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Earnings in line; margins flat QoQ

LCR ratio contracts sharply

* HDFC Bank (HDFCB) reported a mixed quarter with in-line PPOP and PAT, while deposit growth was modest at ~1.9% QoQ.

* Margin remained flat at 3.4% despite a rise in the CD ratio and deployment of excess liquidity on the balance sheet as LCR declined sharply to 110%.

* NII thus came in slightly lower than our estimate, but healthy other income (boosted by the treasury gains) led to in-line profitability.

* GNPA ratio improved 8bp QoQ to 1.3%, while PCR improved to 75%. Fresh slippages moderated to INR70b/1.2% of loans.

* We estimate HDFCB to deliver 17%/19% CAGR in loan/deposit over FY24- 26, while earnings compound at 20% CAGR, translating into an RoA/RoE of 1.9%/16.7% by FY26. We reiterate our BUY rating with a TP of INR1,950 (premised on 2.5x Sep’25E ABV + INR223 for subs).

Revenue growth in line; healthy other income supports profitability

* NII came in 2% lower than MOFSLe as reported margins stood flat at 3.4%. ‘Other income’ stood higher than our estimate at INR111b, aided by healthy treasury gains coupled with strong traction in core fees. During 9MFY24, PAT grew 22% YoY to INR541b vs. INR321b (ex-merger) over 9MFY23.

* Opex was in line at INR160b, as the bank continued with its aggressive employee addition and made further investment in business besides raising the mix of retail assets. The C/I ratio thus stood at 40.3% (core C/I ratio at 41.9%). PPoP was in line with our estimate at INR227b during the quarter.

* Loan growth was robust at 4.9% QoQ, led by robust growth in retail and continued traction in Commercial and Rural banking, while some pick-up was seen in the corporate segment as well. Deposit growth was a laggard at 1.9% QoQ, while the CASA ratio was broadly flat at 38%.

* On the asset quality front, GNPA/NNPA ratios improved to 1.3%/0.3%, as slippages moderated to INR70b/1.2% of loans supported by healthy recoveries and accelerated write-offs. PCR stood healthy at 75%, while the bank carried floating and contingent provisions at INR154b/0.6% of loans. CAR for the bank stood at 18.4% with Tier 1 at 16.8% (CET1 at 16.3%).

* Subsidiary performance: Revenue growth for HDFC Securities stood healthy at 40% YoY to INR7b, while PAT too grew 13% YoY to INR2.3b. HDB Financial reported 29% YoY/8% QoQ growth in loans to INR840b while PAT stood at INR6.4b vs. INR5.0b in 3QFY23. GS-3 assets stood at 2.3% (down 13bp QoQ), while CAR stood at 18% for the quarter.

Highlights from management commentary

* Margin is currently at the lower end of the spectrum and should recover to 3.7% in 18-24 months.

* Contingent and floating provisions amounted to INR154b, and general provision amounted to INR104b as of 3QFY24.

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