HDFCB reported strong 21.6% y-o-y loan growth, that translated into an NII growth of 14.5% y-o-y (3% below Nomura estimates) and core PPOP growth of 14.7% y-o-y. NIM (on average assets) was flat q-o-q at 4% despite strong retail and SME loan growth sequentially. Fee income fared better than we had expected (+38% y-o-y). Management did not offer any further clarity on the merger dynamics. HDFC Bank’s lending subsidiary, HDB Financials, continued to record improved performance – NII +9.6% y-o-y, PPOP +0.4% y-o-y and net income ~4x y-o-y. Stage 3 improved to 4.95% from 4.99% in Q4FY22. We reiterate Buy rating with a lower TP of Rs 1,690, implying 24% upside.
Growth trends: Retail loan mix improved 110bp q-o-q to 39.6% reporting 21.7% y-o-y /4.9% q-o-q growth, with higher contributions from mortgage, personal and cards as well as LAP. Agri declined 4.6% q-o-q while SME grew 3.9% q-o-q and wholesale loans were flat, respectively. The bank let go of ~Rs 500 bn of wholesale loans owing to price competition. Deposit traction was strong with 2.9% q-o-q growth, although CASA momentum declined 2.2% q-o-q. Home loans are now processed at ~2,000 branches – 50% higher sequentially.
Profitability & capital: CET 1 was 17.1%. Bank posted 1.84% RoA and 15.2% RoE.
Forecast revisions: We revise FY23F/24F/25F EPS by -1.2%/-0.6/-0.8% owing to lower treasury income and lower NIMs. We forecast 16.6% and 16.8% EPS and core BV CAGRs over FY22-25F.
Valuation: HDFCB currently trades at 3x Q1FY23 book and 17.3x Q1FY24F EPS. At our TP of Rs 1,690, the implied multiples are 3.2x Q1FY24F book and 18.1x Q1FY25F EPS. This compares to its 10-year average of 4x P/B and 20.6x P/E. Risks: Slower core PPOP momentum, management bandwidth in managing balance sheet for future integration.
