HDFC Bank Limited (NYSE:HDB) Q3 2024 Earnings Call Transcript

HDFC Bank Limited (NYSE:HDB) Q3 2024 Earnings Call Transcript January 17, 2024

HDFC Bank Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day, and welcome to HDFC Bank Limited’s Q3 FY ’24 Earnings Conference Call on the financial results presented by the management of HDFC Bank Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank. Thank you, and over to you, sir.

Srinivasan Vaidyanathan: Okay. Thank you, Nirav. Good evening, and a warm welcome to all the participants. There is an earnings presentation deck published on our website. Please refer to it as appropriate. As you get to it, in the meantime, let’s cover a brief on the macroeconomic environment that operated during the quarter before we review the earnings. We continued to see healthy domestic activity — economic activity driven by robust common spending, primarily in capital expenditure, improvement in domestic manufacturing and resilient services sector performance. As you know, the GST collections grew 13% year-on-year. Manufacturing and services PMI continued to remain in the expansionary zone and the consumption side improved consumer demand driven by sector spending resulted in robust growth across various sectors.

Our [indiscernible] rate unchanged at 6.5% and retained its stance and changed at withdrawal of accommodation and modestly reduced its inflation forecast in the second half of the year. As we look ahead, the economic environment is poised for strong growth. India’s year-on-year GDP growth for financial year ’24 is estimated at about 7%. And for financial year ’25, GDP growth rate is expected to be around 6.5%, continuing to be one of the fastest-growing major economies in the world. Let’s go through the key factors of the bank’s growth journey. Advances can be referred to on Page 7 and 8. Gross advances are at INR 24.7 trillion as of 31st December, reflecting the sequential momentum of INR 1.1 trillion or 4.9%. Retail advances grew 3.3% quarter-on-quarter, primarily driven by strong performance in the mortgage business.

Retail mortgage disbursements of INR 460 billion during the quarter grew 18% over prior year. In the CRB business, it continued its strong momentum, registering a quarter-on-quarter growth of 6.7%. Wholesale segment, excluding non-individual loans of HDFC grew 1.9% sequentially. Non-individual loans of HDFC aggregated to INR 0.99 trillion compared INR 1.03 trillion as of last quarter end. Focus on the primary deposits continued. Looking at Pages 7 and 9, total deposits as of December end amounted to INR 22.1 trillion, primarily comprising of retail deposits, which is at 84% of total deposits. Retail deposits, which are the bedrock of the franchise, grew well over INR 530 billion or 2.9% during the quarter, while non-retail deposits reduced by INR 118 billion quarter-on-quarter resulting in total deposit growth of INR 411 billion or 1.9% during the quarter.

Current account deposits ended the quarter at INR 2.6 trillion, registering a growth of INR 80 billion or 3.2% sequentially or INR 280 billion, 12.3% over prior year. Savings deposits as of December end at INR 5.8 trillion grew INR 99 billion or 1.7% sequentially and over INR 430 million or 8.3% year-on-year. Overall CASA deposits ended the quarter at INR 8.4 trillion, resulting in a CASA ratio of 37.7%. Term deposits aggregated to INR 13.8 trillion as of December end and grew by INR 232 billion or 1.7% during the quarter. On the distribution footprint expansion, referring to Page 10, it reflects our branch network, which stood at 8,091 outlets as of December end. Overall, there has been an increase of 908 branches over the last 12 months. During the quarter, we added 146 branches, which is at the rate of 1.6 branches per day.

Payment acceptance points are at 4.8 million, a year-on-year growth of 25% as adoption of Vyapar app built momentum. In CRB, our rural business reach expanded to 210,000 villages, a growth of 60,000 villages over last year. In the customer franchise building, we added 2.2 million new customer liability relationships during the quarter and around 7.4 million relationships so far in the current fiscal year. Our customer base stands at 93 million customers. This provides an opportunity to further engage and deepen our relationships. In order to position us for greater engagement, we have added 41,000 employees over the last 12 months and 10,000 during the quarter. On cards, we issued we issued 1.6 million new cards in the quarter. Total card base stands at 19.9 million.

