Top Conviction Ideas : Buy HDFC Bank Ltd for Target Rs. 2,300 - Axis Securities Ltd
* Readying to Accelerate Growth: HDFCB’s credit growth lagged systemic growth, driven by its conscious decision to reduce LDR. With the LDR now <100%, the bank will look to resume its growth journey, with FY26 pegged at par with systemic growth and a further acceleration going into FY27E, with growth ahead of systemic growth. The management has identified segments to drive this growth, with the retail portfolio, particularly non-mortgage segments, poised for a strong growth uptick. This growth will be driven by a pick-up in consumption demand on the back of tax rate cuts and improved demand during the festive season.
* Near-term NIM Pressures to Persist: HDFCB‘s NIMs contracted by ~11 bps QoQ, excluding the impact of one-time IT refund in Q4. Margin compression was on account of the higher share of floating rate loans driving a sharp decline in lending yields by ~30 bps QoQ, with the impact of the Feb’25 and Apr’25 repo rate cuts visible. In Q2, the management expects NIMs to remain under pressure and are likely to bottom out with the Jun’25 repo rate cut (of 50 bps), reflecting in the lending yields. The SA rate cut taken by the bank is reflected in the CoF (down 10 bps QoQ); however, the TD repricing is expected to happen with a lag. Margins are expected to stabilise from H2FY26 onwards as the deposits reprice downwards.
* RoA Optimisation Underway: HDFCB has been consistently performing on its guidance in its endeavour to revert to its pre-merger levels across metrics, and its execution capabilities remain strong. With LDR at a <100% level, the bank will look to accelerate growth momentum in FY26 to match systemic growth. While near-term pressures on NIMs will weigh on earnings, healthy fee income growth, controlled costs, and pristine asset quality, keeping credit costs benign, will offset the impact of margin compression. We expect HDFCB’s RoA/RoE to improve to 1.9%/15-16% over FY27-28E vs 1.7%/13.6% in FY26.
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