Banks Q3 Preview - Unsecured AQ Remains Under Watch; ICICI, HDFC Bank, SBI Among Motilal Oswal's Top Picks

Motilal Oswal Report

Credit growth moderates; estimate FY25 credit growth at ~11%: Systemic credit growth has declined to ~11.5% from the recent high of ~16% amid a slowdown in unsecured retail and demand moderation in certain other secured segments.

A few banks have already lowered their growth guidance (IndusInd Bank, RBL Bank), while select large banks are also likely to report tepid full-year growth guidance owing to a high credit-deposit ratio and rising asset quality concerns. Slower economic activity as reflected in a slower GDP growth print is closely watched and may drive growth moderation in Corporate/SME segments.

While the incremental LDR has moderated to below 80% (~100% in Jul’24), the outstanding LDR remains elevated at ~80%. We thus estimate credit growth to be at ~11% for FY25, while expect FY26 growth to be broadly maintained at 12.5%.

HDFC Bank (BUY)

HDFC Bank Ltd. is navigating post-merger short-term challenges, including high CD ratios and inherited high-cost borrowings, with a strategic focus on deposit mobilization and balance sheet optimization.

Loan growth is recovering, driven by Retail and CRB portfolios, which now contribute ~82% of the mix. We estimate a loan CAGR of ~10% and deposit CAGR of ~16% over FY24-27E.

Margins are stabilizing, with NIM improving to 3.46% in Q2 FY25. The bank expects further recovery as high-cost borrowings mature and the mix shifts toward high-yielding assets. NIMs are projected at ~3.6% by FY27.  Asset quality remains strong, with GNPA/NNPA at 1.4%/0.4%. A robust provision buffer of Rs 262 billion (~1.1% of loans) offers comfort against potential credit risks.

Operating efficiency is improving, with stable cost ratios despite continued investments. Cost-to-income and cost-to-asset ratios are projected to decline to ~39% and 1.7%, respectively, by FY27.

HDFC Bank is positioned to deliver steady growth and profitability, supported by strategic liability management, margin recovery, and a strong focus on asset quality. We estimate RoA/RoE at 1.9%/14.9% in FY27. The standalone bank trades at 2.3x FY26E ABV.

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