IGI Logo

HDFC Bank disappointed on deposit growth in Q1FY25, after a stellar uptick in Q4FY24 due to run-down in its CA pool as well as a conscious run-down in bulk deposits. However, the bank managed to report slight NIM improvement of 3bps QoQ to 3.66%, likely defying the industry trend. That said, lower treasury gains led to 3% PAT miss at Rs162bn. Going forward, Bank has guided to further calibrate credit growth (lower than deposit growth), reduce its high LDR to premerger levels, mobilise PSL (organically/inorganically), and still manage margins aided by improving portfolio mix and funding cost by gradually retiring eHDFCL’s high-cost debt. Thus, we have cut our credit growth estimates over FY25-27 to 10-12% from 12-14%, partly offset by contained credit cost, thereby leading to earnings cut of 2-6%. However, we retain BUY with TP of Rs2,000/sh, rolling fwd on 2.4x Jun-26E standalone bank ABV and better subs valuations (Rs270/sh vs Rs250 earlier). We believe incremental deposit mobilization and IPO of HDB Fin Services will be key near-term monitorables.

Bank guides for slower credit growth to prune high LDR, but still wants to manage margins

HDFCB reported subdued credit growth at 11% YoY/-1% QoQ on a merged basis as the bank continues to run-down eHDFCL’s corporate book. Thus, the retail share has now risen to 50% of the book. Bank also continues to grow its CRB book at a faster pace, leading to its share rising to 32% as it drives in better yields and also helps build organic PSL. However, nearly flat deposit growth during Q1FY25 was a major upset after a stellar Q4FY24, due to outflow in CA pool and conscious unwinding of bulk deposits. Going forward, bank has guided to further calibrate credit growth (lower than deposit growth), reduce its higher LDR to pre-merger levels, mobilise PSL (organically/inorganically), and still manage margins aided by improving portfolio mix and funding cost by gradually retiring eHDFCL’s high-cost debt. Bank is also open to raise lending rates to support margins, if the need arises.

Seasonally higher slippages; higher contingent buffer provides comfort

Bank reported seasonally higher slippages at Rs79bn/1,4% of loans, mainly due to seasonal stress in agri portfolio, partly aggravated by election-related disruption. Amid the rising stress in unsecured loans and possibly transient pain from farm loan waiver (if any) in Maharashtra (given upcoming elections in Nov), we believe the bank is well covered to protect its P&L backed by strong contingent/floating provision buffers (1.1% of loans; Rs35/sh). Hence, we build in contained credit cost at 0.5-0.6% over FY25-27E, which should support the bank’s RoA amid slower growth.

Retain BUY with a TP of Rs2,000/share

We have cut our credit growth estimates over FY25-27 to 10-12% from 12-14%, partly offset by contained credit cost, leading to 2-6% earnings cut. However, we retain BUY with a TP of Rs2,000/share, rolling fwd on 2.4x Jun-26E standalone bank ABV and better subs valuations (Rs270/share vs Rs250 earlier). We believe incremental deposit mobilization and IPO of HDB Financial Services will be key near-term monitorables.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354