Asset quality held in good stead amidst concerns over RBI’s recent recognition norms. Key monitorables:

a) loan growth returning to 25% driving core NII growth; and b) sustenance of NIMs at ~4.3% with recent dip in CD ratio. Best-in-class franchise, marginal stress baggage and proposed equity raising (pending government approval) place HDFC Bank in a sweet spot to capitalise on emerging opportunities. Maintain ‘BUY’.

Loan growth was lower than expected (at sub-20% YoY versus >27% YoY).

Retail growth was broadly on track (up >27%), barring some blip in housing (no home loan bought from parent over two quarters due to GST-related clarifications). Softer growth in the non-retail book (up merely <10% YoY, albeit on a higher base) disappointed, as market opportunity and lower stress pool provided bank with relatively free growth runway.

Armed with strong capital, scale benefits, wide distribution, faster TAT and better services, HDFC Bank is well placed to garner maximum benefits of churn in competition. However, at the same time, it will be wary of pricing war. Best-in-class liability franchise, expansion of rural/semi-urban branches and improvement in productivity owing to digital focus will ensure the bank delivers above-industry earnings growth—>25% CAGR over FY18-20E—and sustains superior return ratios (RoA of 2%). We maintain ‘BUY/SO’ with TP of Rs 2,454 (at 4x FY20E P/ABV).