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Consistency at play; enough levers and buffers to absorb global uncertainties and grow

Interaction with senior management of HDFC Bank suggests the bank is well geared to sustain high-teen growth in loans and advances. Visibility continues to be high on its consistent earnings delivery and >2% RoA / >18% RoE for FY23E/FY24E. Nonetheless, the stock has corrected >10% in past one year and underperformed Nifty by ~20% and Bank Nifty by ~7%. It currently trades at <3x FY23E BV at ~2SD discount to 5-year average valuation. Maintain BUY with unchanged target price of Rs1,955. Key risks: i) adverse behaviour of restructured pool; ii) lower core fee and higher opex may drag earnings.

Geopolitical situation creates macro uncertainties/volatility, but there is no direct impact on the bank’s portfolio and it is continuously assessing the situation. Retail loan growth is at an inflection point and will scale up hereon while momentum will sustain in commercial lending. Strategic and execution focus to effectively implement project Future Ready will start yielding results. Tightened credit architecture will aid medium-term credit cost to settle lower than recent averages. Cumulative creditrelated contingency + floating buffer of 80bps not only makes the bank more resilient for any uncertainties, but also aids in experimenting with some newer products, newer geographies and newer customer profiles.

Geopolitical situation creates macro uncertainties/volatility, but no direct impact:

The bank is continuously assessing the situation amidst geopolitical uncertainties and performing scenario analysis to gauge the impact. Real economic growth may be adversely impacted by 50-100bps but nominal growth due to higher inflation will be unaffected and unlikely to adversely affect credit growth.

Rise in oil prices, commodity prices and exchange rate volatility creates macro volatility and it is difficult to gauge at this juncture the second-order or third-order derivative impact of the same on growth or asset quality.

Directly, there does not seem to be any impact on the bank’s loans and advances portfolio due to prevailing geopolitical tensions. There is no direct exposure to the involved countries, nor are any of the large corporate customers directly impacted.

We expect impact on bilateral trades globally, disruption in demand, supply and payment mechanism, and exchange rate volatility to have some effect on forexrelated revenues.

Project Future Ready to yield results in the medium term: Bank’s strategic and execution focus to effectively implement project Future Ready will start yielding results particularly in the following domains: 1) Newly identified growth engines of MSME and rural banking, 2) digital marketing as another key delivery channel, 3) expanding presence in semi-urban and rural markets, 4) creating a new digital factory to foster innovation, and 5) putting in place the right talent and further strengthening its core functions to drive the project.

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