You’ll see on Page 11, balance sheet remains resilient. LCR for the quarter was 110%, capital adequacy ratio was at 18.4%, Tier 1 ratio at 16.8%. Let’s start with net revenues on Pages 12 and 13. Net revenues for the quarter were at INR 396 billion, grew by 25.8% over prior year. Net interest income for the quarter, which is 72% of net revenues and is at INR 285 billion, grew by 23.9% over prior year. The core net interest margin for the quarter was at 3.4%, and on an interest earning asset basis, net interest margin for the quarter was at 3.6% and was flat to prior quarter. Getting to details of other income on Page 15. Total other income at INR 111 billion. Fees and commission income, which is almost close to 2/3 of the other income was at INR 69 billion and grew by 15% over prior year.

Retail constitutes approximately 94% of fees and commission. FX and derivatives income at INR 12 billion was higher by 12% compared to prior year of INR 11 billion. Net trading and mark-to- market income were at INR 15 billion for the quarter, prior quarter was at about INR 10 billion. Other miscellaneous income of INR 15 billion includes recoveries from written-off accounts and dividends from subsidiaries. Referring to Page 16 on operating expenses for the quarter, which were at INR 160 billion, an increase of 28% prior year. Cost-to-income ratio for the quarter was at 40.3%. Cost to assets was at 1.9%. Coming to the asset quality on Page 17 to 19, the GNPA ratio was at 1.26% compared to 1.34% in prior quarter, and 1.23% prior year. Out of the 1.26%, about 15 basis points are standard, but the core GNPA ratio is at 1.11%.

However, these are included by us in NPA as one of the other facilities of the borrower is in NPA. Net NPA ratio for the quarter was 0.31%. Prior quarter was at 0.35%. The slippage ratio for the current quarter is — slippage for the current quarter is at about INR 70 billion or 26 basis points. Last quarter was at about INR 78 billion. During the quarter, recoveries and upgrades were INR 45 billion. Write-offs in the quarter were at about INR 31 billion. No sale of NPA accounts during the quarter. On the provision side, total provisions reported were around INR 42 billion. And excluding the contingent provision, it was INR 30 billion as against INR 29 billion during the prior quarter and INR 28 billion for the prior year. As I just mentioned, the total provisions in the current quarter included additional contingent provisions of approximately INR 12 billion, and it is pertaining to investments in AIF on a prudent basis.

The fair value of AIF is up by INR 5 billion, but 100% provisions are being taken at book value. The core specific loan-loss provisions for the quarter of around INR 26 billion as against INR 25 billion in the prior quarter. The provision coverage ratio was at 75%. At the end of current quarter, contingent provisions and floating provisions were approximately INR 154 billion, general provisions were INR 105 billion. The total provisions comprising specific floating, contingent and general were about 159% of gross nonperforming loans. This is in addition to security held as collateral in several of the cases. In addition, the bank holds contingent provisions of INR 12 billion on a prudent basis to AIF I just mentioned. Floating contingent and general provisions, excluding the contingent provision on AIF were about 105 basis points of gross advances as of December end.

Coming to credit cost ratio, the total annualized credit cost ratio for the quarter, excluding the contingent provisions I just referred, was at 49 basis points, prior quarter was also at 49 basis points. Recoveries, which are recorded as miscellaneous income amounted to 13 basis points of gross advances for the quarter as against 16 basis points for the prior quarter. The total credit cost ratio, net of recoveries, was at 35 basis points in the current quarter as compared 34 basis points in the prior quarter. The profit before tax was at INR 194 billion, grew by 19.8% over prior year. After INR 15 billion of tax provisions no longer required, consequently to the favorable orders received, net profits after tax for the quarter was at INR 164 billion, grew by 33.5% over prior year.

