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Highlights of the Q1FY24 HDFCB Earnings Call:
My Summary

HDFC Bank reports margin contraction, decline in EPS, and an increase in NPA. But the management strongly believes that there is a seasonality effect in Q1 and growth will pick-up here onwards.

There was emphasis on the fact that the company never engages in “deposit-pricing wars” to gain market share and will continue to focus on building a better relationship with their clientele.

Management Commentary:

Mr. S. Vaidyanathan, CFO
Merger update

• Subsidiaries of HDFC have become subsidiaries of HDFC Bank
• We want to thank all the regulators for their support
• Seamless integration of expertise, onboarding talent and etc is done

General Update

• PMI and CMI level augurs well for potential customers of the bank
• Robust growth showing strong customer demand
• Uneven monsoon has impacted sowing. Increased NPAs in agri portfolio.
• Overall, we see resilience in domestic demand on the back of investment in infrastructure

Key Themes

• 39 branches added in the quarter
• 1.7 lakh villages reached – 2 lakh is the target
• Customer franchise – we added 2.5 million liability customers
• We have issued 1.5 mn cards
• Website receives strong traffic
• Focus on granular deposit is continued
• Retail deposits added 38,000 crore in the quarter at the rate of 2.4% QoQ
• On a pro-forma basis, retail constitutes 83% of total merged deposits.
• Technology agenda continues – 12.5 million unique customers on the website
• 1.5x increase in customer spends
• Want to drive distribution as well as customer engagement
• LCR on a pro-forma basis was over 120%
• CAR is at 18.9%
• NII was 72% of Net Revenue

Other Income

• Fees & Commission accounts for 2/3 of the other income
• Recoveries from written-off accounts and dividends from subsidiaries accounted for 1000 crore

In the medium and long term, customer reach is the key.

• GNPA from 1.7 from 1.28 in Q1FY22
• GNPA excluding agri = 0.94%
• Slippage ratio is at 5800 crore – 4200 crore if you exclude agri
• 2100 crore of write-offs
• PCR is at 75%
• Credit Cost annualized was at 70 bps

HFL

• Added 6 million customers
• Digital offerings are very lucrative

Continued strength has been shown. PAT increased by 30%. RoE of 17.3%. EPS is at 22.2 at consolidated level.

Q&A
Suresh Ganapathy - Macquarie Capital

Q: On deposit growth. Quarterly fluctuations are there but on incremental business, it seems like you have lost market share.

• Typically, Q1 is a slow quarter across various parameters
• Typically it is in single digits
• It’s not about 1 quarter, you look at how we built on top of that in March – 50,000 crore came through in March
• In Q1, we will usually see Current Account Deposits come down, and Savings account deposits moderate
• Issuing cards and spending grew 30% on the retail cards
• We are confident that the building blocks we built, will lead to enormous growth in the next few quarters

Q: On advances, the merged entity grows at 15% but you said it has grown at 18%. What number to go by?

• Page 23 of the earnings
• The bank’s advances grew by 20%, and HDFC’s individual loans grew at 14%
• HDFC’s non-individual loans de-grew by 18% YoY – there has been management attention given to figure out why this happened
• So there is 16% growth all-in-all

Q: Can you sustain the current levels of RoA?

• Level of confidence is very high
• We are looking at 1.9 – 2.1 RoA
• Broadly, that is where we are targeting and know we will be at

Mahrukh Adajania – Nuvama Wealth Management

Q: On Opex, this also happened in the last year’s Q1, Opex growth scales up in the 2nd half (600-700 branches in each quarter in the 2nd half). 8% sequential growth, will it come back?

• 8% QoQ is the build-up of the branches that has happened there
• We built capabilities and build branches
• When credit reverses to mean, you need the maturity cycle to come to fruition.
• We have started in some extent in the Sept quarter and properly in the December quarter
• Not all of the credit cost is reinvested

Q: On loan growth and incremental deposit growth. Loan growth you had indicated doubling of growth – merged balance sheet has grown at 13%. Can we see 17-18% growth as we end the year?

• 3-4 year periods, it indicated 17%-18% growth
• Our capacities are built and that is how we are gaining traction to reach this level
• On an overall basis, we are confident on credit demand but only at the right price for us.
• We were not shy in refusing to participate in certain loans that we didn’t like

Q: Would you be able to quantify the CRR and SLR for the quarter?

• Not really. We provided you high level terms of how we are supporting growth and liquidity
• On combined basis, we are quite comfortable to meet the regulatory requirement

Kunal Shah – Citi

Q: On retail deposit side, last time it was quite encouraging. Q1 has some side of seasonality but with the investment and capabilities we have, what is the traction you see for the next 7-8 quarters?

• We don’t give forward looking statements
• Seasonality is low
• This will come back up and we will drive that back

Q: Credit growth doesn’t account for IBPC (inter-bank participation certificate) , right?

