Buy HDFC Bank Ltd For Target Rs.2,050 - Emkay Global
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Biz Update – Credit growth improving and is much more broad-based too
Q3 Business Update
* HDFC Bank reported healthy but in-line credit growth of 16% yoy/5% qoq in Q3FY22 (total loans stood at ~Rs12.6tn). This looks much more balanced and broad based. Retail loans grew by 13.5% yoy/4.5% qoq, commercial & rural banking were up 30% yoy/6%, while corporate growth reaccelerated to 7.5% yoy/4.5% qoq.
* HDFCB continues to hold a relatively larger housing portfolio from HDFC Ltd, totaling Rs74.6bn (Rs71bn in Q2FY22/Q3FY21). Adjusted for portfolio buyouts too, overall credit growth was 16.5% yoy/5% qoq. Notably, the bank has started regaining market share in cards, and should see further acceleration, along with PL, subject to absence of or partial lockdown situation.
* Deposit growth has moderated a bit to 14% yoy/3% qoq, while CASA deposit growth remained stronger at 25% yoy, partly benefiting from the RBI’s directive to maintain current accounts with only the main lender. The CASA ratio remains high and healthy at 47%, leading to better CoF. This, coupled with better LDR (up 200bps qoq to 87%), should support NIMs, which otherwise remain under pressure due to the higher share of corporate/mortgage book and interest reversal on NPAs.
* We expect overall NPAs to trend down due to better collection efficiency, mainly in the retail segment. However, agri NPAs would be the main monitorable. Moreover, assetquality outcomes at its NBFC subsidiary, HDB Financial Services, will also be closely monitored, in view of the relatively risky customer/credit profile.
Outlook:
The stock has underperformed by its own standards as well as that of the peers after the management change, more so due to the RBI’s embargo on its card/digital initiatives and Covid-induced growth/asset-quality disruption. The risk of fresh Covid waveinduced lockdowns could once again disrupt business/asset-quality normalization. However, we believe that the bank has built reasonable Covid buffers (0.8% of loans) and should be relatively resilient. After the recent correction, the stock is trading at a reasonable valuation (2.9x FY23/2.5x FY24 ABV). We have a Buy rating on HDFCB with a TP of Rs2,050, given its proven track record in managing asset quality across cycles, strong franchise/capital profile, and the ability to deliver superior return ratios.
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