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Stronger balance sheet preferred over margins

Quick Pointers:

* Mixed quarter; miss on NII/NIM NII offset by better fees/opex

* Faster LDR could generate excess liquidity, which may drag margins

HDFCB saw mixed results; core PAT was in-line, but NII/NIM and net slippages were a miss, offset by higher fees and lower opex. Pre-merger LDR was 85-87% (now 99.8%), which could be achieved in 2-3 years. Hence, loan growth is guided to be lower than system for FY25, in line with system for FY26 and faster than system for FY27. While our LDR assumptions are in line with guidance, loan growth estimates for FY26/27E are lower since deposit environment remains constrained. NIM is seeing a drag as LDR fall is generating excess liquidity, which could be utilized to prepay liabilities basis negotiation with lenders. However, HDFCB would like to keep the balance sheet fortified suggesting that liquidity could remain in surplus. Hence, we trim NIM for FY25/26E by 5/7bps, which is neutralized by increase in fees and reduction in opex; our core PAT does not change materially. We roll forward to Sep’26 core ABV but our TP is intact at Rs2,000 as we tweak the multiple to 2.4x from 2.5x. Retain ‘BUY’.

*  Lower NII/NIM offset by better fees/opex: NII was lower at Rs301.1bn (PLe Rs311.1bn) due to miss on NIM, which came in at 3.59% (PLe 3.71%) owing to lower loan yields and increase in liquidity. Loan/deposit growth was 7%/15% YoY. CASA ratio fell to 35.3% (36.3% in Q1FY25). LDR fell QoQ from 103.5% to 99.8%. Other income was higher at Rs114.8bn (vs PLe Rs110.9bn) due to higher fees. Opex at Rs168.9bn was 2.3% below PLe. Core PPoP at Rs229.2bn was largely in-line; PPoP was Rs247.1bn (PLe Rs249.1bn). GNPA saw a blip and rose by 3bps QoQ to 1.36% (PLe 1.28%) due to higher net slippages. Provisions were a tad better at Rs27bn (PLe Rs29.9bn) due to provision reversal on AIF investments of Rs6.8bn. PAT was Rs168.2bn (PLe Rs166.6bn), while core PAT, adjusted for provision write-back, was largely in-line at Rs148.7bn.

* Loan mix improves; LDR falls at a faster pace: Loan growth was soft at 1.3% QoQ led by IBPC sell down of Rs1.14trn and decline in corporate. Retail/CRB grew by 2.6%/4.2% driven by HL, BuB and emerging corporates. Stress in PL/CC was in control for HDFCB (vs peers) due to slower growth over the last 18 months. HDFCB could gain market share in unsecured as most of the stress related to the merger has been recognized, which could support NIM over the near to medium term. Advances growth rate is guided to be lower than system for FY25, in line with system for FY26 and faster than system for FY27. LDR fell to 99.8% (vs 103.5% in Q1FY25); the bank operated at an LDR of 85-87% pre-merger, which could be achieved in 2-3 years.

* Liquidity to be preferred over NIM: Faster LDR reduction is generating excess liquidity, which the bank intends to use for prepayment of liabilities if opportunity arises, although a chunk of liabilities is non-callable. Hence, LCR increased QoQ from 123% to 128%, and there was shift in liquidity from investments to cash, which caused a drag in NIM. HDFCB suggested that liquidity would be preferred over margins to the extent balance sheet strength is intact. Hence, we cut NIM for FY25/26E by 5/7bps to 3.52%/3.59%.

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