Buy HDFC Bank Ltd For Target Rs.2,000 By Yes Securities Ltd
LDR aspects still portend a long walk to freedom
Our view – Loan growth slowing to 7% YoY demonstrates LDR considerations have had a material impact
Balance sheet growth – Management reiterated that they would be able to bring down LDR faster than anticipated and provided a glide path for loan growth enhancement: Earlier, the bank had thought it would take 4-5 years for LDR to go down to previous levels. However, given that credit growth in the system is poised to decline after 2 years of elevated levels, the bank will be able to reduce LDR to prior levels over 2-3 years. The bank clarified that they would grow below system growth this year, match it in FY26 and then outpace it in FY27. As of 2Q, the gross advances growth continued to be tepid at 7.0% YoY while deposits growth far outpaced the same at 15.1% YoY.
Asset Quality - Slippages remained broadly under control while headline credit cost for the quarter benefited from an AIF provision writeback: Gross NPA additions amounted to Rs 78bn for 2QFY25, translating to an annualized slippage ratio of 1.25% for the quarter. Gross NPA additions had amounted to Rs 79bn during 1QFY25. Provisions were Rs 27.0bn, up by 3.8% QoQ but down by -7.0% YoY, translating to calculated annualised all-inclusive credit cost of 44bps. There was a contingent provision release due to clarification received regarding AIF provisions. If one adds back the reversal, the provision amounted to Rs 33bn for the quarter.
Net Interest Margin - Margin remained broadly stable on sequential basis and management stated they would be able to manage interest rate cuts:
NIM was at 3.46%, down -1bp QoQ but up 6bps YoY. The share of floating rate loans including EBLR and MCLR would be 69-70% of loan book, of which MCLR would be a relatively small proportion. While there will be quarterly variation in margin, in the medium term, the bank should be able to manage margin in this particular range. We maintain a recent, relatively cautious ADD rating with a revised price target of Rs 2000: We value the standalone bank at 2.3x FY26 P/BV for an FY25/26/27E RoE profile of 15.0/15.5/15.7%. We assign a value of Rs 260 per share to the subsidiaries.
Other Highlights (See “Our View” above for elaboration and insight)
* Opex control: Total cost to income ratio was at 40.6% down/up by -43/18bps QoQ/YoY and the Cost to assets was at 1.9% up/down by 1/-22bps QoQ/YoY.
* Fee income: Core fee income to average assets was at 1.1%, up/down 12bps/- 4bps QoQ/YoY.
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