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Steady quarter at the core; NII momentum improves

HDFC Bank’s reported a strong quarter with a) NII growth of 25% YoY aided by stable NIMs (4.3%), b) robust loan and deposit growth momentum (+20% YoY growth each for loans and deposits) and c) stable asset quality with GNPL/NNPL/restructuring at 1.2%/0.3%/0.5%. Although, there was a minor miss in Core PPOP (-3% vs JMFe) driven by elevated opex (+26.5% YoY, +11% QoQ; bank opened 684 new branches during the quarter), we are not overtly concerned as the bank continues to maintain its best-in-class cost-to-income ratio of 39.9% which should improve further as benefit of opex starts to flow in. We believe the bank is past the slowdown in its revenue growth and expect NII growth to be driven by strong loan growth momentum, albeit NIMs are expected to come down post the merger. We are building in the merger completion by end of 1HFY24 in our estimates. We believe valuation compression due to potential decline in RoEs on a post-merger basis has largely played out given that core bank is now trading at 2.5x NTM P/BV vs 2.8x NTM P/BV (premerger announcement). While meaningful upsides are contingent to continued growth momentum across business lines and smooth integration of HDFC Ltd driving steady improvement in quality of earnings, we believe downside risks are minimal from current valuations given the strength of its liability franchise as well as its high quality asset book. Our revised target price of INR 1,840 values HDFC Bank at 2.5x FY25E P/BV with INR 167 for subsidiaries value. Maintain BUY.

* Robust loan/deposit growth momentum: Loan growth was robust and broad-based at +19.5% YoY/+2% QoQ - wholesale (+20% YoY/-1% QoQ), CRB (+30% YoY/+5% QoQ) and retail (+20% YoY/+4.5% QoQ). Deposits grew at +20% YoY/+4% QoQ with CASA at 44% (-140bps 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 841 branches in 9MFY23 and management stated that 600 branches are in pipeline and will be added shortly.

* NII growth momentum improves; opex remain elevated: NII growth was strong at +25% YoY / +9.4% QoQ with reported NIMs stable at 4.3% (though +19bps expansion in calculated NIMs of which 6bps was led by interest on IT refund). 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 +26.5% YoY, +11% QoQ and we expect it to remain elevated in the near to medium term as the bank continues to expand its branch network (+684 branches in the quarter), increase its employee base, focus on driving retail growth and invest in enhancing its digital offerings. Although, there was a minor miss in Core PPOP (- 3% vs JMFe; +19% YoY, +6% QoQ) driven by elevated opex, we are not overtly concerned as the bank continues to maintain its best-in-class cost-to-income ratio of 39.9% which should improve further as benefit of opex starts to flow in

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