HDFC Bank rating: Buy — New leadership looks to double market share

By: |
August 29, 2020 5:25 AM

Quality of moratorium loans holding up, limiting risk of slippages; retail is expected to revive from Q3FY21; ‘Buy’ maintained

Management believes market share gains from PSU (60%+ of sector ) to private banks will continue and offers scope to double share in credit from 7-8% now.Management believes market share gains from PSU (60%+ of sector ) to private banks will continue and offers scope to double share in credit from 7-8% now.

We hosted CEO-designate & CFO of HDFC Bank for an investor call where they highlighted scope to double market share as PSUs consolidate. Insights into longer-term strategic initiatives with ecosystem-building, digitisation & non-urban focus are interesting and differentiated from peers. Encouragingly, underlying quality of moratorium loans (9%) is holding up which will limit risk of defaults & management expects growth in retail segment to revive from Q3FY21.

Buy Transition from Change Agent to CEO
Sashidhar Jagdishan highlighted that since his appointment as Change Agent of the bank about a year back, Aditya Puri has mentored him for taking charge as CEO. This involved extensive travel to branches across urban & rural markets and participation in most operational as well as strategic initiatives.

Pillars of growth for next five years
Management believes market share gains from PSU (60%+ of sector ) to private banks will continue and offers scope to double share in credit from 7-8% now.

Underlying theme of its strategic initiatives for the next five years will be to win wallet share of clients by building ecosystems across segments. These will be through a complete revamp of digital platforms, re-imagination of branches, strengthening of payments infrastructure, ramp-up of Virtual Relationship Management (VRM) platform from 6 m clients now to 25-30 m, and deepening presence in non-urban markets.

Management highlighted that in payments platforms it has already developed ecosystem across cards, POS network, merchants (online & offline) and plans to replicate these in sectors like healthcare, autos, merchant/trade ecosystem, and rural markets.

How is the near-term panning out?
It was encouraging to hear that on asset quality, not only is their moratorium loanbook smaller vs.peers at 9% of loans but (i) 97% of moratorium borrowers haven’t defaulted in past; (ii) more than half of these paid dues in June; and (iii) 98% of salaried clients got salary credits. Hence, the bank expects a manageable level of slippages out of these loans.

Other aspects — class action suit, Puri’s stake sale, concentration of loans, HDB-FS, and fintech partnerships
Regarding the class action suit, mgmt clarified they haven’t received any communication so it might be early to comment. On Puri’s stake sale, they clarified that the stake sale is for a combination of reinvestment in ESOP (c.60%) that will vest on Oct-20 & retirement planning. Loans to Top-20 borrowers have doubled in 3 years and this is largely to PSUs/high-quality corporates. For NBFC-subsidiary, HDB-FS, management sees strong growth prospects, albeit at higher credit costs. Finally, on fintech, mgmt plans to partner with various Indian and int’l platforms to sustain leadership across businesses.

Maintain Buy
We maintain our Buy rating on stock with a SOTP-based target price of Rs 1,350/share including value of bank at 3.3x Jun-22 adjusted PB.

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