HDFC Bank: Potential earning cuts largely priced in; early signs of merger synergies surfacing

22 Feb 2024 , 11:29 AM

Analysts of IIFL Capital Services hosted HDFC Bank at IIFL’s Investor Conference, where the bank discussed emanating merger synergies. With the focus on profitability over growth, they have cut their est. by 6-7% led by lower loan growth and stable NIMs, and are now 9% below the Street. Analysts of IIFL Capital Services believe potential earnings cuts are largely priced-in as the stock has corrected 17% YTD vs. 5% EPS cut. Maintain Buy with a revised SOTP based TP of ₹1,790 (24% upside). 

Consensus earnings cut likely, but seems priced in. 

Tighter than expected system liquidity (Rs2 trn of deficit vs. Rs1.5 trn surplus in Sep23) and faster LDR improvement should weigh on growth and margins. Analysts of IIFL Capital Services build flat NIMs, 17% deposit CAGR and 14% loan CAGR over FY25- 26, assuming system deposit growth of 12% in FY25 (13% YoY now), incremental MS of 15% for HDFC (vs. 17% since FY19) and incremental LDR of ~85%. Analysts of IIFL Capital Services cut their FY25-26 est. by 6-7%, and are now 9% below the Street. However, analysts of IIFL Capital Services believe potential earnings cuts are largely priced-in as the stock has corrected 17% YTD vs. 5% EPS cut.

Early signs of merger synergies surfacing. 

With 53% of e-HDFC’s borrowings maturing beyond 3 years, NIM benefit will only accrue in the medium-term. However, merger synergies have started manifesting: (1) Increase in incremental home loan MS to 18-20% (corroborated by analysts of IIFL Capital Services channel checks) led by wider distribution network, product basket, customer segment and TAT reduction to one-third. (2) Saving accounts for new disbursals have risen to 80% from 35% pre-merger. (3) 90%+ branches opened in FY22 have already break-even. (4) Increase in counter share of the subsidiaries. Cross-sell potential is significant with retail product penetration of only 2-20% for its 90mn+ customer base. 

Positive medium-term outlook; attractive valuations. 

Despite EPS cuts, analysts of IIFL Capital Services expect 14% CAGR PAT growth vs. 7-17% for peers. Their SOTP based TP of Rs1,790 is based on core FY26 P/B of 2.2x. Maintain Buy rating as HDFC has: (1) Significant market share gain potential over an extended period of time. (2) Superior RoRWA. (3) Attractive valuations of 1.9x 1YF core P/B and 13x 1YF P/E (both 2 S.D. below LTA).