After Q1 results, HDFC Bank shares are trading higher; should you buy, sell, or hold them?

For the April–June quarter of the current fiscal year (Q1FY24), HDFC Bank reported a favorable scorecard, with the exception of a modest sequential shortfall on the asset quality front.

The stock’s ‘Buy’ recommendation was generally retained by analysts, although they noted that a smooth merger transition, rising expenses, and the margin trend will all be closely monitored in the near future.

The standalone net profit for the quarter that ended in June 2023 for HDFC Bank was Rs 11,951.7 crore, up 30% from Rs 9,196 crore in the same quarter the previous year.

In the first quarter of FY24, the bank’s net interest income (NII) climbed by 21.1%, rising from Rs 19,481.4 crore to Rs 23,599.1 crore.

In Q4FY24, HDFC Bank’s asset quality declined sequentially. In comparison to the previous quarter, the bank’s gross non-performing assets (NPA) grew by 5.7% to Rs 19,045.1 crore from Rs 18,019 crore, while its net non-performing assets (NPA) jumped by 9.4% to Rs 4,776.9 crore from Rs 4.368.4 crore.

What Steps Should Investors Take Next?

According to Kotak Institutional Equities, a few elements on the balance sheet of the combined HDFC Bank are still difficult to predict, which suggests that the estimate for near-term profitability is still insufficient. According to the bank, there are a lot of options available to handle this shift.

“Although we’d want to see the liabilities side move fully normalized and return to its pre-merger level, the scale of this transition and the additional growth the bank is seeking might make the change take longer than we’d like. Instead than concentrating simply on retail deposits, it may be more essential to consider the cost of capital and growth options. All banks will ultimately be forced to concentrate far more on deposits because of the industry’s continually huge gap between deposit and loan growth, according to Kotak.

This firm has maintained a ‘BUY’ rating on the company, valuing it at Rs. 1,925, or 2.6 times book for RoEs at 16–17% levels.

The HDFC Bank had a steady quarter with excellent increase in NII and PAT, driven by lower provisions, even as margins were constant, according to Motilal Oswal Financial Services. Loan growth was supported by a resurgence in the retail industry, continued strength in commercial and rural banking, and both. Loan volume for the restructured book decreased by 27 basis points, but asset quality ratios stayed the same. A robust PCR and dependent provisioning buffer should promote asset quality.

“We offer predictions for the amalgamated firm and project net profits of Rs 654 billion, Rs 798 billion, and Rs 957 billion from FY24 to FY26, corresponding to a RoA of 1.9 to 2.1%. Therefore, we predict that the RoE for the combined business will return to levels over 17% by FY26. We maintain our ‘buy’ rating and Rs 2,070 as our target price, the brokerage stated in its report.

According to LPK Securities’ study, HDFC Bank’s operational performance in the first quarter of FY24 was inconsistent. Slippages increased consecutively by 18%, and the GNPA is below the historical average of 1.4 % at 1.17 %. Provisioning expenditures increased sequentially from Rs 26.8 billion in 4QFY23 to Rs 28.6 billion in 1QFY24. The rise of NII was modest sequentially (21.1% YoY, 1.1% QoQ), in contrast to the loan growth (15.8% YoY, 0.9% QoQ).

The brokerage reiterated its recommendation to “buy” with a price target of Rs 2,074 since it believed that HDFC Bank was well-positioned due to its better underwriting standards, increased liquidity, appropriate coverage, and solid capital position.