HDFC Bank Limited Q4 FY23 Earnings Conference Call Insights

Key highlights from HDFC Bank Limited (HDFCBANK) Q4 FY23 Earnings Concall

Management Update:

• [00:04:33] HDFCBANK said it issued 1.4 million cards during 4Q23 with total card space at 18 million.

Q&A Highlights:

• [00:20:53]Mahrukh Adajania at Nuvama asked about road map for deposit mobilization in the next 3-4 quarters. Srinivasan V CFO replied that the quarter saw a deposit growth of INR150,000 crores, with retail deposits accounting for INR107,000 crores. This includes growth in time deposits of 30%. New branches are being opened to ensure future sustainability.

• [00:23:29] Mahrukh Adajania with Nuvama enquired about the drivers of strong performance in commercial transportation and its outlook. Srinivasan Vaidyanathan CFO answered that commercial and rural banking, including the Commercial Trucking Group, is a priority sector for HDFCBANK in terms of lending and financing ULCV and LCVs, as well as providing working capital financing.

• [00:25:20] Kunal Shah from Citi queried about operating costs rising significantly in 4Q23 vs. previous periods and if there are any one-off employee costs like ESOPs or RSUs. Srinivasan Vaidyanathan CFO said that expenses such as ESOPs and RSUs, will continue. It’s not a one-timers, it’s ongoing.

• [00:25:37] Kunal Shah from Citi also asked what should be expected from cost-to-income and cost-to-assets ratios in FY24. Srinivasan Vaidyanathan CFO answered that the cost-to-income ratio is currently at 42% and was 40% in 2019. This benign credit environment presents a great opportunity for HDFCBANK to operate at this level.

• [00:28:46] Kunal Shah from Citi asked about the quantum of ESOP expenses for 4Q23. Srinivasan Vaidyanathan CFO replied that the full quarter ESOP and RSU is close to INR300 crores.

• [00:29:25] Kunal Shah from Citi enquired what would be the effect of the deposit growth on margins over time. Srinivasan Vaidyanathan CFO clarified that deposits can come and go depending on how the wholesale business manages its balance sheet. The margin operates in a narrow band, with a modified duration of 1.2-1.3 years and lead/lag effect of 10-20 basis points. Currently, there is a lead effect and the cost of funds has increased this quarter.

• [00:34:48] Rahul with Goldman Sachs enquired when will the repricing of the floating and new fixed rate books being onboarded in the past 6-9 months show up in the yields numbers. Srinivasan Vaidyanathan CFO replied that the key factor affecting margin stability is the composition of the book that has shifted from fixed rate to wholesale. As the retail component increases and the wholesale component decreases, the credit cost will normalize and the return on assets will remain stable at 2-2.1%.

• [00:37:19] Rahul with Goldman Sachs also asked is 42% the peak for cost-to-income, considering slower credit growth next year, or will it peak later. Srinivasan Vaidyanathan CFO clarified that HDFCBANK has not peaked out, but it can go up and down QtoQ depending on the activity. In 4-5 quarters, the company is expecting things should lap itself and 18-24 months for revenues to start coming in to support the cost.

• [00:42:02] Rahul with Goldman Sachs asked that RBI recently allowed a pay later or pre–approved credit line on UPI and what’s the incremental thing RBI has done. Srinivasan Vaidyanathan CFO said that EMI type products have recently become available and there is a new UPI channel for it. It’s too early to comment on effectiveness, since ticket sizes are small. However, the ticket sizes at EMI are much higher than the industry average.

• [00:43:14] Saurabh Kumar at JPMorgan asked about the reason for growth rate in other assets being very high. Srinivasan Vaidyanathan CFO replied that other assets and liabilities have increased by INR10,000 crores each in a quarter. RIDF has increased by INR40,000 crores as part of the bank’s strategy to optimize between different components of what is available in the market on PSL.

• [00:46:41] Adarsh Parasrampuria from CLSA enquired why the costs of expanding branches and adding employees are increasing beyond what is expected with the distribution expansion. Srinivasan Vaidyanathan CFO clarified that it is important to invest in branches and people, which adds to the cost. The branch productivity is up in terms of deposits per branch and it is necessary to get the volume and revenue to pay for the costs.

• [00:49:15] Adarsh Parasrampuria of CLSA asked if an update can be provided on the RIDF book and PSL compliance status at the end of the year. Srinivasan Vaidyanathan CFO answered that the goal is to organically grow and increase distribution reach, which means working on CRB business to reach 1.65 lakh villages and beyond. Everything else, such as PSLC, RIDF, IBPC, etc., are fillers that can be optimized in order to achieve the least cost.

• [00:51:35] Manish Shukla from Axis Capital queried if the bank expects similar branch and employee additions in FY24 as in FY23. Srinivasan Vaidyanathan CFO said that the bank expects to continue expanding its branches at the current rate, evaluating it every quarter to make sure it is achieving its goals.

• [00:52:44] Manish Shukla from Axis Capital asked for the trigger to cut some of HDFCBANK’s short term MCLR rates. Srinivasan Vaidyanathan CFO said that the bank modified the way it applies tenor premium, which is not capturing much volume in the front end. Additionally, only 6% of the bank’s total book is floating rate MCLR loans, and very little of it is in the front-end bucket.

• [00:53:49] Manish Shukla from Axis Capital asked what’s driving the high deposit mobilization rates at the bank, since HDFCBANK is not offering the highest rate in the market. Srinivasan Vaidyanathan CFO answered that to bring in new customers, the branch network and brand should be leveraged. Time deposits are emphasized with a 14% penetration rate and a goal of 7,000 branches offering 50 deposits per month at ticket sizes of INR4-5 lakhs, which will increase the penetration rate by 50 bps. RMs are engaged to harvest customer potential over a 24-month maturity period.

• [00:58:54]  M.B. Mahesh from Kotak asked that at current deposit rates, how does the cost of funds move in balance sheet over next few quarters. Srinivasan Vaidyanathan CFO replied that the cost of funds and yield on assets will both go up due to the mix of deposits, not because of changes in rates. Lead-lag effects can cause small fluctuations in the costs, but they tend to stay within a narrow band of around 0.2.