• IBPC is a very transient book – it goes out and comes back in
• We manage it QoQ
• There are a few objectives from Priority Sector Lending point of view, liquidity Point of view
• We don’t have a target for IBPC – it is opportunistic
• If we get a good price, we pass it on
• PSL and our ability to do what we need to do – it depends on what the market is pricing

Q: What will be the Integration costs with respect to the merger?

• They are all within reason, nothing substantial
• We will call it out as we finish this

Saurabh Kumar – JP Morgan

Q: On deposit cost, Interest cost is up sharply QoQ. On HDFC mortgage book, it is already repo-linked, right?

• Deposit cost is a function of the mix that has happened
• It depends on growth in Time Deposits – that depends on the market rates
• We try to price it at a rate a little below market rates – so it gives us a bigger duration
• We have pitched at rates where only SBI is slightly above us for almost all products
• Mortgages, you asked about the EBLR, it will move to Repo based pricing. But it starts off with no impact on the customer.
• It will be competitively priced

Q: What impact will it have on NIMs?

• If you look at how HDFC managed - we have taken the same people and similar risk philosophy, we had narrow margins because we were fairly hedged – so HDFC’s NIMs didn’t jump out of the range
• So upcycle or downcycle, it will continue to be managed

Rahul Jain – Goldman Sachs

Q: Going to your statement of you using low credit costs to expand – till when will you be able to sustain this?

• There’s no crystal ball about when the credit returns to mean
• Few quarters ahead of time, we will figure it out. Risk management will tell us.
• The Quality of book is sound
• Maturity cycle of the product and the credit will evolve – then by the time the reversion comes in, in 12-18 months, we will already be prepared
• In 18-24 months, the base effect also steps in

Q: On segmental growth, home loans have picked up. Everything else is subdued. Is this effort…or only quarterly phenomenon?

• It is only a quarterly phenomenon
• It is always mid to double digit growth in Q1
• There is a good amount of underlying demand that is there.
• 18-20-22% growth is what our risk management looks and determines. Every growth gets monitored and evaluated.
• Demand is far higher that the growth that they allow

Q: Any incremental colour of PSLC, RIDF?

• I want to be careful of the price in the market
• We have tranches of requirement
• At an aggregate level, we are higher than required

Q: Any one time costs expected from the merger?

• There will be some merger related costs but it will be in the manageable range
• Nothing out of the page in a big manner
• It could be some capital assets we will pull in for capacity building

Abhishek Murarka – HSBC

Q: On wholesale book, how much is left to rundown?

• It has come down 18% over the last 12 months
• That was a part of the management action
• I don’t have one number where we will settle but we keep evaluating the number
• Our wholesale book is not just a lending book, but a whole relationship book – we provide them a plethora of other services
• Here we are evaluating it – we will want to grow it at some point of time, but not now.
• We very much want to be in this segment
• Construction lending is very closely linked to mortgage lending
• There is no chance that we will not be in this segment – as we need to have insight into that development
• Land financing types, project financing that doesn’t meet regulatory requirements – we will not be doing. This could be 5-10K crore but we are yet evaluating this

Q: On deposits, incremental deposits market share is at 25%, but we are at 20% right now –so incrementally would you have to raise rates to fill this gap? Will this lead to stickier rates on the Cost of Funds?

• We don’t drive a business thinking of the market share. We don’t look at that
• We look at what is our funding requirement
• There is no mindset about market share target
• We have stated in the past, since a very long time – not just the past 2-3 years – that the bank has demonstrated discipline in pricing
• We never lead volume by pricing – it is about being closer to the customer – that is how the branches have been built.
• The branch strategy was accelerating since some time to build the pace
• 2.4 mn customers added this quarters, then you engage with them to gather some more balances
• Our penetration in Term Deposits has grown by around 50 bps point – which may seem less, but the base has also grown
• Any point of time, TD pricing was at peer pricing benchmarks
• Pricing is not the lead consideration of gathering deposits

Q: Is RoA calculated on quarterly bank balances?

We will share with you the denominator

Manish Shukla – Axis Capital

• Incremental Credit to Deposits is up because of the merger
• Pre-merger it was at around 80-83%
• It can’t be brought down immediately due to the maturity profile
• It will play out when it comes down in 3-4 years down to normal

Pranav – Burns (?)

Q: If we didn’t go down the IBPC route, what would’ve been impacted? What would you have to sacrifice?

• The base line for on the basis of which Priority Sector Lending is determined, goes down in the IBPC route
• From a pricing PoV, there is better pricing - it gives you a good pickup in the spread
• You’ll be more leveraged, and therefore the benefits are higher.

Closing Comments

• Further questions can be taken up with our IR team
• We look forward to speaking some other time

X.

Ps. There have been certain omissions/paraphrasing in these notes. It is not a word-for-word transcript