Add HDFC Bank Ltd For Target Rs. 1,995 By Yes Securities Ltd
LDR remains the elephant in the room
Our view – Asset quality performance creditable given environment
Balance sheet growth – Loan growth remained at a crawl as management continued to work on reducing loan to deposit ratio: The advances for the bank stood at Rs 25,182 bn, up by 0.9% QoQ and 3% YoY. However, Asset Under Management grew by 8% YoY. The deposits were at Rs. 25,638 bn, up by 2.5% QoQ and 15.8% YoY. The bank has sufficient liquidity and capital to grow and capture market share when macro turns favourable. The bank had previously said that it would lag system loan growth in FY25, match it in F26 and exceed in FY27. Hence, the current growth is in line with what the bank had said, averred management.
Asset Quality – Adjusted for seasonal agri slippages, gross slippages were stable sequentially, while management cited stable overall asset quality: Gross NPA additions amounted to Rs 88bn for 3QFY25, translating to an annualized slippage ratio of 1.4% for the quarter. Gross NPA additions had amounted to Rs 78bn during 2QFY25. Microfinance is less than 1% of overall book and is also a stable book. Provisions were Rs 31.54bn, up by 16.8% QoQ but down by -25.2% YoY, translating to calculated annualised credit cost of 50bps.
Net Interest Margin - Margin remained broadly stable on sequential basis as opposing factors canceled each other out: NIM was at 3.43%, down -3bps QoQ but up 3bps YoY. The borrowings book, particularly that inherited from HDFC Limited, is having a cost of about 8%, including the hedges. As part of the ongoing process, the bank extinguished some of this. However, the tailwind from reduced borrowing cost has been offset by reduced CASA. Interest reversal amounted to Rs 1-1.5bn and impacted margin by a few bps.
We maintain an ADD rating with a revised price target of Rs 1995: We value the standalone bank at 2.4x FY26 P/BV for an FY25/26/27E RoE profile of 15.3/15.0/15.1%. We assign a value of Rs 231 per share to the subsidiaries.
(See Comprehensive con call takeaways on page 2 for significant incremental colour.)
Other Highlights (See “Our View” above for elaboration and insight)
* Opex control: Total cost to income ratio was at 40.6% up by 2/33bps QoQ/YoY and the Cost to assets was at 1.8% down by -2bps/-1bp QoQ/YoY.
* Fee income: Core fee income to average assets was at 1.0%, down/up - 3bps/9bps QoQ/YoY.
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