Summaries of subsidiaries can be seen on Pages 21 to 26. On HDB — to cover on HDB, the quality of the book continues to see sustained improvement with a gross stage 3 of 2.25% as of December against 3.73% as of prior year-end — prior year end — prior year. Provision coverage on Stage 3 book stood at 68%. Profit after tax for the quarter ended December increased to INR 6.4 billion against INR 6 billion for the quarter ended September 30. ROA and ROE annualized for the quarter of December stood at 3.1% and 19.9%, respectively. Earnings per share for the quarter was at INR 8.04 and book value per share stands at INR 164.6. Now getting to HDFC Life on an IGAAP basis. The profit after tax for the quarter ended December was at INR 3.7 billion, grew 16% year-on-year.

India embedded value at INR 451 billion improved 20% compared to prior year. On AMC, quarterly average AUM at INR 5.5 trillion grew 24% year-on-year. Profit after tax for the quarter amounted to INR 4.9 billion registering a year-on-year growth of 33%. Earnings per share for the quarter was at INR 22.9. HDFC ERGO on an IGAAP basis. Profit after tax for the quarter ended December was at INR 1.3 billion, registering a growth of 6% year-on-year. Solvency ratio at 187% as of December end. HSL, our securities company, the total reported revenue for the quarter — total reported net profit for the quarter after tax was INR 2.3 billion as against INR 2 billion in Q2 ’23. Earnings per share in the total was INR 144 and book value per share stands at INR 1,253.

On ESG, kicking up our CSR commitment, the bank has undertaken multiple projects across India, with an aim to address critical developmental issues such as sustainable livelihood, education, soil and water conservation and key ratings and awards are in Page 27 for reference. In summary, our results reflect robustness in growth across various parameters driven by employees passionately working with our customers to execute the business model, which has resulted in an advances growth sequentially of 4.9% and 2.9% sequential momentum in retail deposit growth. Profit after tax for the quarter increased by 33% versus prior year, delivering a return on assets in the quarter of about 2% and return on equity of about 15.8%. Earnings per share reported in the quarter is at INR 21.6 on a standalone bank level and INR 22.7 at the consolidated bank level.

Book value per share on a stand- alone basis is at INR 556, and on a consolidated basis, it is at INR 576. With that, may I request the operator to open up the line for questions, please?

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Q&A Session

Operator: [Operator Instructions] The first question is from the line of Mahrukh Adajania from Nuvama.

Mahrukh Adajania: Sir I have two questions basically, and the first one in general is on deposit growth. Sir, in general there’s a lot of noise around RBI having a discussion with banks on LDR, plus deposit growth has been very, very tight in November and December irrespective of whether you’ve had a discussion with RBI or not. So how do you view deposit growth and LDR from here on? If you could give us some sense target or guidance on how LDR will pan out, or what LDR are you looking at in FY ’25. And a related question to that is that if deposit taking remains tight irrespective of the LDR debate, then what would you choose? Would you choose to offer higher rates compared to competition because you ask rate for deposits is on the higher side now? Or would you choose lower margins if the deposit situation remains like this for say 2 quarters?

Srinivasan Vaidyanathan: Thank you, Mahrukh, for asking. If I miss anything, come back, but let me start with your first one in terms of the deposits and the CD ratio itself, right? It probably addresses a broader point that many of them would have. If you think about — first of all, any conversations with RBI is confidential, and it is between the regulator and the bank. So we will not be able to talk about any individual conversations or anything else. So keep that to the side. That’s not your main point. Your main point is in terms of the rate of growth of deposits as well as on the CD ratio, given where it is. So let’s talk about that. Now on the deposits if you see. Firstly, on the deposits I do want to mention that how we approached it here.

At an overall level, our deposits grew by INR 411 billion. At an overall level, our deposits were at that level. Yes, yes, I am closer to the mic. I think somebody is saying they can’t hear. So INR 411 billion. That’s the total growth that we had. Within that, if you see the retail deposit growth of INR 530 billion and 2.9% during the quarter. However, nonretail deposits reduced by INR 118 billion, INR 118 billion quarter- on-quarter it reduced, almost 3.3% reduction sequentially in the nonretail deposit. Again, very price- sensitive. We chose not to participate and get that price thing up. And we wanted to focus more and more on granular there. So that’s one. And if you think about the individual component of various deposits, we did — I talked about the current account growing at 3.2%, and within the current account, the retail current account constitutes 72% and has been growing 3.8% sequentially.

