HDFC Bank is extremely well placed to keep gaining share in all parts of loans – retail, MSME, corporate. Digital will keep driving cost ratios down. Liabilities are becoming less of a constraint given growth in funding. Current market conditions will help improve profitability further.
In the last decade EPS CAGR has been 22% and the stock is up at a 23% CAGR. We expect loan CAGR of 20% over the next 3-5 years. Retail continues to do very well, and the bank’s balance sheet and technology strength will help it increase the pace of market share gains in corporate and MSME lending too.
Retail liabilities have lagged loan growth at HDFC Bank in the past 2-3 years. CASA is likely to trail loan growth, given that the bank offers 3.5% on savings deposits and interest rates are on an upswing. However, it is focused on retail time deposit growth and is offering higher rates to increase share. Cyclically, current events in the NBFC segment are likely to cause funding to shift towards stronger banks, enabling faster liquidity growth. The recent relaxation in Liquidity Coverage Ratio will take LCR for HDFC Bank to ~127%. In lending too, we expect less competition in retail as NBFC growth slows, which will help HDFC Bank further.
Volume growth is likely to be 20%. But, there will be some compression in revenue yields. On NIMs, structural pressure will be from lower CASA, and fee yields (fees / assets) will face some pressure as digitisation fosters competition in distribution.
However, lower costs should compensate, given currently high cost ratios (costs to assets at ~2%). Cost to income ratio has declined ~2ppt a year for the last two years – we expect this to continue.
Valuations are attractive at 20x one-year forward earnings and 3.1x book. There is no need to raise further capital for 4-5 years given high ROCET1, which will keep capital consumption low. Our price target cut reflects lower value for subsidiaries (given peer group multiple compression); for the ADRs, it also reflects the move in currency.