HDFC Bank Q3 Results Review - Deposit Growth To Decide The Pace Of Credit Growth: Axis Securities

Axis Securities Report

HDFC Bank Ltd. reported healthy advances growth of 62/5% YoY/QoQ. The retail book grew by 106/3% YoY/QoQ, the CRB segment (including agri) by 35/7% YoY/QoQ and the corporate book by 11/2% YoY/QoQ.

Housing Development Finance Corporation Ltd.’s wholesale book de-grew by ~4% QoQ. Net interest income grew by 24/4% YoY/QoQ. Core NIMs stood at 3.4%, flat QoQ.

Non-interest income grew by 31/4% YoY/QoQ, led by a treasury gain of Rs 14.7 billion and recoveries, dividends and other income of Rs 15.2 billion.

Fee income remained flat QoQ. (fee income is ~1.2% of loans). Opex grew by 37/10% YoY/QoQ. Opex grew by 28/4% YoY/QoQ.

The cost-to-income ratio remained steady at 40.3% QoQ. Pre provision operating profit grew by 24/4% YoY/QoQ. Provisions came in higher than expected. Pursuant to the RBI Circular, the bank has made a contingent provision of Rs 12.2 billion for investment in AIFs.

Profit after tax grew by 34/2% YoY/QoQ.

Gross non-performing asset improved to 1.26% from 1.34% QoQ.

Slippages during the quarter stood at ~Rs 70 billion, while healthy recovery and upgrades of ~Rs 76 billion drove asset quality improvement.

Outlook

Strong deposit growth remains a critical factor in enabling the bank to sustain its higher credit growth. We believe current valuations are attractive given HDFC Bank's ability to deliver a healthy ~21% compound annual growth rate earnings growth over FY24-26E.

We expect the bank to deliver return of assets /return of equity of 1.8-1.9%/15- 17% over FY25-26E.

Valuation and Recommendation

We value the core book at 2.75 times September 25E adjusted book value versus its current valuation of 2.6 times September25E ABV and assign a value of Rs 192/share to subsidiaries of the merged entity, thereby arriving at a target price of Rs 1,975/share, implying an 18% from the cash management product

Key risks to our estimates and target price

• The key risk to our estimates remains a slowdown in overall credit momentum owing to the bank’s inability to ensure deposit mobilisation which could potentially derail earnings momentum for the bank.

• Slower substitution of higher-cost debt with lower cost deposits could continue to hurt margins

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