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Navigating transition challenges

Q4 marked by one-offs; right moves in the making

HDFC Bank’s (HDFCB IN) Q4 earnings were characterized by a few oneoffs: a) transaction gains of INR 73.4bn from stake sale in HDFC Credilla, b) INR 15bn staff ex-gratia payment and c) floating provisions of INR 109bn (to prop balance sheet). Adjusted for these, earnings were broadly steady. Qualitatively, better NIMs (up 4bps QoQ), LCR improvement (to 115 % versus 110% QoQ) and lower LDRs held Q4 in good stead. We had earlier highlighted HDFCB’s conundrum as regards managing growth versus NIM balance, and this was clearly visible in Q4 commentary – HDFCB is focusing on the latter now (a key change). While believe we are closer to bottoming of core earnings, even as recovery may take longer and thus the stock may see time correction (near term) till investors find merit in execution.

Focus on NIM trajectory sustains

Surprisingly, HDFCB has been able to improve NIMs (4bps QoQ) even on lower LDR and improvement in LCR, largely given yield tweak across the loan portfolio. But with many variables at play – transitionary liquidity requirement (scale has its own challenges while running tight liquidity), changing loan construct and systemic challenges on deposits – NIM recovery may take longer (not to mention, any rate change at the system level may push this down further).

Deposit mobilization quintessential & remains most focused aspect

While deposit growth surprised – up 7.5% QoQ – monitor sustained momentum given this was partially attributable to year-end run. FY25 may be characterized by the nature of balance sheets & deposit franchises. With current liquidity scenario and nudge by regulators on CD ratio, systemic aggression on deposits may sustain amidst HDFCB’s heightened needs post-merger. Thus, sustained deposit mobilization will be the key to building confidence. Also, investment in deeper geographies may mean that HDFCB is structurally equipped to deliver strong outcome while managing merger deliverables. Productivity from such branches may be key to shaping investment outlook

Valuation: Upgrade to BUY; TP unchanged at INR 1,889

Once known for consistency, HDFCB has seen it all – Covid, management transition, RBI ban, merger pangs. While merger challenges are close to bottom out, it lacks positive triggers. That said, it has corrected >6% post our downgrade (report dated 20 September 2023 Not so smooth after all) and risk-reward seems favorable even as near-term time correction may play through (till investors find merit in execution)

Please refer disclaimer at Report

SEBI Registration number is INH000000933