ICICI Securities Research Report on HDFC Bank
Date: July 22, 2024
Recommendation: Buy
Target Price: ₹1,850
Key Highlights
- Net Interest Margin (NIM): Improvement driven by profitable growth.
- Borrowings: Decreased quarter-on-quarter (QoQ).
- Loan and Deposit Growth: Both were modest, as noted in the provisional business update.
- Deposits: End-of-period deposits remained flat QoQ, while average deposits grew by 4.6% QoQ.
- CASA Balances: Decreased by 5% QoQ, with the ratio at 36.3%, down from 38.2% QoQ.
- Overall Loans: Fell by 1% QoQ due to a 5% drop in wholesale loans, although retail loans increased by 1.5% QoQ, and Commercial Real Estate (CRB) loans grew by 1% QoQ.
Financial Outlook
HDFC Bank (HDFCB) reported a Q1FY25 Profit After Tax (PAT) of ₹161.7 billion, down 2% QoQ, with an annualized Return on Assets (RoA) of 1.88%. Despite flat deposits and a 1% decline in loans QoQ, Net Interest Income (NII) rose by 3%, exceeding expectations by 1%, attributed to a more favorable loan mix promoting profitable growth.
Key positives include a 9% reduction in borrowings QoQ and an increase in the Liquidity Coverage Ratio (LCR) to 123%. Core fee income, operating expenses, and asset quality metrics were generally in line with expectations.
Looking ahead, there is an anticipated solid 18% compound annual growth rate (CAGR) in deposits from FY24 to FY26E, supported by an expanding distribution network and focus. However, loan growth is expected to lag behind systemic averages at a projected CAGR of 12%, as the bank aims to improve its Loan-to-Deposit Ratio (LDR) and substitute borrowing.
Conclusion
Maintain a Buy rating with a target price of ₹1,850, valuing the core banking business at 2.3 times FY26E Adjusted Book Value (ABV). A key risk to monitor is the potential slowdown in deposit mobilization, which could adversely affect loan growth and NIM.
