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Better growth, margin delivery drives core PPoP beat

* Strong credit growth at 23% YoY coupled with margin expansion led to better than expected core PPoP growth, at 17% YoY. However, higher provisions for shoring-up PCR constrained the profit growth at 20% YoY to Rs106bn. Bank expects core-profitability to improve, on better growth/ margins/ fees, but be partly offset by investment in branches/ people/ tech in a run-up to the merger.

* Bank believes credit growth will remain healthy, while strong focus on driving-up retail share which, coupled with continued asset re-pricing, should keep margins in shape despite the recent deposit rate hikes. Bank continues to focus on the self funding ratio (SFR) in the SME book, which drives up deposits and also provides protection.

* The merger process is on the fast track and the bank is hopeful of it being completed a quarter earlier then guided. Currently, NCLT have given approval for a shareholders meet in late Nov-22, after which it may take up to another 7-8 months to complete. That said, clarity on the HDFC Life stake and the merger structure from the RBI remains elusive.

* Notwithstanding the merger-related regulatory overhang, we believe HDFCB offers the best play on India’s consumption story and is also a good defensive bet in the topical turbulent markets. The stock currently trades at reasonable valuations, at 2.3x FY24E ABV. We retain our long-term BUY rating, with TP of Rs1,800/sh (valuing the core bank at 2.7x Sep-24E ABV) and a subs valuation of Rs78/sh.

* Credit growth plus higher retail orientation to keep margins in shape: HDFC Bank continues to report strong credit growth, at 23% YoY/6% QoQ, gaining market share. Corporate growth remains strong at 26% YoY/8% QoQ, despite the bank declining loans to the tune of Rs200-250bn due to rate consideration. Within the corporate segment, the bank is now more focused on rates and should thus be incrementally margin-positive. Retail growth too has been healthy, at 21% YoY/5% QoQ), which should gradually accelerate and lead to improvement in the share of retail. Bank has increased deposit rates which, coupled with accelerated branch expansion in 2H in the run-up to the merger, are likely to drive up deposit growth. However, the bank expects NIM to stay healthy, benefiting from higher growth (including that in retail/SME) and asset repricing.

* Asset Quality trending well, but continues to shore up provision buffer: Fresh slippages moderated QoQ to Rs57bn/1.9% of loans, mainly owing to reduction in the seasonal agri stress. This, coupled with healthy recoveries, led to a 5-bps reduction in GNPA to 1.2%. The restructured book has sharply moderated to Rs78bn/0.5%, from 0.8% of loans in Q1FY23 due to recognition/recovery and health credit growth. Following its prudent strategy, the bank shored up the specific PCR to 73% and continues to carry contingent + floating buffer at Rs110bn (0.7% of loans), which should keep incremental LLP in check amid the increasing macro-dislocation.

* Outlook and Valuations: We increase our earnings estimate for FY23-25 by 1%, factoring-in better growth/margins, albeit partly offset by higher opex as the bank accelerates investment in branches, people and technology. We retain our long-term BUY on the stock, with TP of Rs1,800 (valuing the core bank at 2.7x Sep-24E ABV) and a subs valuation of Rs78. Key risks: Unfavorable merger structure and moderation in growth (particularly retail) due to the macro dislocation.

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