expansion, cost of funding, and operating expenses. As such, I choose to leave my Hold rating for HDFC Bank unchanged.

HDB's Loan Growth Was Decent But Still Slowed From Prior Quarters

On April 4, 2023 last week, HDFC Bank issued a 6-K filing disclosing key operational metrics for the company in Q4 FY 2023.

The company's loans grew by +16.9% YoY to INR13.7 trillion in the fourth quarter of fiscal 2023. On the surface, HDFC Bank's loan growth at the high teens percentage level seems impressive in absolute terms.

But this is the second consecutive quarter that the bank has witnessed a moderation in loan growth. Specifically, HDB's loan growth on a YoY basis slowed from +23.5% in Q2 FY 2023 to +19.5% in Q3 FY 2023, before moderating further to +16.9% for Q4 FY 2023.

The World Bank published a press release on April 4, 2023 lowering its GDP growth estimate for India for the new year from 6.6% previously to 6.3% now, taking into account "slower consumption growth and challenging external conditions." It is inevitable that a more moderate pace of expansion for the Indian economy will translate into loan growth deceleration for HDFC Bank as seen in the recent quarter.

HDFC Bank's Deposit Growth Was Strong But Deposit Mix Became Less Favorable

HDFC Bank's performance in terms of deposit growth and mix was mixed in the most recent quarter.

Total deposits for HDB expanded by +8.7% QoQ and +20.8% YoY to INR18.8 trillion in Q4 FY 2023. HDFC Bank's YoY growth in deposits for the fourth quarter exceeded its loan growth (+16.9% YoY) and represented a meaningful acceleration as compared to previous quarters. As a comparison, HDFC Bank's total deposits increased by +19.0% and +19.9% for Q2 FY 2023 and Q3 FY 2023, respectively.

On the flip side, HDFC Bank's CASA (Current Account and Savings Account) deposit growth was disappointing. HDB delivered a +11.3% YoY increase in CASA deposits for the recent quarter. In contrast, HDFC Bank's actual CASA deposit growth rates for Q1 FY 2023, Q2 FY 2023, and Q3 FY 2023 were relatively better at +20.1%, +15.4%, and +12.0%, respectively. Moreover, HDB's CASA ratio declined by -3.8 percentage points YoY from 48.2% as of end-FY 2022 to 44.4% as of end-FY 2023.

In a nutshell, HDFC Bank has done a good job in growing its total deposits at a very healthy pace in the recent quarter, but a lower CASA ratio (cheapest funding source for banks) suggests that HDB's overall funding cost would have likely increased.

Aggressive Network Expansion Is A Double-Edged Sword For HDB

In an earlier interview with Indian media publication The Hindu Business Line published on February 23, 2023, HDFC Bank revealed that it expects to "close the year (FY 2023) with 1,200-1,300 branch additions" and intends to "add similar numbers" for FY 2024 and FY 2025.

HDFC Bank had approximately 7,183 branches as of the end of calendar year 2022, so this implies that HDB is aiming to expand its physical branch network by a mid-teens percentage growth rate in the next few years.

On the positive side of things, HDB's aggressive branch network expansion will allow the bank to sustain strong deposit growth, as it did in Q4 FY 2023 (detailed in the prior section). At its earlier Q3 FY 2023 earnings call (transcript sourced from S&P Capital IQ ) on January 14, 2023, HDFC Bank stated that its "goal is to grow (deposits) faster than the market to gain share."

On the negative side of things, HDFC Bank's profitability and bottom line could take a hit from this frenetic pace of new bank branch openings. Using Q3 FY 2023 (not every Indian bank has reported recent Q4 FY 2023 numbers) as a comparison, HDB's operating costs grew by +27% in that quarter. In contrast, the operating expenses for HDB's key peers ICICI Bank ( IBN ) and Axis Bank [AXSB:IN] increased by +16% and +18%, respectively for Q3 FY 2023.

HDFC Bank's Valuations Are Unappealing On A Peer Comparison

HDFC Bank's valuations are unattractive based on a comparison with its peers.

In terms of earnings-based valuation metrics, HDB's consensus forward next twelve months' normalized P/E multiple is 18.2 times now as per S&P Capital IQ data. HDB trades at a premium to ICICI Bank and Axis Bank, which are valued by the market at forward P/E multiples of 16.8 times and 9.1 times, respectively.

With regards to asset-based valuation metrics, the market values HDFC Bank at a trailing price-to-tangible book or P/TBV ratio of 3.5 times. Axis Bank and ICICI Bank are currently trading at trailing P/TBV multiples of 1.9 times and 3.0 times, respectively.

Concluding Thoughts

HDFC Bank's shares continue to warrant a Hold rating in my opinion. An analysis of HDB's recent Q4 FY 2022 business update suggests that the outlook for the bank is murky, which implies that a Hold rating for the stock is fair.

For further details see: