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Buy This Large Cap Banking Stock For Target Price of Rs 1,800, Recommended By Prabhudas Lilladher

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Stock Outlook

Stock Outlook

The Current Market Price of the stock is Rs 2,445.65 apiece. The stock’s 52-week low level is Rs 2,026 apiece and the 52-week high level is Rs 3,021.10 apiece, respectively.

Returns over the past 5 years

Returns over the past 5 years

The stock over the past 1 week has given a 1.12% positive return, whereas, in the past 1 month, it gave 0.89% negative return. In the past 3 months and 1 year, it gave 19.15% positive return and 13.44% negative return, respectively. Over the past 3 & 5 years, it gave 23.87% and 39.56% positive returns, respectively.

 Branch intensity to garner deposits increasing

Branch intensity to garner deposits increasing

Owing to HDFC Bank’s deep distribution network and strong processes historically there was natural influx of CASA, which is expected to continue. However, due to the impending merger, focus is to garner term deposits (TD) and RM scorecards and related incentives have been adjusted accordingly to target FDs. The bank does not intend to increase deposits by raising rates. While tighter liquidity could squeeze deposit growth, as rates are rising, money would flow back towards FDs. Assuming system deposit growth of 10%, HDFC Bank would need to consistently capture ~25% market share in incremental system deposits over the medium term, to fund organic growth and liability maturity of HDFC Ltd. In our opinion, this may not be challenging considering sharp branch focus to garner TD, higher productivity from existing branches and targeted branch expansion of 1000-2000 per annum. Historically, the bank has touched an incremental market share in TD of 42% in FY18, 21.5% in FY20 and 26.1% in FY22. In Q1FY23 bank already added ~Rs600bn in TDs.

 Grandfathering of bank borrowings may be permitted

Grandfathering of bank borrowings may be permitted

A concern was whether grandfathering of HDFC’s bank borrowings could be allowed for the bank. While application to the RBI is pending for approval, from a regulatory standpoint interbank borrowings are allowed as per RBI norms, which may suggest that grandfathering of bank borrowings could be allowed in this case. Hence as envisaged, overall borrowings of HDFC may be repaid as per maturity pattern and ALM of HDFC suggests that roughly 20% of the liabilities would mature each year post merger.

 

Unsecured loan book to be range bound

Unsecured loan book to be range bound

Another investor query was that as share of unsecured would reduce post-merger from 16% to 11%, could there be further headroom to expand unsecured lending and increase its contribution back to 16%, thereby providing a fillip to margins. Management interaction suggests that unsecured share would remain at 11-12% as ticket sizes in housing would be higher than those of PL/CC. Also, the bank would be cautious to expand in unsecured, considering that a rising interest rate environment generally witnesses an increase in retail delinquencies.

 

Risk to NIM due to PSL shortfall, partially abated

Risk to NIM due to PSL shortfall, partially abated

A key risk to NIM is that any shortfall in PSL even after purchasing PSLC would entail investment in NABARD/SIDBI bonds which yields only 3.0-3.5% causing a 10-15bps drag in NIM. Interaction with banks suggest that this cost may be recovered through pricing adjustments in other products. Also, henceforth PSL shortfall on a standalone basis for HBFCB could reduce as loan mix would veer towards retail. PSL requirement is higher in a corporate heavy portfolio, while as retail rises its requirement goes down.

Margins to improve gradually

Margins to improve gradually

On a standalone basis NIM may not expand dramatically as shift in book mix towards retail would be gradual and proportion of the fixed rate book is higher for the bank owing to a lower share of housing. From a loan portfolio standpoint, EBLR linked is 30%, MCLR is 9%, T-Bill is 11% while fixed is 43%. Retail contribution could increase by 1-2% per quarter. The bank would aspire to keep margins between 3.8-4.2%. In a rising rate scenario, share of fixed rate loans would increase.

Opex to remain elevated in near term

Opex to remain elevated in near term

The brokerage said, “We had assumed that HDFCB will add 1200-1400 branches over the medium term, while management has maintained its guidance of adding 1000-2000 branches per annum. Branch accretion for FY23 would be back-ended with most branches being added in H2FY23. Hence opex would remain elevated and may see a growth, similar to our estimates (CAGR of 22% over FY22-25E). Commentary suggests that 50% of fresh branches would be opened in SURU locations.”

Prabhudas Lilladher recommends buy for a target price of Rs 1,800 apiece

Prabhudas Lilladher recommends buy for a target price of Rs 1,800 apiece

The brokerage said, “Our update released on 6th July’22 (link) had covered merger-related aspects like liabilities’ glide path, asset mix, regulatory requirements and profitability. Discussions with investors on this merger update brought to light certain queries, following which we met HDFC Bank management to allay these concerns viz. 1) garnering higher market share in system deposits, 2) grandfathering of HDFC’s bank borrowings, 3) share of unsecured loans in the merged entity, 4) drag on NIM due to PSL shortfall and 5) outlook on NIM/opex.”

The brokerage added, “We believe that faster deposit accretion for HDFC Bank from a system standpoint may be achievable, while grandfathering of bank borrowings may be permitted. Unsecured share in the merged entity might remain between 11-12%, as mortgage portfolio (higher ticket size) would grow aggressively. Standalone NIM may gradually improve (4.2% in FY22), as share of retail would rise that may also protect NIM owing to lower PSL requirements. Opex could remain elevated over the medium term. As we slightly raise NII for FY24E/25E, our PAT increases by average 2.5%. Hence we raise SOTP based Target Price from Rs1740 to Rs1800 basis Sep’24 core ABV but maintain ‘BUY’.”

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.



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