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Pandemic hits quarter; geared to push recovery ahead

About the stock: HDFC Bank is a leading private sector bank with consistent growth and operational performance over various cycles. The bank has maintained superior return ratios compared to its peers resulting in premium valuations.

* Largest private sector bank with loan book of over | 11 lakh crore

* Consistent performance with +4% NIM and +15% RoE in past many years

Q1FY22 Results: HDFC Bank’s performance was below expectations considering the tough environment.

* Loans were up 14.4% YoY at | 11.4 lakh crore with deposits up 13.2% YoY

* NII up 8.6% YoY, NIM down 10 bps QoQ at 4.1%, C/I down QoQ to 35%

* GNPA accretion higher at 15 bps QoQ to 1.47%, r/s book at 80 bps

* GNPA doubled in HDB at 7.75%; further trend remains in focus

What should investors do? HDFC Bank’s share price has grown by ~2.5x over the past five years.

* We remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value HDFC Bank at ~3.7x FY23E ABV and | 50 for subsidiaries to arrive at a revised target price of | 1800.

Key triggers for future price performance:

* Strategy to expand segments, geography & digital focus to aid future growth

* Stressed accretion elevated; higher specific provision and contingency buffer of 70 bps provides comfort

* Encouraging demand resolution & superior franchise to aid earnings revival

Alternate Stock Idea: Apart from HDFC Bank, we also like Axis Bank.

* Strong liabilities franchise, adequate capitalisation and healthy provision buffer to aid business growth as well as earnings trajectory

* BUY with target price of | 900

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