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Analyst Day 2022 – Confident on growth opportunity

HDFC Bank, at its Annual Analyst Meet 2022, reiterated its medium-term growth aspirations and potential upsides from the HDFC Ltd merger. The bank intends to double its core balance sheet over a 5yrs period driven by strong growth in commercial and rural banking and increased momentum on retail assets (aided by greater mortgage origination, uptick in vehicle loans, cards and thrust on gold loans). While acknowledging the near-term RoE impact due to the merger, management remains confident of delivering pre-merger RoEs in 3-4years after the consummation of the transaction. The bank is likely to focus on greater origination of term deposits incrementally (which implies CASA ratios could moderate from current levels) as it also prepares to increase duration on its liabilities book. As per the mgmt., ~50% of incremental PSL requirements (~Rs1.75tn on post-merger basis) will be funded through housing finance while balance is likely to be funded through agri/micro loans. Also, existing excess liquidity on the balance sheet of the merged entity is unlikely to have significant drag on margins as per the management. The bank is optimistic on merger likely to drive strong medium-term growth trajectory driven by penetration of mortgages in the bank’s existing customer base (only ~2% of cust. overlap with HDFC Ltd) of ~71m. Over 60% of bank’s current branch network is likely to enter a sweet-spot with respect to productivity given its completing 10years of operations and incrementally bank intends to add 1,500-2,000 branches per year to double its network. The bank is also currently revamping its tech architecture to a fully cloud native, containerized stack. Additionally, some of industry-first products that have been/likely to be rolled out are a) fully digital vehicle loan for ETB/NTB customers, b) SmartHub Vyapaar 2.0 for merchants and c) digital credit cards. Management believes that HDFCB is attractively positioned to capture larger share of growing Indian economy aided by it’s a) large distribution network (6300+ branches), b) complete product range, c) growing customer base (71mn in FY22 vs 41mn in FY17), d) proven ability to execute, e) well diversified loan book and granular deposits and f) prudent and robust risk management with industry best asset quality (GNPA of 1.2% as of FY22). The management remains confident of sustaining its growth rates at 18-22% while emphasizing that all its key business verticals (wholesale, retail and commercial/rural banking) will continue to deliver RoA of 2%+ and maintain the credit quality of the portfolio

We believe valuation compression due to potential decline in RoEs on a post-merger basis has largely played out given that core bank is now trading at 2.0x FY24E P/BV vs 2.5x FY24E P/BV (pre-merger announcement). While meaningful upsides are contingent to sustainable uptick in NIMs, continued growth momentum across business lines and smooth integration of HDFC Ltd driving steady improvement in quality of earnings, we believe downside risks are minimal from current valuations given the strength of its liability franchise as well as its high quality asset book. Our revised target price of INR 1,690 values HDFC Bank at 2.5x FY24E P/BV (on post-merger basis for sustainable RoEs of c.17% vs 19% earlier) with INR 164 for subsidiaries value. Maintain BUY.

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