HDFC Bank gains up to 2% even as asset quality deteriorates in Q1; global brokerages divided

HDFC Bank Q1 results: HDFC Bank shares in Monday’s trade (July 22) gained up to 2 per cent at day's high to Rs 1,640 per share after the lender posted better-than-expected set of results on most metrics, nevertheless asset quality at the country’s leading private sector bank took a hit during the June quarter of the current fiscal year.

For the reporting quarter, the bank reported a standalone net profit of Rs 16,174.8 crore, marking growth of 35.3 per cent compared with the corresponding period a year ago. Its net interest income (NII) - or the difference between the interest earned and the interest paid - grew 26.4 per cent on a year-on-year basis, to Rs 29,837.1 crore, according to a regulatory filing. 

Both net profit and NII exceeded analysts' expectations. 

Zee Business research estimated the lender’s first-quarter net profit at Rs 15,915 crore and NII at Rs 29,635 crore.

Of the total advances mix at the lender, 50 per cent is accounted for by the retail category.

HDFC Bank Shares | Asset quality soared QoQ

The private sector lender's asset quality deteriorated, as reflected in its gross non-performing assets (NPAs) as a percentage of total loans increasing to 1.33 per cent from 1.24 per cent in the January-March period. Its net non-perfmring assets (NNPAs) also increased, to 0.39 per cent in the April-June period from 0.33 per cent in the previous quarter.

Should you buy, sell or hold HDFC Bank after its Q1 results?

Global brokerages are divided on the stock’s outlook. Global brokerage has downgraded the stock to neutral from overweight.The target has also been slashed to Rs 1,700 from the earlier Rs 1,800, suggesting 6 per cent potential upside. The brokerage sees the lender to run low incremental LDRs or loan-to-deposit ratio in FY25/26. Further, it will be focused on improving CASA/loan mix rather than loans/ average balance sheet growth. Repair here could take time especially in an environment of weak CASA growth in system & thus could keep growth slow, added the brokerage.

CASA/Asset ratio remains the key to monitor as it has come down to 24 per cent for the lender as on June quarter versus 33 per cent pre-merger.

Another brokerage Bernstein has continued with its outperform rating on the counter with a target of Rs 2,100. The brokerage held that even if the growth is gradual at the lender, the numbers hint at an improvement trajectory.  As per the brokerage, a major positive at the lender during Q1 had been marginal sequential improvement in NIM and a sharp decline in borrowings (10% QoQ), nonetheless, the weak deposit growth appears system-wide and is a negative.