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HDFC Bank reported an operationally in-line quarter with core PPOP at INR 182.2bn (+11% YoY, -2% QoQ) on the back of a) stable reported NIMs at 4.1%, despite cost side pressures, b) sustained fee income momentum (+16% YoY) and c) elevated opex levels (cost-to-income at 42.8%). PAT, however, grew +30% YoY to INR 120bn led by continued low credit costs. Pro-forma merged loan and deposit growth was a tad soft at +1% QoQ/+13% YoY and +1.4% QoQ/+16% YoY resp., though management continues to remain optimistic on the growth picking up going ahead given Q1 in a seasonally weak quarter. Opex levels were elevated (+34% YoY, +4.4% QoQ and cost-to-income of 42.8%) as investment in branches/employees continues and are expected to remain a tad elevated in the near term. GNPLs/NNPLs/restructuring at 1.2%/0.3%/0.3% (+5bps/+3bps/-5bps QoQ) were broadly stable despite seasonally higher agri slippages leading to low credit costs of 76bps. HDFCB has underperformed BANKNIFTY by 6%/2%/3%/14% over the last 3m/6m/12m/2yr and now trades at 2.2x FY25E core P/B. We believe HDFCB can reverse the underperformance driven by a) revival in growth momentum, b) strong profitability metrics and c) robust asset quality. We believe trajectory of deposit accretion and NIM sustainability is a key monitorable for HDFCB as it onboards a large floating rate asset book. We build deposit and loan growth of 20% each for FY25E. RoE is likely to hit pre-merger levels only post FY25E in our view. We have raised our earnings estimates given that the merger takes effect 1 quarter prior to our previous estimates. Maintain BUY with a TP of INR 1,900 valuing the core bank at 2.5x FY25E P/BV with INR 178 for subsidiaries value.

* Steady operational performance: HDFC Bank reported a core PPOP of INR 182.2bn (+11% YoY, -2% QoQ) on the back of a) stable reported NIMs at 4.1%, despite cost side pressures, b) sustained fee income momentum (+16% YoY) and c) elevated opex levels (cost-to-income at 42.8%). Reported NIMs were flat QoQ (at 4.1%), though, calculated NIMs saw a drop of 12bps and we expect NIMs to moderate going ahead. While management continues to be optimistic on maintaining NIMs near current levels, we expect NIMs to moderate going ahead as lower margin home loans of HDFC Ltd gets added to the loan portfolio. Opex levels were elevated (+34% YoY, +4.4% QoQ and cost-to-income of 42.8%) as investment in branches/employees continues and are expected to remain a tad elevated in the near term as the bank continues to expand its branch network and consequently its employee base, focus on driving retail growth and invest in enhancing its digital offerings.

* Soft growth momentum; though expected to pick up ahead: Loan growth on proforma merged basis was at +13% YoY/+1% QoQ driven by degrowth in HDFC Ltd’s nonindividual loan book (-10% QoQ). HDFC Bank’s standalone growth was higher at +20% YoY/+2% QoQ led by retail (+18% YoY/+3.7% QoQ) and CRB (+29% YoY/+2.2% QoQ) while wholesale segment saw muted growth (+11% YoY/-1.2% QoQ). Deposits grew at +19% YoY/+1.6% QoQ (standalone) and +16% YoY/+1.4% QoQ (consolidated) with CASA (standalone) at 42.5% (-190bps 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

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