NII growth trajectory weakened to a low point last witnessed in FY14, driven by 20bp lower NIM (time deposits grew rapidly), offset by a reduction in the cost-to-asset ratio and higher fees. Retain Buy with price target of Rs 2,530.

Retail drives loan growth: Headline loan growth was 22% y-o-y with retail growth at 25% y-o-y and wholesale at 18% y-o-y. Retail growth was driven by personal loans and credit cards, which continued to grow at >30% y-o-y and 7% sequentially. Housing loan purchases from HDFC Ltd restarted after two quarters. Consolidated loans grew (~21.2% y-o-y) entirely on the back of the bank as HDB Financial’s loan growth weakened to ~8% y-o-y (Q1FY18: 36.6%, Q4FY18: 34.9%) .

Time deposit surge: Headline deposits grew 20% y-o-y on 24.9% y-o-y growth in term deposits and 17.4% y-o-y growth in savings deposits. Management does not favour unilaterally raising savings deposit rates. As higher-cost deposits transmit to higher MCLR, we expect the impact on the overall cost base to fall, offset by higher yields on the larger asset base.

Asset quality stable; agri contributes ~18% of overall slippage: Gross NPL was 1.33% (vs 1.30% in Q4FY18 and 1.24% a year ago). The slippage ratio for the quarter was 2.4%, the 4-year average being ~2.0%, based on trailing 12M loans. Overall slippage in the quarter was Rs 35.5 bn, of which Rs 6-6.5 bn related to the agri-related portfolio. Credit costs for the quarter were ~95bp of the advances and provision coverage ~70%. As in FY18, the bank had Rs 2.5 bn of contingent provisions towards the agri portfolio, some of which could have been used in the quarter. Floating provisions were Rs 14.5 bn.

Core profitability strong: NII grew 15.4% (7.1% below JEFe) mainly on softer NIM, at 4.2% (v/s JEFe 4.3%). Lower NIMs stemmed from: (i) growth in bought-out housing loans; (ii) lower yield on investment book; and (iii) higher agri-related slippage. Core fee income growth was strong, at 23%. The expense ratio improved further, to 40.1% ex-treasury, with the cost-asset ratio at an all-time low of 2.2%, offsetting the weaker top-line trajectory.

Estimate change: Change in estimate of ~2-6% in net profit estimates driven by slightly lower loan book growth. We broadly maintain our margins & credit cost estimates and build in lower cost to income. We see FY18-21e EPS CAGR at 24.3% and adj. BVPS CAGR at 21.9%.