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Home / Markets / Mark To Market /  HDFC Bank’s Q3 show may not elevate stock

HDFC Bank Ltd’s shares fell by 1.5% on NSE on Monday, a day when the Nifty50 index was marginally up. The bank’s December quarter (Q3FY22) results announced on Saturday show it earned a net profit of 10,342 crore. This is broadly in line with Street estimates and represents an 18% year-on-year (y-o-y) growth, which isn’t bad.

In Q3, the bank’s net interest income rose by 13% y-o-y, driven by a healthy loan growth of 16.5%. Net interest margin is unchanged sequentially at 4.1%, down 10 basis points (bps) y-o-y and below the historical average. One basis point is 0.01%. “This has been an irritant in the past few quarters, mainly due to slow retail growth and an unfavourable portfolio mix," said analysts from Emkay Global Financial Services in a report on 16 January. “Retail credit growth remains sub-optimal, with its share at 47%, down from 53-54% two years ago, weighing partly on margins," the brokerage added. Even so, it helps that the retail business is improving momentum.

Gaining momentum
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Gaining momentum

Meanwhile, HDFC Bank’s non-interest income grew by 10%. This was impacted by a weak show by fee income, which rose merely 2% mainly owing to lower fees in payment products. Overall, HDFC Bank’s Q3 results, while not bad, aren’t impressive. “We saw a decline in provisions for the first time since Q1FY15 as the bank showed asset quality strength. But operating profit performance is still weak and likely to be so in the near term," said Kotak Institutional Equities’ analysts in a report.

As such, shares of HDFC Bank have underperformed peers over the past one year. The reasons for this include RBI’s embargo on its card/digital initiatives and slower topline growth. The card embargo is now lifted. In CY21, HDFC Bank’s shares rose by just 3%, while rival ICICI Bank Ltd’s shares rose up to 39%, helping boost the latter’s valuations. HDFC Bank has continued to underperform ICICI Bank in 2022, so far.

Jefferies India expects HDFC Bank to narrow the gap on growth and sustain its higher return on equity, which will be key to compounding-led returns from the stock. “We see 18% CAGR in profit over FY21-24 and improvement in net interest income growth towards 16-17% would be key to rerating," said Jefferies’ analysts. CAGR is compounded annual growth rate. In the near term, investors should watch if lending is hit owing to the Omicron coronavirus variant.

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