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Business growth soft; restoring C/D ratio remains a key focus

NIMs improve 3bp sequentially

* HDFC Bank (HDFCB) delivered broadly in-line performance, with NIMs improving 3bp QoQ, and the C/D ratio declining 87bp QoQ to 103.5%. PAT increased 2.3% QoQ (5% beat), aided by lower provisions.

* Provisions were 10% lower than MOFSLe at INR26.02b, as the bank utilized INR4b of contingent provisions pursuant to the repayment of underlying loans. HDFCB is holding total provisions (floating and contingent) at INR269b and 1.1% of loans.

* Other income declined 1.5% QoQ (adj. for 4Q one-offs) amid lower treasury income. Opex grew 0.9% QoQ (adj. for one offs), while C/I rose to 41%.

* GNPA ratio deteriorated 9bp QoQ to 1.33%, while PCR decreased 283bp QoQ to 71.2%. Fresh slippages inched up to INR79b (1.5% of loans).

* Amid the increasing focus on restoring LDR to normalized levels, we cut our loan growth estimates to 9%/11% for FY25/FY26. We thus estimate LDR to improve to 98.5%/93.5% over FY25/FY26.

* We estimate HDFCB to deliver an FY26E RoA/RoE of 1.9%/15% and reiterate our BUY rating on the stock with a TP of INR1,850 (premised on 2.3x FY26E ABV + INR256 for subsidiaries).

Business growth muted; elevated C/D ratio to suppress loan growth

* NII grew 2.6% QoQ to INR298.4b (broadly in line), while NIM improved 3bp QoQ to 3.47%. Other income declined 1.5% QoQ (adj. for 4Q one-offs) amid lower treasury income.

* Opex increased 0.9% QoQ to INR166.2b (inline). C/I ratio, thus, inched up to 41%, which was due to the addition in the workforce over prior quarters and the increasing number of branches as per the management. PPoP, thus, came in at INR238.8b (in line).

* Loan growth declined 0.9% QoQ, led by 5% QoQ dip in corporate & wholesale books. Deposit growth was flat, while the CASA ratio declined 200bp QoQ to ~36%. LDR stood at 103.5% with the bank stating that its key focus will be on bringing its LDR down, while focusing on profitability. As a result, we now model a loan growth at 9%/11% YoY, while estimating ~16% deposit CAGR over FY24-26. We thus estimate LDR to improve to 93.5% by FY26E.

* GNPA/NNPA ratio deteriorated 9bp/6bp QoQ to 1.33%/0.39%. PCR dipped 283bp QoQ to 71.2%. HDFCB holds total provisions (contingent + floating) of INR273b/1.1% of loans. CAR improved to 19.3%, with Tier 1 at 17.3% (CET1 at 16.8%).

* Subsidiary performance: HDB Financial reported 30% YoY/6% QoQ loan growth to INR956b, while PAT stood at INR5.8b vs. INR5.7b in 1QFY24. GS3 assets stood at 1.9%, while CAR was 18.8%. HDFC Securities: Revenue jumped 65% YoY to INR8.2b, while PAT rose 55% YoY to INR2.9b.

Highlights from the management commentary

* Management mentioned that the bank is not bound by a specific LDR; however, lowering the LDR lies in the bank’s interest.

* The bank does not engage in rate competition to attract deposits. Instead, it focuses on engagement and service delivery, emphasizing that the environment is more important than rates.

* The bank will grow at a slower pace compared to deposit growth. Over time, the focus has been on profitable growth rather than just growth.

* Growth in unsecured personal loans has been deliberately slower, reflecting a conscious decision made early within the internal system. This adjustment aligns with regulatory requirements.

Valuation and view:

Reiterate BUY with a TP of INR1,850 HDFCB posted an in-line performance, characterized by slight margin improvement and controlled provisions. Business growth was tepid in 1Q, with loan growth declining 1% QoQ due to wholesale. Asset quality witnessed marginal deterioration, while PCR moderated 280bp QoQ to ~71.2%. However, HDFCB holds a healthy pool of provisions (floating + contingent) at INR269b/1.1% of loans. While the bank has not given any specific guidance on the C/D ratio, management has indicated that it will actively focus on bringing the ratio down at an accelerated pace. Consequently, we model some moderation in loan growth in FY25 and FY26E. However, the gradual retirement of high-cost borrowings, along with an improvement in operating leverage, will provide some support to the return ratios over the coming years. We estimate HDFCB to deliver 16% CAGR in deposits and a slower 10.1% CAGR in loans over FY24-26. We thus estimate HDFCB to deliver an FY26 RoA/RoE of 1.9%/15.1%. We reiterate our BUY rating on the stock with a TP of INR1,850 (premised on 2.3x FY26E ABV + INR256 for subsidiaries).

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