Buy this biggest Private banking stock for a Target of 2000.

 

Retail deposit mobilization, and margin management to take precedence over credit growth.

HDFCB reported subdued credit growth at 12.5%YoY/1.6% QoQ on a merged basis as the bank continues to run down eHDFCL’s corporate book. However, the bank accelerated deposit growth QoQ – Rs1.66trn, including retail deposits at ~Rs1.3trn and the balance being bulk deposits, which in turn led to a sharp reduction in LDR by 600bps QoQ to 104%, thereby easing regulatory concerns. The bank also reported an improvement in LCR to 115%. Despite the sharp fall in LDR, the bank managed to report a slight uptick in NIMs (+3bps QoQ) to 3.63%, much to our and street’s surprise. 

Going forward, management would avoid giving any tangible guidance. However, management reemphasized its stance on retail deposit mobilization and managing margins via a better portfolio mix, replacing eHDFCL’s high-cost borrowings and need be a rate hike, amid rising pressure from lower incremental LDR and inorganic PSL build-up to meet sub-targets as the RBI leeway ends in Sep-25.

One-off gains are consumed to build a strong contingent provision buffer and, thus, balance-sheet resiliency.

 HDFCB’s headline asset quality continues to improve with the GNPA ratio largely stable at 1.2%, but the bank has shored up contingent provision buffers (over Rs109bn QoQ) to 1.1% of loans utilizing one-off gains from HDFC Credila’s stake sale gains and lower tax incidence due to a favourable court case. This should improve HDFCB’s balance-sheet resiliency and tier-II capital ratio, while management indicates that it has no plans to utilize these provisions except for unexpected events. In addition to contingent/floating provision buffer, the bank maintains a healthy specific PCR at 74% and, thus, should help the bank maintain incremental LLP at 0.5-0.6%, amid rising margin pressure.

Valuation, View and Target Price

 We have cut our earnings estimates for FY25-26E by ~7%, factoring in slower credit growth and, thus, slightly lower RoA/RoE at 1.8-1.9%/15-16% over FY25-26E. However, we retain BUY with a downward revised TP of Rs2,000 (earlier Rs2,100), valuing the standalone bank at 2.5x its Mar-26E (from 2.7x Dec-25E), partly offset by better subsidiary valuation (Rs250/sh vs. earlier Rs190/sh), including mainly NBFC subsidiary – HDB Financial Services (to come for the IPO in FY25) and HDFC AMC.

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