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Steadily moving towards improved growth and profitability

NIMs stable despite liquidity built-up; CD ratio, LCR improves sharply

* HDFC Bank (HDFCB) reported steady performance in 2QFY25, with net earnings of INR168.2b (~3% beat).

* NIMs declined 1bp QoQ to 3.46%, while the C/D ratio declined sharply by ~4% QoQ to 99.8%.

* Provisions were 5% higher than MOFSLe at INR27b. The bank utilized INR7b of contingent provisions pursuant to the reversal of AIF provisions. HDFCB is holding total provisions (floating and contingent) of INR262b.

* GNPA ratio increased 3bp QoQ to 1.36%, while PCR remained stable at 71.2%. Fresh slippages stood at INR78b (1.3% of loans).

* Given that the bank is focusing on bringing C/D to a normalized level, we trim our loan growth estimates to 7%/10% for FY25/FY26. Thus, we estimate C/D to improve to 97.1%/92.2% in FY25/FY26.

* We estimate HDFCB to report gradual recovery in loan growth over FY25- 27E with earnings growth accelerating faster. We thus estimate HDFCB to deliver FY26E RoA/RoE of 1.8%/14.6%. We reiterate our BUY rating with a TP of INR2,050 (2.4x Sep’26E ABV + INR295 for subs).

Credit growth modest; fresh slippages remain under control

* NII grew 10% YoY to INR301.1b (in line), while NIMs saw a marginal decline of 1bp QoQ to 3.46% despite a rise in cash and bank balances. Other income grew 7.2% YoY/7.6% QoQ amid better core fee income. In 1HFY25, earnings grew 18% YoY to INR329b and we estimate 2HFY25 earnings to grow ~5.7% YoY to INR340b.

* Opex rose 1.6% QoQ to INR168.9b (in line). The C/I ratio, thus, declined to 40.6%. PPoP grew by 3.4% QoQ to INR247.1b (in line).

* Loans grew at a modest 1.3% QoQ amid slower growth in home loans and a 3% QoQ dip in corporate book, while most of the other segments continued to do well. Deposit growth was robust at 5.1% QoQ, while the CASA ratio declined 70bp QoQ to 35.3%. We estimate a gradual recovery in loan growth at 7%/10%/13% YoY over FY25/FY26/27 respectively and expect a ~15% deposit CAGR over FY24-26.

* C/D declined sharply by 375bp QoQ to 99.8% as the bank aims to bring down C/D ratio at an accelerated pace while also focusing on profitability. We estimate C/D to decline to ~92% by FY26.

* GNPA/NNPA ratios increased 3bp/2bp QoQ to 1.36%/0.41%. PCR was broadly stable at 71.2%. HDFCB holds total provisions (contingent + floating) of INR262b or 1.1% of loans. CAR improved to 19.8%, with Tier 1 at 17.8% (CET1 at 17.3%).

* Subsidiary performance: HDB Financial reported loan growth of 27% YoY/ 3% QoQ to INR986b, while PAT stood at INR5.9b vs. INR6.0b in 2QFY24. GS3 assets increased to 2.1%, while CAR was 19.3%. HDFC Securities: Revenue jumped 52% YoY to INR9.1b, while PAT rose 49.5% YoY to INR3.2b

Highlights from the management commentary

* AIF provisions were fully provided at 100% for the bank's contribution to the AIF, eliminating the need for proportionate provisioning, which led to a reduction in contingent provisions.

* The bank's LCR target is 100-120%, with a historical average of 115%. In 2Q, LCR reached 128%, driven by granular retail deposits. The bank aims to optimize deposits.

* Loan mix: 69-70% is EBLR, with MCLR being a small part of EBLR. The remaining 30% of the book is fixed-rate. The corporate book accounts for 19% of total loans, with a majority potentially under MCLR.

Valuation and view:

Reiterate BUY with a TP of INR 2,050 HDFCB posted an in-line performance in 2QFY25, characterized by stable margins and healthy asset quality. Deposit growth was strong, while advances growth was tepid, aligning with the bank’s strategy to reduce C/D in an accelerated manner. Asset quality witnessed a slight deterioration, while PCR was broadly stable at ~71.2%. However, HDFCB holds healthy provisions (floating + contingent) of INR262b or 1.1% of loans. Given that the bank is focusing on bringing down C/D in an accelerated manner, we factor in a moderation in loan growth in FY25/FY26 to 7%/10%. However, the gradual retirement of high-cost borrowings, along with an improvement in operating leverage, will support return ratios over the coming years. We estimate HDFCB to report gradual recovery in loan growth over FY25- 27E with earnings growth accelerating faster. We thus estimate HDFCB to deliver FY26E RoA/RoE of 1.8%/14.6%. We reiterate our BUY rating with a TP of INR2,050 (2.4x Sep’26E ABV + INR295 for subs).

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