Amid steep market correction recently which has led to benchmark indices BSE Sensex, NSE Nifty 50 falling 15 per cent from lifetime highs, shares of HDFC Bank have declined over 10 per cent. So far this year, the private bank’s stock has tumbled 11.28 per cent. However, brokerage firm Motilal Oswal Financial Services believes that the share is likely to rally over 50 per cent going forward as ‘Asset quality remains robust with credit costs undershooting the long-term trend.” HDFC Bank shares on Wednesday rose over 2 per cent and were quoting Rs 1,355 on the BSE.
Why are analysts betting on HDFC share price rally?
Retail loan growth revives, strong traction to sustain: According to Motilal Oswal, HDFC Bank exhibited robust traction in corporate and commercial banking segments until FY21, which offset the softness in retail lending. However, the private lender has witnessed a healthy pick-up in retail loans recently. The recent growth was led by the unsecured business, as personal loans and credit card book rose 11%, 16% respectively over similar period while home loans grew 9.1%. The brokerage estimates overall loans to clock ~18% CAGR over FY22-24.
‘SURU’ to be a key focus area: The private lender has created a new business segment of Commercial and Rural Banking to capture the next wave of growth and indicated that it is the largest bank in MSMEsegment, and this segment is witnessing robust traction. In 3QFY22, commercial and rural loans grew 30% on-year, while growth in low-yielding corporate book moderated to 7%. “HDFC Bank indicated that it would continue to expand its presence in the SURU region by enhancing its banking channel network across India. We expect the healthy trend to continue,” said Motilal Oswal.
Strong digital capabilities to underpin business growth and cost ratios: HDFC Bank continues to maintain a leading market share across multiple digital channels with 18% share in PoS terminals and around 9%, 27% share in debit and credit card spends respectively as of 9MFY22. The lender has a credit card base of 15.8m (23% share).
“About 96% of transactions are carried out digitally, resulting in continuous improvements in cost ratios and productivity. We thus estimate its C/I and costasset ratio at ~38%/~2.0%, respectively,” the brokerage report said.
NII growth to recover to 18% over FY22-24E: According to Motilal Oswal analysts, HDFC Bank has witnessed margin compression of 20bp as of 3QFY22 v/s the pre-COVID level. However, with revival in retail loan growth along with improving product mix and continued strength in liability franchise, they expect NIMs to improve gradually. “We note that after decelerating sharply at +8.6% YoY during 1QFY22, NII growth has recovered to 13% YoY in 3QFY22. We estimate NII growth to improve successively and sustain at 18% CAGR over FY22-24. This will enable a revival in PPoP growth as well, which too has softened to ~11% YoY during 3QFY22,” they added.
Raising contingency buffers as credit cost undershoots long-term trends: HDFC Bank has been reporting controlled levels of slippages over the recent quarters, which have enabled improvements in asset quality ratios, according to Motilal Oswal. GNPA and NNPA ratios have thus moderated to 1.26% and 0.37%, respectively, while PCR has remained healthy at around 71%.
“The controlled slippage run-rate has allowed the bank to shore up its contingent provisions prudently and reinforce its balance sheet further. HDFCB has thus raised the total provisioning buffer to around Rs 8,640 crore. We estimate the credit cost to sustain at an average of ~1.1% over FY22-24 as it continues to bolster its near-term contingent provisions,” the brokerage said.
Earnings outlook robust; PAT CAGR of 18% estimated over FY22-24: According to Motilal Oswal note, HDFC Bank appears well positioned to deliver an improvement in PPoP growth at an average of 17% over FY22-24E after likely moderation in FY22E. It believes that the bank’s asset mix continues to improve and costs remain in control, operating earnings will gain further traction in FY23E. “We thus estimate HDFCB to report 17%/18% PPoP/PAT CAGR over FY22-24E,” it said.
Strong earnings outlook; valuations attractive at current level: HDFC Bank continues to deliver strong business growth vs peers and its business momentum has also swiftly recovered to pre-COVID levels propelled by a healthy pick-up in the Retail segments, said Motilal Oswal. Meanwhile, growth in commercial and Rural Banking remains robust. The brokerage expects, the margin trajectory to recover gradually over FY23 while the uptick in retail loan growth and unsecured products would be supportive of fee income trends.
HDFC Bank stock rating: BUY
Target price: Rs 2,000; Rally: 50%
Motilal Oswal in its report noted that HDFC Bank’s asset quality ratios have improved, though the restructured book stands comparatively higher at 1.4% of loans. “Healthy provisioning coverage and a contingent provision buffer provide comfort on asset quality. Pick-up in loan growth, particularly Retail, would support NII and margin, which would drive profitability in the coming quarters,” it said. it estimated HDFC Bank to deliver around 18% PAT CAGR over FY22-24. The brokerage maintains ‘BUY’ rating on the stock with a target price of Rs 2,000, implying 50% upside.
