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On expected lines, valuation reassuring

HDFC Bank (HDFCB IN) Q3FY26 PAT of INR 186bn , up 11% YoY , was ahead of our estimates on higher treasury income even as core PPoP (ex -treasury) was in line with our estimates ; characteristically Q3FY26 had steady undertones , underlying steady progress. Q3FY26 saw steady loan growth outcomes , up 12% YoY & 2.7% QoQ , with the bank confident of tracking above system growth in FY27. Q3 NIM surprised , up 8bp QoQ, feeding into 3.4% QoQ NII growth (better than our expectation s). Better liquidity scenario and changes in regulatory approach played in favor of HDFC B, making balance sheet realignment easier. We have been arguing about its conundrum to manage growth vs NIM vs LCR vs CD ratio outcomes, which are likely to cause dislocation . T ransition ing through the tough part journey here after should be more amicable for the bank, but transition on LDR would be a challenge . As the bank has underperformed the broader index by 7% in the p ast month it trades at 1.9x FY28 E P/BV rendering the risk -reward favorable. We revise to Buy with an unchanged TP of INR 1,147.

Traversed through tougher transition, but monitorable persists: FY25 saw slower loan growth outcomes, with the bank seeing sub -6% YoY loan growth in its bid to accelerate CD ratio outcome . However , Q3FY26 saw trend reversal with 12% YoY loan growth. Deposit growth was lower , up 11.6% YoY , with the ratio going up again . While bank directionally maintained guidance for lower CD ratio , we see it stretched and expect a more calibrated approach to CD ratio outcomes here after, which would pave the way for steady normalization. HDFCB retained its stance of higher -than -industry growth in FY27, which seems plausible as momentum in the machinery (bank’s infrastructure) takes over.

Much to ponder on with focus on NIM trajectory: HDFCB reported an 8bp QoQ rise in NIM (to 3.35% on total assets). Better liquidity, CRR cut impact and rising CD ratio benefitted NIM . Deposits needs in FY27 may call for stickier costs , feeding into challenges as the bank tries to balance between LCR vs LDR vs growth vs NIM outcomes. Given already low credit cost, levers in opex would sustain earnings pressure in the near term . Q3 had one -off opex ( Labour Law change impact) of INR 8bn (much higher than reported by peers) ,setting the base higher.

Asset quality remains key differentiator: Slippages were curtailed (1.2% vs 1.1% QoQ), with rise in the agri segment (seasonal trend) while steady progress was seen in other segments. The bank seems confident of no major red flags. The bank carries total (floating and contingent) buffer of 1.3% of loans, which render s comfort. We see steady credit cost for the bank.

Revise to Buy with an unchanged TP of INR 1,147: A merger of this scale is an onerous ask, but HDFCB is doing a commendable job , in our view . The p ast two years ha ve been challenging , undergoing transition on both sides of balance sheets. We see near -term challenges easing . We believe valuation re -rating could take time, but we are closer to the steady normalization phase. Having corrected by 7% in the past month, we view the risk - reward as favo rable ; thus , we revise to Buy from Accumulate with a n unchanged TP of INR 1,147based on a SOTP method .

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