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Balancing scale and transition challenges

Near term likely to be challenging; recovery, the key

HDFC Bank’s (HDFCB IN) Q3 PAT of INR 163.7bn was broadly in line with our estimates following higher other income (stake sale in Bandhan Bank) and lower tax, even as core profitability fell short of expectations. The key highlight was higher-than-expected strain on NIM (even on trimmed expectations), given higher funding cost pressures. Given the regulator’s focus on CD ratio and HDFCB already at 110%, with LCR of 110%, the bank has much to balance (growth versus NIM conundrum). While one may argue on bottoming of earnings, we believe recovery may take longer and the stock may see time correction till investors find merit in execution.    

Much to ponder on as focus on NIM trajectory sustains

Earlier, HDFCB had indicated that higher liquidity and ICRR impacted NIM, which was expected to improve, However, despite using many levers (LCR down to 110%; LDR at 110%), the bank, at best reported stable NIM. With many variables at play, viz. transitionary liquidity requirement (scale has its own challenges while running tight liquidity), changing loan construct, and systemic challenges on deposits, we believe NIM recovery may take longer (not to mention, any rate change at the system level may push this down further).       

Monitor deposit mobilization as system pressure likely to sustain

We believe FY25 may be characterized by the nature of balance sheets and deposit franchises. Add to that, the merger for HDFCB has made deposit mobilization quintessential and essentially, the most discussed point by investors. With current liquidity scenario and regulator’s focus on CD ratio, we believe systemic aggression on deposits may sustain amidst HDFCB’s heightened needs post-merger. Thus, sustained deposit mobilization will be the key to confidence building. Also, its investment in deeper geographies may mean that it is structurally equipped to deliver strong outcomes while managing merger deliverables. Productivity from these branches may be critical to shaping investment outlook. Given HDFCB’s execution skill, we would rather be believers. 

Valuation: Recommend Accumulate; TP revised to INR 1,889

Once a poster boy for consistency, HDFCB has seen it all – COVID-19, management transition, RBI ban and now merger pangs. While merger has its own challenges, we believe these are nearing an end, but HDFCB lacks positive triggers. Given near-term concerns, time correction may play through. Factoring in soft core, we prune FY24E EPS 3%, while FY25E remains intact. We introduce FY26E estimates and roll to September 2025E, leading to a revised TP of INR 1,889 (from INR 1,820).

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