Buy HDFC Bank Ltd For Target Rs. 2,025 - Yes securities
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Result Highlights
with recoveries and upgrades amounting to Rs 33bn
* Margin picture: NIM at 4.1% was flat QoQ with several moving parts largely canceling each other out, for the quarter
* Asset growth: Advances grew 6.2%/16.9% QoQ/YoY, sequentially driven by Commercial and Rural Banking segment
* Opex control: Total opex rose 8%/32.6% QoQ/YoY, employee exp. grew 5%/37.8% QoQ/YoY and other exp. grew 9.5%/30.3% QoQ/YoY
* Fee income: Fees and commissions rose 9.5%/17.7% QoQ/YoY, where retail fee income constitutes 94% of the total fee income
Our view – Balance sheet size has its own challenges, Downgrade to ADD
The rapid rise in opex for HDFCB is indicative of the bank needing to work harder to achieve deposit growth: HDFCB’s intention to add about 1500 branches per year is not new but its sudden fructification in 4Q is a stark reminder. Regardless of the generic narrative about the advent of digital strategy, there is no substitute to branch footprint when it comes to delivering deposit growth from an elevated base. High sequential opex growth was driven not only by branch openings but also personnel addition. 638 branches were opened during the quarter, taking the total branch openings for the financial year to 1479 branches. 6600 people were added during the quarter. The bank would like to run cost to income ratio at 42%, which may fluctuate on quarterly basis.
HDFCB managed to hold to NIM on sequential basis, while management sounded neutral on NIM outlook: On the positive side, the fixed rate book, which is 45% of the loan book, runs for 2-3 years and hence, its repricing will continue for some time.
Secondly, the share of wholesale loan book, which is 53-54%, currently, will come down on structural basis. On the other hand, cost of deposits would go up mainly due to the share of term deposits rising in total deposits. RIDF book has also been moving up for the bank.
We downgrade HDFCB from BUY to ADD with a revised price target of Rs 2025: We value the standalone bank at 2.9x FY24 P/BV for an FY24E/25E RoE profile of 13.6/14.3%. We assign a value of Rs 227 per share to the subsidiaries, on SOTP. We had begun with an ADD rating for HDFCB in our in our Sector Initiation Report dated June 2021 before we upgraded it to BUY in our Sector Report dated May 2022.
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