Buy HDFC Bank; target of Rs 2100: Emkay Global Financial

Emkay Global Financial's research report on HDFC Bank

Despite the slower NII growth and contingent provisions (Rs12.2bn) towards AIF investments, HDFCB reported in-line PAT at Rs163.7bn, primarily due to lower tax incidence (write-back of Rs15bn provisions, pursuant to a favorable court order). After sharp fall in 2Q, Bank noted stable NIM at 3.6% (3.4% on assets), which we believe was partly due to absence of the ICRR drag and a better LDR. Though deposit growth was slower in 3Q (+2% QoQ), Bank contends that it would continue to resist bulk deposits unlike other banks, and even mobilize regulatory cost-efficient borrowings in the interim. That said, we believe the Bank needs to accelerate deposit growth, given rising regulatory concerns about higher LDR (+100%) and lower LCR at 110%. This may have some bearing on margins in the near term, but would support structural margin recovery in the long run, as it replaces the high-cost eHDFCL borrowings and thus supports core profitability. On asset quality, Bank remains comfortably placed, while one off-gains from the HDFC Credila stake sale, potentially in 4Q, could help it further shore-up provision buffers.

Outlook

We cut FY25-26E earnings by 3%, building-in the growth moderation, but retain our long term BUY with TP of Rs2,100/sh (valuing the core bank at 2.8x Dec-25E ABV + subs at Rs192/sh). That said, all eyes will be on deposit and margin recovery in the near term.