Buy HDFC Bank Ltd For Target Rs. 1,040 by Prabhudas Liladhar Capital Ltd
Slower recovery in quality of core revenue
HDFCB saw a soft quarter as core PPoP missed PLe by 1.6% due to lower NII and fees. Beat on core PAT was driven by better opex and asset quality. Reported NIM trajectory has been sub-par over last 4 quarters due to faster corporate growth and fall in retail share YoY from 53% to 49%. This has led to faster fall in loan yields despite 50bps YoY reduction in cost of funds. We trim NIM for FY27/28E by avg. 7/3bps. Reducing opex to assets and benign asset quality remain a silver lining; bank expects further gain from productivity led by digital transformation while ECL impact may not be material. We tweak multiple to 2.1x from 2.2x. and trim TP to INR 1,040 from INR 1,100. Retain ‘BUY’.
Soft quarter; Miss on NII/fees offset by better opex and asset quality:
NII was a 1.5% miss at Rs335.3bn (PLe Rs340.3bn) as NIM (calc.) was 4bps lesser at 3.39%; reported NIM was down 13bps QoQ to 3.4%. Loan/deposit growth was largely in-line at 15.6%/14.7% YoY. Avg. CASA was up 65bps QoQ to 30.1%. LDR increased to 95.8% (94.6% in Q4FY26). Other income was higher at Rs30.2bn (PLe Rs23bn) due to dividend and others; fee was a 5.9% miss to Rs98bn. Opex at Rs181.9bn was 3.7% lower due to other opex. Core PPoP at Rs251.5bn was 1.6% below PLe; PPoP was Rs281.7bn. Asset quality was better; GNPA was lower at 1.17% (PLe 1.19%) due to lesser net slippages. Provisions were lower at Rs30.6bn (PLe Rs35.9bn). Core PAT was largely in-line at Rs167.7bn while PAT was Rs190.6bn.
Deposit growth was strong QoQ due to seasonality:
Loan growth was 3.4% QoQ mainly led by corporate (3.6%) and small/mid-market (3.8%) while retail growth was 1.5%. INR 140bn has been disbursed under ECLGS as of 30th Jun’26. Retail loan share (52%) is targeted to move back toward ~60% over time. Rise in wholesale TD share from 17% to 20% in Q1’27 was led by slowdown in growth of household deposits. On FCNR(B), most of Jun’26 was spent on approvals; ramp-up is likely in Jul-Sep’26. Higher cost e-HDFC bonds of INR 450bn would mature by FY28 which may be refinanced by RTD at 100-125 bps cost advantage (bonds 7%+ vs RTD 6%).
We trim NIM for FY27; opex benefit to continue:
Cost of funds is the main NIM lever, potential benefit may be 40-50bps that is contingent on reduced volatility in system liquidity. As per the bank, productivity gains from digital transformation may continue leading to improved opex efficiency. On ECL, incremental impact if any (may not be material), would be cushioned by contingent provisions.
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