Asset quality remains pristine; eyes set on growth
▪ CD ratio continued to moderate with deposit growth being higher than system growth
▪ Asset quality remains pristine with healthy provision buffer; NIMs declined but largely in line with our estimates
▪ Maintain BUY. Raise SOTP-based TP to Rs 2,298 (from Rs 2,213), set at 2.5x Jun’27E ABV
CD ratio continues to improve: CD ratio moderated to 95.1% in Q1FY26 (96.5% in Q4FY25) vs a high of 110.5% in Q3FY24. The moderation was driven by slowdown in credit growth to 6.7% YoY vs deposit growth of 16.2% YoY higher than system growth (10.1%). HDFCB plans to reduce its CD ratio to pre-merger level in the 85- 90% range in the medium term. Further, credit growth is expected to gradually pick up and report a CAGR of 12.7% in FY25-28E. We expect CD ratio to improve to ~92.7%/90% in FY26/FY27.
Asset quality remains pristine: AQ remains resilient with GNPA ratio of 1.4% (+7bps QoQ). Excluding agri seasonality, GNPA ratio was stable at 1.14% in Q1FY26 vs 1.13% in Q4FY25. Slippage ratio increased marginally to 1.4% (+18bps QoQ). HDFCB made floating provision (FP) of Rs 90bn by using one-off gains from HDBFS partial divestment in the quarter. In addition, the bank created Rs 17bn of contingent provision (CP) and hence, reported a healthy provision buffer (FP+CP) of Rs 366bn or 1.4% of net loans.
NIMs declined but largely in line with estimates: NIMs declined to 3.35% (-12bps YoY; -11bps QoQ) — largely in line with our estimates. As a result, NII at Rs 314.4bn (+5.4% YoY) missed our estimate by only 0.9%. The decline in NIMs was mainly due to faster repricing of loans with yield on loans at 9.18% (-23bps QoQ) and a slow decline in cost of funds to 5.63% (-4bps QoQ). We expect NIMs to improve from Q3FY26, aided by the shift from high-cost borrowings to deposits as maturity kicks in, a lagged deposit repricing and the positive impact of the announced CRR cut. PAT grew to Rs 181.6bn (+12.2% YoY) in Q1FY26.
Maintain BUY: We believe HDFCB has managed to outperform large private sector peers previously by effectively navigating business cycles, delivering stronger profitability and margins, coupled with better asset quality. Return ratios to stay healthy with ROA of 1.7-2.0% and ROE of 13.4-15.7% in FY26-FY28E. Hence, we maintain BUY with revised SOTP-based TP of Rs 2,298 (from Rs 2,213) and roll over valuation to 2.5x Jun’27E ABV.
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