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Profitability remained flat: HDFC Bank’s net interest income reported marginal increase of 2.6% QoQ to Rs 29,837cr as margins remained flat. Pre-provision operating profit (PPOP) grew by 27.2% YoY to Rs 23,8854cr, however, PAT declined by 2.0% QoQ as other income de-grew by 41.3% QoQ amid lower treasury income.

Advances growth remains muted: Loan book during the quarter declined by 0.77% QoQ to Rs 24,869bn mainly due to run down in wholesale advances by 5.3% QoQ. Retail advances saw marginal increase by 1.63% QoQ to Rs 12,817bn as segments such as retail mortgages, personal loans and auto loan reported growth of 2%/(-) 1.7%/(-)4.1% QoQ. Advance growth in retail segment especially in personal loan has been deliberately slower, reflecting conscious made early within internal systems.

CASA ratio falls further: The bank's deposit growth was relatively stagnant, with a slight decline of 0.03% QoQ, bringing total deposits to Rs.23,791 bn. Term deposits, however, showed robust growth, increasing by 3% QoQ. In contrast, savings account deposits and current account deposits experienced declines of 0.4% and 13.8% QoQ, respectively. This significant reduction in savings and current account deposits negatively impacted the bank's CASA ratio, which fell to 36.3%, representing a decline of 114 basis points on a QoQ basis.

Margins remained flat with marginal improvement: During the quarter, net interest margin improved marginally by 3bps QoQ to 3.47% as the yields on assets improved to 8.4% while cost of funds remained steady at 4.9%. The bank aims to increase the yields on assets to maintain appropriate loan mix which is sustainable in the long run. Going forward, the management expects cost of funds to decline marginally which shall aid the net interest margins.

Asset quality continues to remain robust: Asset quality for the bank continues to remain robust as both Gross NPA (GNPA) and Net NPA (NNPA) remain at one of lowest levels in banks history while on sequential basis there has uptick in both metrics. During the quarter GNPA increased by 9bps QoQ and NNPA increased by 6bps QoQ. GNPA/NNPA stood at 1.33%/0.39%. The bank maintains confident of asset quality and expects to maintain its asset quality of superior quality as compared to its peers.

Valuation and outlook: We remain positive on HDFC Bank as characterised by slight improvement in margins. The management expects margin to improve in the coming quarters as the deposits pace picks up and interest rates moderate. The bank continues to maintain healthy asset quality. Financially, we expect NII/PPOP/ PAT to grow at a CAGR of 25%/30%/31% over FY24-26E. We continue to remain positive on HDFC Bank and maintain Buy rating with a target price of Rs 1,937 valuing the bank at 2.4x of its FY26E Adj. BV.

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