HDFC Bank is a conviction buy for target price of Rs 2050 (26% upside): ICICI Direct

Revival in growth with steady RoA to aid valuation; merger benefit to accrue with a lag

About the stock: HDFC Bank is a leading private sector bank with consistent growth and operational performance over various cycles. Post merger, the bank has become the second largest in terms of size with diversified portfolio. The bank has maintained superior return ratios compared to its peers resulting in premium valuations.

• Largest private sector bank with loan book of ₹ 16 lakh crore

• Consistent performance with +4% NIM and +15% RoE in past many years

Investment Rationale

• Strengthening of distribution capabilities to enable future growth: HDFC Bank has been aggressive in strengthening its distribution capabilities across channels with continued focus on semi urban & rural areas. Branch count has increased from 6342 in Mar’22 to 7860 in Jun’23 in-line with strategy to double branch in FY22-25E. Such expansion is expected to keep opex elevated, though is expected to enable garnering of liabilities. Thus, CD ratio at ~110% (post-merger) is expected to normalize at 85- 88%, in next 3-4 years.

• Steady operational performance to regain normalised RoA: On proforma basis, HDFC Bank, post-merger, has reported 13% growth in advances, however, management seemed confident of revival in credit off-take to 17-18% in FY24, as non-individual book run down recedes. Liabilities accretion to bring CD ratio from more than 100% (post-merger) to normalised level of ~85% remains in focus. Margins (post-merger) are expected to moderate in near term at 3.8-3.9%, however, decline in CI ratio (expected at 34-35%) and moderation in credit cost (given substantial increase in home loan book) is expected to result in steady RoA at 1.8-1.9% in FY24-25E.

• Merger to result in near term volatility; integration benefit to accrue gradually: Merger of HDFC Bank & HDFC Ltd has led to accretion of ₹6 lakh crore of asset base and ₹6.4 lakh crore of liabilities. Management remains confident of integration benefit with substantial cross selling opportunities, thus, expecting merged entity to grow at 17-18% in FY24E (with receding of non-individual book from parent).

Rating and Target price

• Historically, HDFC Bank has delivered consistent strong business growth coupled with superior return ratios. Post merger, integration and accretion of liabilities remain the focus area. Management is confident of pedalling growth to 17-18% with steady return ratio at 1.8-1.9% in FY24-25E, though we expect some volatility in near term.

• Valuing the merged entity on SOTP basis assigning 2.5x FY25E ABV for lending business (merged basis) and ₹ 144 for subsidiaries arriving at a target of ₹ 2050 per share. Maintain BUY rating on the stock.