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Market share gains are here to stay

The credit market share of HDFC Bank has increased from 3.9% in FY10 to 10.2% in FY21 driven by investments in technology, branches and brand building by the bank. Despite these investments, the cost to income ratio of the bank is among the best in the industry (39% as of FY21). Going forward, the bank has enablers in a place like capital adequacy ratio (20%), strong liquidity (LCR at 123%) and widespread branches to capture growth opportunities.

Traction in retail advances should see healthy margins

On account of Covid-19, the lockdown was imposed in the country, thereby impacting the retail and SME segment. With the opening up of the economy and removal of restrictions by RBI on credit card issuances, we expect a strong uptick in loans, fee income and margins going ahead.

Book quality healthy, would remain watchful for near term

Prudent risk management, well diversified credit portfolio has enabled the bank to maintain healthy asset quality with Gross NPA and Net NPA at 1.26% and 0.37% respectively in 9MFY22. However considering the stress in the economy, we have factored in high slippages and credit cost for FY22E, which is expected to peter down in FY23E.

OUTLOOK & VALUATION

HDFC Bank is one of the leading private sector banks having strong parentage and brand equity created over many years. Bank has been consistent in gaining market share in loans and have better than industry NIMs over many years. Going forward, with pick up in loan growth, healthy NIM and lower cost to income ratio, henceforth, we expect HDFC Bank to report ROA/ROE of 2.0%/18.2%. We reinstate with a BUY rating for target price of Rs.1,893 for 18-24 months.

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