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Core performance in line; margins improve QoQ

Prudently deploys one-off gains to boost floating provisions

* HDFCB delivered a healthy quarter, with NIMs improving 4bp QoQ and the CD ratio declining 6% QoQ to 104%. PAT (adj. for one-offs) and NII both stood in line with our estimates.

* The bank prudently deployed the stake sale gains from Credila (INR73.4b) and tax credit to further strengthen the balance sheet as it made floating provisions of INR109b during the quarter.

* Opex jumped as the bank made INR15b of staff ex-gratia provisions; however, the adjusted C/I ratio stood at 41.3%.

* GNPA ratio improved 2bp QoQ to 1.2%, while PCR was largely flat at 74%. Fresh slippages increased marginally to INR73b or 1.2% of loans.

* Over FY24-26, we estimate HDFCB to deliver 13.5%/18% CAGR in loans/deposits and 16% CAGR in earnings, translating into RoA/RoE of 1.9%/15.5% by FY26.

* We reiterate our BUY rating with a TP of INR1,950 (premised on 2.4x FY’26E ABV + INR253 for subs).

Adj. PAT in line; CD ratio, liquidity coverage ratio improves

* NII grew 2% QoQ to INR290.8b (in line), supported by slight improvement in lending yields while the cost of funds held largely stable. Other income grew strongly, boosted by Credila stake sale gains; however, core fee income also grew 21% YoY/15% QoQ. During FY24, PAT grew 38% YoY to INR608b vs. INR441b (excluding merger) in FY23.

* Opex came in higher at INR180b, mainly due to INR15b ex-gratia staff provisions. Reported C/I ratio stood at 38%; however, adjusting for all oneoffs, it came in at 41.3% vs. 40.3% in 3Q. Adj. PPoP, thus, came in slightly lower vs. our estimates at INR234b (3% miss).

* Loan growth stood at 1.6% QoQ, led by healthy trends in retail and CRB. The corporate segment reported a sequential decline. Deposit growth was robust at 7.5% QoQ, while the CASA ratio improved 50bp QoQ to ~38%.

* GNPA/NNPA ratios improved to 1.2%/0.3% as fresh slippages remained broadly under control at INR73b or 1.2% of loans. PCR was healthy at 74%. The bank made additional floating provisions of INR1009 (44bp); Outstanding floating and contingent provisions stand at INR273b or 1.1% of loans. CAR stood at 18.8%, with Tier 1 at 16.8% (CET1 at 16.3%).

* Subsidiary performance: HDB Financial reported 29% YoY/7% QoQ loan growth to INR902b, while PAT stood at INR6.6b vs. INR5.5b in 4QFY23. GS-3 assets stood at 1.9% (down 35bp QoQ), while CAR stood at 19%. HDFC Securities: Revenue growth stood healthy at 77% YoY to INR8.6b, while PAT grew 64% YoY to INR3.2b.

Highlights from management commentary

* With HDFCL bond maturities approaching, the bank will utilize deposits to meet obligations, which may potentially reduce LDR from the current levels.

* In 4Q, the bank made floating provisions after obtaining prior approval from the RBI. These provisions are aimed at bolstering the balance sheet. Floating provisions stand at 50bp of loans, while the bank carries contingent provisions of 59bp.

* Margin will be driven by deposit costs and business mix considerations. The bank emphasizes stability and avoids taking unnecessary risks or engaging in price competition.

* Branch expansion will not be restricted, despite potential cost implications. The number of branches the bank can open depends on several factors such as identifying suitable locations and meeting regulatory requirements.

Valuation and view: Maintain Buy with TP of INR1,950

HDFCB reported in-line adjusted earnings in 4Q, characterized by margin, CD ratio and LCR improvement. Loan growth was modest as the corporate book saw a decline, while growth in retail and CRB remained healthy. Asset quality ratios stood stable, while PCR declined marginally to ~74%. The bank has bolstered floating provisions and hence total floating and contingent provisions stand at healthy 1.1%. The bank refrained from giving any specific growth guidance as it is focusing on improving its CD ratio and replacing HDFC borrowings, which are coming to maturity. The gradual retirement of high-cost borrowings, along with an improvement in operating leverage, will boost return ratios over the coming years. We estimate HDFCB to deliver a steady 18% CAGR in deposits and sustain a 13.5% CAGR in loans over FY24-26. We thus estimate HDFCB to deliver an FY26 RoA/RoE of 1.9%/15.5%. Retain BUY with a TP of INR1,950 (2.4x FY26E ABV + INR253 for subs).

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