HDFC BANK LTD Stock Research Report

EMBRACING THE UPTURN!…

HDFC Bank (HDFCB) is the second-largest bank in the country with a balance sheet size of over ~Rs 36 Tn (post-merger). As of Sep’24, the bank has over 9,000 branches and 20,000 ATMs spread across 4,088 Indian cities. Key subsidiaries of the bank post the merger with HDFC Ltd. are HDFC Life, HDFC ERGO General Insurance, HDFC AMC, HDB Financial, and HDFC Securities.

Key Rationale

◼ Eyeing accelerated LDR improvement:

HDFCB has re-iterated its stance of reducing its LDR to pre-merger levels of mid-to-high 80%. The management indicated that the bank would adopt an accelerated approach to trim LDR to the desired level from the current levels of ~100%. While deposit growth has seen a strong pick-up in Q2FY25, the bank will continue to maintain the momentum, with a focus on granular retail deposits.

Credit growth slowdown is imperative and the management highlighted that credit growth in FY25E would be below systemic growth. It would pick up in FY26E and be largely in line with systemic growth before accelerating in FY27E. Thus, the bank aims to reduce its LDR to high-80% over the next 2-3 years. We factor in a slower credit growth of ~12% CAGR over FY24-27E vs a deposit growth of ~17% CAGR over the same period, thereby enabling HDFCB to bring down its LDR to ~90-91% by FY27E.

◼ Pursuing credit growth judiciously:

HDFCB continues to focus on mortgages as it provides a better customer relationship. In the non mortgage retail segments, the bank has moderated growth purely based on credit dynamics. HDFCB continues to focus on growing the priority sector advances organically while maintaining high quality by passing them through stringent credit filters. In the corporate book, the bank has refrained from pursuing growth in the higher ticket-size loans, wherein the spreads are unencouraging. Going ahead, as the unsecured loan cycle turns positive, HDFCB will resume its growth trajectory by cherry-picking the right customers at the right price

◼  Best-in-Class Asset Quality:

HDFCB has been able to maintain pristine asset quality across cycles and this can be credited to its strong underwriting practices and risk-calibrated lending. Currently, amidst stress in the unsecured portfolios at a systemic level, HDFCB’s unsecured portfolio continues to perform well, with retail GNPA at 0.8%. This is primarily owing to the bank being ahead of the curve in identifying stress based on early warning indicators and pruning growth in the unsecured segment. Asset quality in the other segments (CRB, Agri, and Corporate) continues to remain healthy, given the bank’s ability to judiciously balance between growth and risk. We do not expect any major asset quality challenges and believe credit costs are likely to be contained at ~50bps over the medium term.

◼  Outlook & Valuation:

The management has clearly highlighted its focus on reducing its LDR to pre-merger levels adopting an accelerated approach, resulting in a significantly slower credit growth vs deposit growth. HDFCB does not intend to disturb the deposit growth momentum that has picked up in the current quarter. We expect HDFCB to deliver RoA/RoE of 1.8-1.9%/14-16% over FY25-27E, supported by gradually improving cost ratios and steady credit costs.

◼ Key Risks: a) Slowdown in overall credit momentum owing to the bank’s inability to ensure deposit mobilization, b) Slower substitution of higher-cost debt with lower-cost deposits

Key Financials (Standalone)