HDFC Bank: Takeaways from the conference

10 Jan 2024 , 11:06 AM

Recommendation: Buy; Target Price: Rs 1930

 

Analysts of IIFL Capital Services hosted HDFC’s senior management team — Mr. Kaizad Bharucha (DMD), Mr. Srinivasan Vaidyanathan (CFO), Mr. Arvind Kapil (Head – Mortgage) and Mr. Ashish Parthasarthy (Head – Branch Banking) — at their conference a few weeks ago. While FY24 loan growth is likely to be slower due to IBPC and run down of e-HDFCL’s non-individual loans, it expects the growth to accelerate from FY25 onwards. The bank expects to sustain incremental deposit market share of 20% (10% share on o/s basis) and CASA ratio to improve. Near-term NIMs are likely to remain range-bound, and see only modest expansion in the next one to two years. It reiterated the ROA guidance of 1.9-2.1% over the long-term (2% in Q2). Q3 results could drive low-single-digit earnings cut (due to NIMs). But, analysts of IIFL Capital Services maintain BUY rating as HDFC has: (1) Significant potential to gain loan/deposit market share over an extended period of time. (2) Ability to deliver best-in-class RoRWA of 2.9% (vs 1.8-2.8% for peers). (3) HDFC is trading at attractive valuations of 2.3x 1YF core P/B (1.5 S.D. below LTA). 

Targeting 20% incremental deposit market share: 

HDFC has gained 15% incremental deposit market share in the last five years (20% in 2Y), and expects to capture 20% share going ahead. This should be mainly driven by branch expansion into ‘fast growing districts’, ‘high potential districts’, limited competition in the new locations and faster deposit compounding as the branches mature. It is also mobilising funds via the infra bonds (raised Rs75 bn at 7.7% recently). This aids in meeting statutory requirements, and is also cheaper vs bulk deposits after factoring in the regulatory costs and deposit insurance premium. 

Growth and margin outlook to improve in the medium term: 

Analysts of IIFL Capital Services expect near-term loan growth (IBPC and run-down of non-individual loans) and margin (range-bound vs improvement) trends to be relatively muted. However, the medium-term outlook remains strong, driven by: (1) Pick-up in the mortgage disbursements and scaling-up of higher yielding affordable housing loans. (2) Cross-sell opportunity with only 2-20% of its retail customer base penetrated. (3) Existing interest rate swaps for e-HDFCL wholesale liabilities that can support margins as the rate cycle turns. 

Expect to deliver best-in-class RoRWA; reiterate BUY: 

Analysts of IIFL Capital Services expect HDFC to gain loan/deposit market share over an extended period of time and deliver best-in-class RoRWA. Valuations are attractive at 1 S.D. below LTA for largely similar ROA/ROEs as in the past.