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Growth accelerates further; asset quality set to improve QoQ

Business Update – Q2FY23

* HDFCB maintained its robust credit growth trajectory – up 23.5% YoY/6% QoQ, in Q2 (vs 21.5% YoY/2% QoQ, in Q1). This was mainly led by continued strong momentum in commercial banking (31.5% YoY/9.5% QoQ)/corporate book (27% YoY /9% QoQ). Retail growth too was healthy, at 21.5% YoY/5% QoQ.

* Mortgage book purchase from HDFC continued to be high at Rs91.5bn in Q2 (vs Rs95bn in Q1). As per our channel checks, vehicle financing too is showing signs of pick up and will, thus, be a key monitorable for the bank (being the leader in the space).

*  Deposit growth was also strong, at 19% YoY, with retail deposit growth at 20% YoY; CASA growth stood at 15% YoY, which led to a slight decline in CASA ratio to 45%. We believe strong growth in the non-retail book coupled with some slip-up in CASA ratio should keep margins and, thereby, core profitability in check.

* After a slight surge in Q1, we expect the bank to report sequential improvement in headline NPAs during Q2, led by better recovery in the agri portfolio (including KCC) and accelerated credit growth. With the bank sitting on healthy, specific + contingent provisions, we expect LLP to moderate which should, thereby, support net profitability.

* Outlook: We believe HDFCB will be the key beneficiary of the buoyant credit markets, given its strong retail orientation as well as its increasing inclination towards corporate growth. However, a positive regulatory stance on the impending merger structure and managing the merger without much disruption will be key for re-rating. Currently, the stock trades at 2.4x FY24E ABV (ex-subs valuation). We retain our BUY rating on the stock, with TP of Rs1,800/share (3.0x Jun-24E ABV + subs valuation of Rs78), given healthy return ratios, strong capital comfort and reasonable valuations.

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