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Profitability remained flat as provisions increased: HDFC Bank’s net interest income reported marginal increase of 2.1% QoQ to Rs 29,077cr as margins remained flat. Pre-provision operating profit (PPOP) grew by 23.8% QoQ to Rs 29,274cr, however, PAT remained flat with a growth of 0.9% QoQ as provisions increased by 220% QoQ. Other income grew by 63.1% QoQ mainly due to higher treasury income and gain from stake sale in HDFC Credelia Financial Services.

Retail advances remained strong: Loan book during the quarter increased by 1.6% QoQ to Rs 25,078bn mainly due to run down in wholesale advances by 2.2% QoQ. Retail advances increased by 3.5% QoQ to Rs 12,611cr as segments such as retail mortgages, personal loans and auto loan reported strong growth of 4%/4.2%/8.4% QoQ. Going, forward the bank aims to continue to maintain its growth momentum in retail advances while capitalizing on wholesale advances.

Strong growth in deposits and improvement in CASA ratio: The bank’s deposits growth was strong at 7.5% QoQ to Rs 23,798cr. The increase in deposits was led by both CASA and term deposits which increased by 8.7%/6.7% QoQ. Along with the growth in deposits, CASA ratio improved by 44bps QoQ to 38.2%. The strong growth in deposits is mainly due to growth in branch count as during the quarter branches increased by 647 as compared to 147 branches in the last quarter.

Margins remained flat with marginal improvement: During the quarter, net interest margin improved marginally by 4bps QoQ to 3.4% as the yields on assets improved by 10bps QoQ to 8.4% while cost of funds remained steady at 4.9%. The bank aims to increase the yields on assets to maintain appropriate loan mix which is sustainable in the long run. Going forward, the management expects cost of funds to decline marginally which shall aid the net interest margins.

Asset quality continues to remain robust: Asset quality for the bank continues to remain robust as during the quarter GNPA declined by 6bps QoQ, however, NNPA increased by 3bps QoQ. GNPA/NNPA stood at 1.2%/0.3%. The bank is seeing improvement in its asset quality across segment and maintains confidence about the asset quality of the bank. The bank expects to maintain its asset quality of superior quality as compared to its peers.

Valuation and outlook: Going forward, we remain positive on HDFC Bank as it is seeing healthy growth in deposits along with growth in its retail loan book. It expects its margins to improve going forward which shall aid the topline growth. Financially, we expect NII/PPOP/PAT to grow at a CAGR of 26%/32%/36% over FY24-26E. We continue to remain positive on HDFC Bank and maintain Buy rating with a target price of Rs 2,010 valuing the bank at 2.4x of its FY26E Adj. BV.

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