HDFC Bank Rating: buy: A mix of factors could trigger a rebound

Retail/SME segment has seen pick-up in growth; valuation’s attractive; Buy retained with TP of `2,070; among top sector picks

A man walks towards an HDFC Bank Ltd. branch in Mumbai, India, on Saturday, April 21, 2018. HDFC is scheduled to announce fourth-quarter earnings on April 30. Photographer: Dhiraj Singh/Bloomberg

HDFCB UPFed in 2021, was up 7% vs. 19% for Nifty Bank, due to fundamental & technical reasons. RBI’s embargo, slower topline & mgmt transition were key fundamental drags, whereas FII selling in banks accentuated it esp. as HDFCB is clean OWT in FII portfolios. We see triggers from pick-up in retail/SME loans, readiness with tech initiatives once embargo is lifted & focus on doubling loan mkt share. Vals. at 2.9x is attractive; we recently moved to top-sector-picks.

The fundamental drags: The key reasons dragging down HDFC Bank’s performance, in our view, have been a combination of (1) RBI’s embargoes and whistleblower issues; (2) succession at CEO level coincided with Covid outbreak that partly affected smoothness of transition; (3) delayed push on retail/SME lending has capped margin-expansion and limited NII to 12% whereas ICICI Bank delivered +40bps expansion in NIMs & 25% rise in NII; and (4) we understand that investors are also contemplating whether the scale bank has will limit normalised earnings growth to 16-18% annualised or whether it can rebound to 18-20% growth rates.

The technical aspects: Over the past month, HDFC Bank has also faced higher than peer pressure from FII’s rotation trade away from Indian banks as is evident from $2-bn worth of selling during Nov. HDFC Bank being a large holding despite zero weight in global benchmark Index (hence a clean OWT in portfolios) and also selling ADR leading to contraction in premium from +20% until Jan-20 (pre Covid) to sub-10% now. Over 2021, HDFCB is up just 7% compared to 19% for Nifty Banks and 43% for ICICI Bank.

What’s needed to drive OPFance? We believe that a combination of fundamental and technical drivers can drive rebound in the stock. Growth momentum in retail/SME segment had picked up in Q2 with 5-7% QoQ growth and we understand that momentum has largely held up. Bank has also seen about `1 trn (8% of loans) from corporate segment get repaid that dragged loan growth; that will normalise in future. These should also reflect in topline growth from Q3-Q4FY22.

Lifting of RBI’s embargoes on new digital initiatives will not only address concerns, but we understand that bank is ready to launch multiple platforms/ partnerships that can support growth. We note that bank could normalise credit card issuances right after RBI lifted the embargo in Aug-21. Mgmt continues to target doubling of market share in loans over next five years – improved confidence will be seen positively. On the technical side, normalisation in FII rebalancing of portfolios (that is generally seen in early year) can have bigger impact on HDFC Bank.

Maintain Buy: As highlighted in our recent report, we recently included HDFC Bank among top-picks in the sector as its valuations at 2.9x FY23 adjusted PB are now at discount to 5yr average and 18% CAGR in earnings and ROEs of 17% will offer healthy compounding. Our TP of Rs 2,070 is based on SOTP that includes the value of bank at 3.7x Sep-23 adjusted PB and $92 on ADR.

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