HDFC Bank (HDFCB) has exhibited a healthy revival in retail loan growth propelled by a pick-up in unsecured segments while the commercial banking segment has also witnessed strong traction. These have enabled a recovery in NII growth and will support Margin/PPoP growth – both of which have likely bottomed out in our view.
The bank has been expanding its presence in the Semi-urban and Rural (SURU) regions, which is enabling it to capitalise on the growth opportunities. HDFCB is steadily becoming the largest lender in MSME financing. HDFCB maintains a healthy market share across digital channels – 18% share in POS terminals, 9%/27% in debit/credit card spends, and 23% in o/s credit cards as of 9MFY22. About 96% of the transactions occur digitally that enable a strong control on cost ratios.
Asset quality remains robust with credit costs undershooting the long-term trend. HDFCB is thus increasing the contingency buffers prudently, which provide comfort. We expect it to deliver healthy business growth fueled by a pick-up in retail (unsecured products) business and continued strength in commercial banking business. We estimate HDFCB to report ~18% PAT CAGR over FY22-24, with an RoA/ RoE of 2.0%/17.5% in FY24E, respectively.
The stock has undergone a significant correction and is trading at ~2SD below its 10-year average valuations, while the growth and earnings outlook remains robust. HDFCB continues to be our high conviction Buy in the banking space and we retain our TP of Rs2,000 (premised on 3.4x FY24E ABV + Rs127 from subsidiaries). Our TP implies 51% potential upside from the current level.
Downside risks: Sluggish margin recovery and performance of restructuring book.
Retail loan growth revives
The bank’s retail loans have grown at an average of 5% q-o-q over the past two quarters. The recent growth was led by the unsecured business, as personal loans and credit card book rose 11%/16% over similar period while home loans grew 9.1%. The growth in auto financing business continued to remain tepid due to softer trends in passenger vehicle financing while the two-wheeler segment continued to report sequential decline. We expect retail growth to remain healthy. We thus estimate overall loans to clock ~18% CAGR over FY22-24.
Margins on the cusp of revival
HDFCB has witnessed margin compression of 20bp as of Q3FY22 v/s the pre-COVID level. However, with revival in retail loan growth along with improving product mix and continued strength in liability franchise (CASA ratio has improved 410bp y-o-y to 47.1% in Q3FY22), we expect NIMs to improve gradually. We note that after decelerating sharply at +8.6% y-o-y during Q1FY22, NII growth has recovered to 13% y-o-yin Q3FY22. We estimate NII growth to improve successively and sustain at 18% CAGR over FY22-24. This will enable a revival in PPoP growth as well, which too has softened to ~11% y-o-y during Q3FY22.