And the savings account deposits I’ll come back and talk about the savings as such, right? There is something on the savings which is — we need to see that, right? Where you are seeing 2 things on savings. One, given the rate where we are in peak is the preference for time deposits. Two, in terms of the spend, we are seeing good amount of spend that is happening from the customers. In our own base, we can see 18%, 20% spend from — on the issuing side — on the acquiring side from a cards point of view. So people are spending. And one other measure we stick, we look at our — aggregate of our card customers what is the balance that they have, right? If you look at the card ANR versus the deposit against it, almost 5.4x they have, right? That means for every 100 that I have as my card balance outstanding, I have 5.4x that in my savings — in my deposit account in the bank.

So there seems to be more spending room there to go. So that’s one. And from a rate cycle point of view. And how do you overcome that is to get more customers. I talked about 2.2 million customers, 7.4 million. These are the kind of what we have. Now coming to the — what does it all do from a deposit growth…

Mahrukh Adajania: Sir?

Srinivasan Vaidyanathan: Yes. I’m here. So I’m getting — you can’t hear? Can you hear?

Operator: Mahrukh, can you hear us?

Srinivasan Vaidyanathan: Okay, I will go ahead. Probably she is — you can hear, Nirav?

Operator: Yes, sir, I can hear you fine.

Mahrukh Adajania: Hello?

Operator: Yes, Mahrukh, now you are audible.

Srinivasan Vaidyanathan: So getting to our CD ratio as such, right? Yes, the LDR, which is the CD ratio that you alluded to, it’s a little more than 110% as we close the quarter. Over a period of time, if you see in this quarter, how did we manage the balance sheet. We had INR 1.15 trillion growth in loans, if you see. And we funded that through INR 411 billion on deposits. And you had investments going down by about INR 485 billion and cash and cash equivalent by about INR 96 million. So essentially, we funded that by the balance sheet somewhat coming — not on the asset side. We got that self- funded through some lower investments. That is what we’re seeing in the LCR ratio going down 110%. So some of the securities came down and cash came down as the ICR ran down on October…

Mahrukh Adajania: I’m unable to hear you.

Srinivasan Vaidyanathan: Nirav, can you hear?

Operator: Yes, sir. Sir, line for Mahrukh has dropped. We’ll move to the next participant. Next question is from the line of Pranav from Bernstein.

Pranav Gundlapalle: I think a question, again, related to deposits, the one question. When you think about deposits this quarter instead of say INR 400 billion that you treated, if you had to double or triple that number, which is the biggest constraint? Is it the LCR, which is a constraint, or is it simply the cost of deposits, or is it the lack of good lending opportunities? Where are you seeing the biggest constraint?

Srinivasan Vaidyanathan: Yes. The biggest constraint is in the area of deposits, right? And if you look at what has happened in the system, very important to look at the liquidity in the system, how it has moved. If you see, it has been positive ever since Q1 ’20. The system liquidity has been positive since Q1 ’20. And now it has moved to a negative territory. All the way, if you look right now, this is the first quarter — full quarter that Q3 that it is a negative INR 664 billion, right? That’s the negative situation in the quarter system has gone down by, that’s the average that you’re seeing. So it’s the lack of liquidity in the system. Rightfully so if you look at how RBI has managed, there is no rate change that has happened.

But the inflation that spiked 4 months ago, 5 months ago, has been managed through liquidity constraints, right, through working on the liquidity side. That is what has happened on a temporary basis. But over quarter-to-quarter, this is happening, but it is coming after more than 3 years, 3.5 years, right? We are seeing liquidity on the negative, which has been there. If you look at last 10 years, there have been several quarters in the past in ’13 or in ’15, 2013, 2015, where it has been negative. But this order of magnitude negative is very recent, in the last 3 months it has become negative. So that deposit is an important ingredient, that is the important constraint to growth, right? And we are at it. And within that, I will tell you retail has done reasonable.