Buy HDFC Bank For Target Rs.2,050 by Motilal Oswal Financial Services Ltd
Earnings in line; asset quality blips amidst seasonality
NIM contracts 3bp QoQ
* HDFC Bank (HDFCB) reported 3QFY25 net profit of INR167.4b (2.2% YoY growth, in line).
* NII grew 7.7% YoY to INR306.5b (in line). NIMs contracted 3bp QoQ to 3.43%.
* Other income stood at INR114.5b (3% YoY growth, in line). Opex grew 1.3% QoQ, while the C/I ratio stood flat at 40.6%.
* Provisions declined 25% YoY to INR31.5b. The bank utilized INR3b of contingent provisions and holds total provisions (floating and contingent) of INR259b.
* GNPA/NNPA ratio increased 6bp/5bp QoQ to 1.42%/0.46%, respectively. PCR decreased 207bp QoQ to 67.8%. Fresh slippages stood at INR88b (however, excl agri, it stood stable at INR65b).
* Advances book grew 3% YoY / 1% QoQ to INR25.2t; deposits grew 16% YoY /3% QoQ to INR25.6t. CD ratio declined to 98.2%, while CASA ratio declined to 34%.
* We lower our earnings estimate for FY26/27 by 3% each and estimate HDFCB to deliver FY26E RoA/RoE of 1.8%/13.9%. Reiterate BUY with a TP of INR2,050 (2.3x FY27E ABV + INR294 for subs).
Asset quality outlook stable; CD ratio eases to 98.2%
* HDFCB reported 3QFY25 net profit of INR167.4b (2.2% YoY growth, in line). In 9mFY25, earnings grew 12.3% YoY to INR497b and we estimate 4QFY24 earnings to grow 7.9% YoY to INR170.1b.
* NII grew 7.7% YoY to INR306.5b (inline). NIMs declined 3bp QoQ to 3.43%. Other income grew 2.8% YoY/ down 0.3% QoQ. Treasury gains declined to INR0.7b vs INR14.7b in 3QFY24.
* Opex grew 7% YoY/1.3% QoQ (in line). C/I ratio stood flat at 40.6%. PPoP grew 6% YoY to INR250b (in line).
* Loans grew at a modest 0.9% QoQ amid slower growth in home and twowheeler loans and 0.9% QoQ growth in corporate book, while most of the other segments continued to perform well. Deposits grew 16% YoY /3% QoQ, with the CASA ratio declining 130bp QoQ to 34.0%. CD ratio declined 158bp QoQ to 98.2%, due to the bank’s efforts to bring down the CD ratio at an accelerated pace while also focusing on profitability. As a result, we estimate a modest loan growth of 5%/10% YoY in FY25/FY26 and expect a ~15% deposit CAGR over FY24-26. We estimate the CD ratio to decline to 90.5% by FY26.
* GNPA/NNPA ratios increased 6bp/5bp QoQ to 1.42% / 0.46%, respectively. PCR declined 207bp QoQ to 67.8%. Fresh slippages stood at INR88b (however, excl agri, it stood stable at INR65b). CAR improved to 20%, with Tier 1 at 18% (CET1 at 17.5%).
* Subsidiary performance: HDB Financial reported loan growth of 22% YoY/ 4% QoQ to INR1021b, while PAT stood at INR4.7b. GS3 assets increased to 2.2%, while CAR was 19.2%. HDFC Securities: Revenue grew 13% YoY to INR7.9b, while PAT rose 16% YoY to INR2.7b.
Highlights from the management commentary
* The borrowing cost stands at 7.75-8%, particularly reflecting borrowing from HDFCL. This quarter, the bank bought INR44b of bonds, which is managed by the treasury team.
* The provision policy for retail loans varies by product type: Unsecured loans are written off at 150DPD, while secured loans are written off at 150-180DPD.
* Loan mix: 70% is floating (of which, Repo is 45% and the remainder is MCLR and other benchmarks), while the remaining 30% is fixed.
Valuation and view: Reiterate BUY with a TP of INR 2,050
HDFCB reported in-line earnings while margins contracted 3bp QoQ. Deposit growth was strong, while advances growth stood tepid, aligning with the bank’s strategy to reduce the CD ratio at an accelerated pace. CASA ratio also declined to 34%. Asset quality witnessed a marginal deterioration, while PCR declined to ~67.8%. However, HDFCB holds healthy provisions (floating + contingent) of INR259b or 1.0% of loans. Given the bank’s focus on reducing the CD ratio at an accelerated rate, we factor in a moderation in loan growth in FY25/FY26 to 5%/10%. However, the gradual retirement of high-cost borrowings, along with an improvement in operating leverage, will support return ratios over the coming years. We cut our earnings estimate for FY26/27 by 3% each, reflecting slower loan growth and CASA moderation. We estimate HDFCB to deliver FY26E RoA/RoE of 1.8%/13.9%. Reiterate BUY with a TP of INR2,050 (2.3x FY27E ABV + INR294 for subs).
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