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Sustainable growth ahead; RoE to revert to pre-merger levels by FY26E

* HDFC Bank (HDFCB) has delivered an exemplary track record over the past two decades that only a few companies in the world can take pride in (27% earnings CAGR in past 20 years). The merged entity is set to extend its lead as the secondlargest bank in the country, with a market share of 16% in loans and 11% in deposits.

* The merger will help the bank improve asset duration and enable sustainable growth over the long term, with mortgage mix rising to 33%. We estimate the loan book to grow to INR 34.7t by FY26E with a ~17% CAGR (B/s size of INR 49t).

* About 70% of HDFC Ltd (HDFC) customers do not have a banking relationship with HDFCB, while out of total ~85m customers of HDFCB, only 5% of them have taken mortgages (2% from HDFC Ltd). This offers a significant cross-sell opportunity, and along with aggressive distribution expansion, it would enable healthy loan growth over the medium term. According to the bank, home loan customers have 7x higher deposit balance potential than those not availing home loans.

* Margins are likely to moderate to ~3.8% in FY24E; however, a gradual re-pricing of borrowings and high-cost deposits of HDFC will lead to a 15-20bp gain in NIM to ~4% by FY26E. We estimate the cost-income (C/I) ratio to moderate to 35% by FY26E, which will compensate for lower margins and will support earnings. ? We estimate PAT of INR646b/INR791b/INR963b over FY24/FY25/FY26, translating into RoA of 1.9-2.1%. We estimate RoE to decline in FY24 and thereafter gradually revert to pre-merger levels of 17%+ by FY26E. HDFCB (Buy) remains one of our preferred stocks in the sector with a TP of INR2,070.

A new era in banking unfolds: Opportunities –> Challenges –> Execution –> Milestones!

HDFCB has become the largest banking franchise in the country by net worth. We estimate the bank to become the highest-profit-making financial entity from FY24E onward. On the basis of market cap, the bank already ranks among the top 3 in the country and among the top 7 lenders in the world. The merged entity has 182k employees, and given the pace of growth, we estimate the bank to become the largest financial employer in the next five years and emerge as a contender for the largest bank in the country by the end of the current decade. While the possibilities are endless, relentless execution, strong governance standards and superior underwriting will be critical for the bank to create shareholder wealth and deliver on its immaculate track record of a 20% earnings CAGR, which we expect the bank to sustain over the medium term.

Merged entity to have total loan book of INR22.45t as on 1QFY24

The merged entity will have a combined loan book of ~INR22.45t, increasing its market share to 15.6%. Its deposit base will increase to ~INR20.65t (10.8% market share), while the CASA mix will moderate to 37.4% from 44.4% currently for HDFCB. We estimate the bank to grow its advances portfolio at a 17% CAGR and increase its deposit base at a 19% CAGR. We thus estimate the CD ratio to moderate to 103% by FY26E from 109% currently.

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