Buy HDFC Bank Ltd for the Target Rs.925 by Motilal Oswal Financial Services Ltd
In-line quarter; NIM declines 10bp QoQ Asset quality remains robust
* HDFC Bank (HDFCB) reported 2QFY27 profit at INR195.1b (5% YoY/2% QoQ, in line).
* NII grew 10% YoY/3% QoQ to INR346.2b, while NIMs on total assets declined by 10bp QoQ to 3.16% (est. 3.18%) due to an adverse impact of leverage on FCNR(B) deposits.
* Other income declined 4% YoY/rose 8% QoQ to INR138.3b (6% beat), supported by healthy growth in fee income and treasury gains of INR8b.
* Advances book grew by a healthy 16.4% YoY/5.2% QoQ to INR31.96t. Deposits grew 18.8% YoY/4.9% QoQ to INR33.27t, aided by FCNR(B) deposit mobilization of INR1.10t. CD ratio thus increased to 96.0%.
* Fresh slippages declined to INR61b. GNPA/NNPA ratios declined to 1.11%/0.37%. PCR rose to 66.9% (up 138bp QoQ).
* We raise FY27/FY28 earnings estimates by 3.5% each and estimate HDFCB to deliver FY28E RoA/RoE of 1.74%/14.1%. Reiterate BUY with a TP of INR925 (1.8x FY28E ABV + INR124 for subs).
Highlights from the management commentary
* NIM trajectory will move upward from the next quarter onward. In 3QFY27, the bank shall benefit partly from the rate hike, though it will be offset by fullquarter impact of FCNR(B) deposits.
* The bank disbursed INR410b under the ECLGS 5.0 scheme, the highest among all banks.
* There would be a mix change in employee composition in the long term. More people in frontline and lesser people in backend and some may be moved to tech.
* Growth has been balanced across PL, wheels, gold, agri and MSME
Valuation and view: Reiterate BUY with a TP of INR925
HDFCB reported a largely in-line quarter, supported by healthy business growth and strong operating profits, although provisions were elevated. NIMs on total assets contracted by 10bp QoQ to 3.16%, while the bank has guided for NIMs to be on an upward trajectory from hereon. Healthy loan growth was driven by SME segment, while retail loan growth gathered some momentum. Deposit growth was healthy, with FCNR(B) mobilization resulting in the CD ratio inching up to 96.0%. We expect the CD ratio to gradually moderate to ~93% by FY28E through calibrated balance sheet management. The bank maintains contingency and floating provisions of INR156b and INR214b, respectively. Improvement in NIMs from retirement of highcost borrowings and operating leverage should support a gradual improvement in profitability and return ratios in the coming years. We raise FY27/FY28 earnings estimates by 3.5% each and estimate HDFCB to deliver FY28E RoA/RoE of 1.74%/14.1%. Reiterate BUY with a TP of INR925 (1.8x FY28E ABV + INR124 for subs).
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