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HDFC Bank reported PPOP of INR 186bn (+14% YoY, -10% vs JMFe) on account of softness in NII growth and elevated opex levels. PAT, however, grew +20% YoY to INR 120bn led by continued low credit costs. While loan growth was strong at +17% YoY, +6% QoQ (gross of IBPC at +21% YoY), NII growth was a tad soft at +24% YoY, +2% QoQ as deposits grew at a brisk pace (+21% YoY, +9% QoQ). HDFCB is preparing for impending merger by shoring up its deposit base with incremental LDR at 62% in 4QFY23. Positively, the deposit growth is driven by retail and granular deposits (+24% YoY, +7.4% QoQ). Reported NIMs were flat QoQ (at 4.1%), though, calculated NIMs saw a drop of 10bps+ and we expect NIMs to come down post the merger. Opex levels were elevated (+33% YoY, +8% QoQ) as HDFCB continues to invest in branches/employees. Management indicated that cost-to-income may remain elevated in near to medium term (42% in 4Q23); though lower credit costs should protect bottom line profitability. HDFC Bank is now trading at 2.3x FY25E P/BV vs 2.8x NTM P/BV (pre-merger announcement) and while meaningful valuations are contingent to a more conducive macro, we believe continued growth momentum, steady profitability and healthy deposit growth (along with high quality of liabilities) offer comfort on incremental stock returns (which could also be aided by foreign ownership dynamics on a post-merger basis). We expect some moderation in ROEs post the merger and await details on regulatory dispensation. Our target price of INR 1,840 values HDFC Bank at 2.5x FY25E P/BV with INR 154 for subsidiaries value. Maintain BUY.

* Robust loan/deposit growth momentum: Loan growth was robust and broad-based at +17% YoY/+6% QoQ - wholesale (+13% YoY/+4.5% QoQ), CRB (+30% YoY/+10% QoQ) and retail (+19% YoY/+4.6% QoQ). Deposits grew at +21% YoY/+9% QoQ with CASA at 44.4% (+40bps QoQ). Acquisition of deposits remains a key focus area for the bank and it plans to leverage the power of branch banking to source deposits. HDFCB plans to add 1,500-2,000 branches every year in order to double its branches in 3-4 years. Consequently, bank has added 1479 branches in FY23 with 638 branches in 4Q23.

* Softness in NII growth; opex remain elevated: NII growth was a tad soft at +24% YoY, +2% QoQ with reported NIMs stable at 4.1% (though 10bps+ drop in calculated NIMs). Management remains confident of maintaining NIMs near current levels as they expect the yields to also reprice upwards to negate the impact of upward repricing of deposits. Further, proportion of retail loans in overall loans is expected to increase which should further support NIMs. Opex growth stood at +33% YoY, +8% QoQ and management indicated that opex is expected to remain elevated in the near to medium term as the bank continues to expand its branch network (+638 branches in the quarter), increase its employee base, focus on driving retail growth and invest in enhancing its digital offerings. Driven by soft NIMs and elevated opex, core PPOP (+14% YoY, flat QoQ) was c.9% lower than JMFe.

* Asset quality remains steady: GNPL/NNPL improved to 1.12%/0.27% (-12bps/-6bps QoQ) as slippages were at INR 49bn (1.3% annualised, vs 1.9% in 3Q23); recoveries/upgrades

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