HDFC Bank - Navigating Through The Challenges: Motilal Oswal

Motilal Oswal Report

Amid persisting challenges on business growth and an intense focus on accelerating liability mobilization, HDFC Bank Ltd. has been delivering a resilient performance in margins and asset quality. During the past two quarters, the bank has reported 7 basis points expansion in margin to 3.47% led by conscious improvement in the asset mix and the retirement of high-cost borrowings.

Asset quality remains broadly stable while provision coverage ratio stands at ~71.2%, which is closer to the levels it used to be before the announcement of the merger.

The bank holds a healthy pool of provisions (floating + contingent) at Rs 269 billion/1.1% of loans. While the bank has not given any specific guidance on the credit/deposit ratio, management has indicated that it will actively focus on bringing the ratio down at an accelerated pace.  Consequently, we have factored in softer loan compound annual growth rate at ~10% over FY24-26E, while deposit CAGR to sustain at ~16%.

However, the gradual retirement of high-cost borrowings, along with an improvement in operating leverage, will provide some support to margins and return ratios over the coming years.

We thus estimate HDFC Bank to deliver an FY26E RoA/RoE of 1.86%/14.9%. We reiterate our Buy rating on the stock with a target price of Rs 1,850 (premised on 2.3 times FY26E adjusted book value + Rs 256 for subsidiaries).

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