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All eyes on margin, deposit growth recovery

Despite the slower NII growth and contingent provisions (Rs12.2bn) towards AIF investments, HDFCB reported in-line PAT at Rs163.7bn, primarily due to lower tax incidence (write-back of Rs15bn provisions, pursuant to a favorable court order). After sharp fall in 2Q, Bank noted stable NIM at 3.6% (3.4% on assets), which we believe was partly due to absence of the ICRR drag and a better LDR. Though deposit growth was slower in 3Q (+2% QoQ), Bank contends that it would continue to resist bulk deposits unlike other banks, and even mobilize regulatory cost-efficient borrowings in the interim. That said, we believe the Bank needs to accelerate deposit growth, given rising regulatory concerns about higher LDR (+100%) and lower LCR at 110%. This may have some bearing on margins in the near term, but would support structural margin recovery in the long run, as it replaces the high-cost eHDFCL borrowings and thus supports core profitability. On asset quality, Bank remains comfortably placed, while one off-gains from the HDFC Credila stake sale, potentially in 4Q, could help it further shore-up provision buffers. We cut FY25-26E earnings by 3%, building-in the growth moderation, but retain our long term BUY with TP of Rs2,100/sh (valuing the core bank at 2.8x Dec-25E ABV + subs at Rs192/sh). That said, all eyes will be on deposit and margin recovery in the near term.

Credit growth accelerates, but deposit/branch growth lags

HDFC Bank posted healthy credit growth of 17% YoY/5% QoQ on merged basis, backed by strong momentum in retail mortgages and CRB. But deposit growth was relatively moderate at 17% YoY/2% QoQ – incremental QoQ growth at Rs0.4trn vs Rs1.1trn in Q2FY24, leading to higher LDR at 110%. Bank contends it will continue resisting bulk deposit growth unlike other banks, and even mobilize regulatory cost efficient borrowings (raised infra bonds in 3Q) to fund growth. That said, the bank’s branch expansion is lagging, with only 270 branches added till YTD vs original target of 1,500 branches (now being toned down to 1,000 for FY24). Reported NIM (on IEA) as well as core NIM (on average assets) for the bank remained stable at 3.6% and 3.4%, respectively, while any deposit acceleration in 4Q could delay/soften near-term margin recovery.

Builds-in the strong specific-/contingent-provision buffer to withstand any future asset-quality hiccups

After a sharp jump in NPAs during 2Q due to the merger, the bank’s GNPA/NNPA ratio improved by 8bps/4bps QoQ to 1.3%/0.3%, respectively, due to contained slippages. Bank’s specific PCR too has improved, to 75%, while the bank has made additional contingent provisions of Rs12.2bn towards its AIF exposure. Additionally, the bank carries NPA contingent provision buffer @0.6% of loans, which we believe it may look to shore-up further, given the potential one-off stake sale gain from HDFC Credila in 4Q. We believe that healthy specific PCR coupled with a strong contingency buffer should help the bank sustain LLP under 0.9% to 1% and, thus, support its RoA over FY24-26E amid margin/cost pressure.

We retain BUY, with unchanged TP of Rs2,100/share

We retain our long-term BUY on HDFCB, with unchanged TP of Rs2,100/share (valuing the core bank at 2.8x its Dec-25E ABV + subsidiary/investment value at Rs192/share), as we believe the merger drag should ease gradually over FY25-26E and lead to sustained RoA/RoE of ~1.9%/16-17% over FY25-26E. Further, we prefer HDFCB with relatively better management stability/valuations vs Kotak, which is undergoing management transition that could be disruptive, as seen in the case of HDFCB. The long-awaited listing of HDB Financial Services should be another catalyst for the stock, going ahead.

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