HDFC Bank Ltd For Target Rs. 1,89 By Elara Capital Ltd
Undergoing a period of hard readjustments
HDFC Bank’s (HDFCB IN) Q3FY25 PAT at INR 167bn (up 2% YoY) was as expected. However, characteristically, Q3 had softer undertones as expectations were low. Q3 witnessed: a) materially slow loan growth (sub-5% YoY) in a bid to fast-track realignment of CD ratios (now at 98.2%), b) strong deposit growth at >15% YoY, but this has its funding cost implications – NIMs declined 3bps QoQ (reported) and c) asset quality outcomes were steady (slippages at 1.4%), better than peers. We have time again highlighted HDFCB’s conundrum to manage growth versus NIM versus LCR versus CD ratio outcomes, which may cause dislocations. Its stance to accelerate CD ratio adjustments and positioning for the next cycle imply that it will undergo an elongated period of balance sheet realignment with sustained lower growth. Thus, near-term outcomes will be onerous. HDFCB is still away from an upswing in core earnings, and the stock may see time correction. We maintain Accumulate with TP retained at INR 1,898.
Balancing growth, NIM, CD ratio and LCR may have dislocations: Q3 loan growth outcomes (sub-5% YoY) have been lower (even on muted expectations). However, deposit growth has been better (up 15% YoY), but much is still left to be desired, especially as it has funding cost implications. HDFCB’s stance of accelerating the drop in CD ratios (currently ~98%) could be onerous on earnings, even as there is natural momentum in the machinery (bank’s infrastructure). HDFCB seems to be making the right moves, but balance sheet realignment will be challenging and will continue to hamper multiples in absence of growth outcomes.
Much to ponder on as focus on NIM trajectory sustains: HDFCB reported a 3bps QoQ drop in NIMs (by 3bps QoQ to 3.62% on earnings assets). The improving NIM argument seems weaker with limited progress thus far. Any accelerated LDR cut, with current liquidity scenario, may strain NIMs (not to mention, any rate change at the system level). Given already low credit cost and limited levers in opex (investment needs), earnings pressure could sustain in the near term.
Asset quality, the key differentiator: Slippages were curtailed (1.4%), with marginal QoQ rise driven by the agri segment (seasonal impact). HDFCB used contingent provisions (INR 3bn, as cash was received for wholesale account) and has maintained coverage of 71% (ex-agri) and buffer (floating plus contingent) of 1% (of loans). We see credit cost outcomes to be steady for HDFCB.
Recommend Accumulate; TP retained at INR 1,898: A merger (with HDFC) of this scale is an onerous ask, but HDFCB is doing a commendable job at that. That said, we see HDFCB still undergoing a transition and near-term uncertainty persisting. We believe a valuation re-rating in absence of growth outcomes is rather challenging. Other school of thought is better asset quality outcomes in a challenging environment. However, benefit on that may be limited – Maintain Accumulate.
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