A deep dive confirms the bank\u2019s strong anchor within the Retail\/SME clientele which helps drive 70% of assets, 75% of liabilities and 80% of fees (60% in FX & derivatives) etc. The bank expects to be an enabler across channels and products, and improve customer experience, while being married to a risk-based pricing principle to drive profitability. Revise price target to Rs 2,465 and retain Buy. Lowest cost of deposits HDFC Bank has managed to keep NIMs steady within a very narrow range of 4.3%-4.5% for close to two decades largely on account of its superior cost of deposits (FY18: 4.82%, a drop of 54 bps y-o-y). Core fee uptick after many years Core fee income margin (as a proportion to the business undertaken, e.g. lending, non-funded lines like guarantees and acceptances), witnessed a bounce back in FY18 after a steady one-way decline since FY10. Third-party distribution too had a hand lifting up margins. FX & Derivative fee Since FY14, the margin in the business (as % of underlying contracts) has seen an upward trend to an all time high. While sustainability needs to be seen, bulk of business (58%) is retail oriented and hence unlikely to see sharp decline in volumes. Asset-Liability gap tighter than ever The cumulative ALM is the tightest in the last 5 years, which should enable NIM stability. While loans in the 1-3 year tenor has increased, funding in the <1 year tenor too has improved. Retail dominance Retail loans are now 70% of the loans, while retail deposits (CASA and time-deposits) are 75% of all deposits. In the last 3 years the funding profile has seen a higher dominance of borrowings \u2014 mainly infrastructure funds which carry no limitation of priority sector lending and SLR placements. Asset quality Gross NPL ratio inched up to 1.3% owing to material increase in NPLs in the agriculture sector. For risk mitigation, HDFCB had purchased `278 bn (5% of FY17 loans) of priority sector lending certificates (PSLC) in FY18 to comply with priority sector regulations. Slippage ratio increased to 2.3%. The bank has managed to recover 25% of its written-off loans. HDFC Bank group financials The consolidated performance continues to be robust with RoA flat at 1.9% and RoE exceeding 18% in the last four years. HDFC Bank: The bank continues to deliver robust profitability through stable NIM, steadily reducing expense ratio (FY18: 41%). Credit cost has inched up to 80 bps of average loans driven by higher NPLs in agriculture and allied sector within the priority sector where NPL ratio has inched up to 3.4% in FY18. HDB Financials: The NBFC has come of age with a loan book of `445 bn with profit growth of 40%+. It is tracking 2.4% RoA and 16.5% RoE with steadily improving NIMs. HDFC Securities: Owing to strong capital markets and better distribution, the net income for the company has more than doubled in the last four years.