HDFC Bank share price jumps 4%, profits sailing strong but story could change, should you buy or sell

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Updated: April 20, 2020 11:44:50 AM

With HDFC Bank’s fortified balance sheet, it is safe to say that the lender is relatively positioned just fine to deal with the storm that is about to hit the financial sector.

The HDFC Bank board had appointed a search committee and also engaged external headhunters to help it zero in on a candidate.HDFC Bank has not only seen a strong 21.3% growth in advances but deposits have jumped 24.3% along with a reduction in gross non-performing assets (NPA) to 1.26%.

India’s biggest private-sector lender, HDFC Bank, reported a 15.5% jump in profits, on-year basis as net interest income for the January-March quarter surged to Rs 15,204 crore. With HDFC Bank’s fortified balance sheet, it is safe to say that the lender is relatively positioned just fine to deal with the storm that is about to hit the financial sector. HDFC Bank has not only seen a strong 21.3% growth in advances but deposits have jumped 24.3% along with a reduction in gross non-performing assets (NPA) to 1.26%. With such strong numbers, brokerages are not shying away from putting a ‘buy’ call on the scrip.

“Undoubtedly, HDFC Bank is better positioned to weather the storm; however, in times of economic dislocation, it is sensible to remain conservative assessing the multiplier adverse effect of Covid-19. We, therefore, anticipate the bank’s loan growth to moderate to 12%, NIMs to contract by 9bps (due to focus on quality) and credit cost to be elevated at 1.7% in FY21E,” said ICICI Securities in a research note. With this, the brokerage has trimmed its earnings estimate by 19% and pruned the target multiple to 3.4 times FY22 PA/BV and revised the target price to Rs 1,139 per share.

The brokerage firm noted that the asset quality has improved as GNPAs decline 16 BPS, however, of these 10 BPS were helped by the moratorium effect. “On a positive note, proportion of retail customers opting for moratorium is in low single-digit and, of that, 95-98% were not in default,” the report said. HDFC Bank’s balance sheet maintains strong liquidity with LCR at 138% and CAR of 18.5% against the 11.08% regulatory requirement.

“Frankly, we would not classify the bank’s disclosed assumptions on its stress test as anything remotely resembling a bedrock scenario,” said Edelweiss Securities in a research report on HDFC Bank post the quarterly results. The private lender remains one of the top picks from the sector for Edelweiss. Apart from the provisions spiking, there not a shred of evidence that hints that the bank is feeling the economic pain of the coronavirus aided disruptions. “This robustness of currently reported fundamentals is unsurprising,” said the brokerage, while highlighting that risk asset accretion will slow and margin will bear the brunt of weaker pricing, lower leverage, higher liquidity and loan mix derisking. “Critically, Q2FY21 should also bring greater visibility on true asset quality impact.”

With a lower target price than the other two brokerages, JM Financial says that HDFC Bank is one of the only two buy-rated names in their coverage. “Valuing the bank at 2.6x FY22E BVPS, with subsidiaries contributing INR 55 per share. We favour HDFCB for its relatively lower asset quality risks, strong liabilities defence, and high capital base,” JM Financial said. Taking a look HDFC Bank’s wholesale SME book, 77% of this book is collateralized by real estate. 65% of the book is self-funded. HDFC Bank’s unsecured loan portfolio has superior asset quality to the rest of the industry. 

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