HDFC Bank m-cap tops Rs 8-trillion; CLSA sees further upside in stock

Topics HDFC Bank | CLSA | Markets

Aided by recent festive demand, healthy monsoon, and unlocking of the economy, HDFC Bank expects 5-6 per cent credit growth
HDFC Bank on Wednesday became the first bank in the Indian history to cross the Rs 8-trillion market capitalisation milestone after its shares hit fresh record high of Rs 1,464 apiece on the BSE in the intra-day deal. The private lender now stands at third position in the overall market-cap ranking of listed companies.

At 09:17 am, HDFC Bank had a market capitalisation of Rs 8.02 trillion, the BSE data shows.

The stock price has nearly doubled at the bourses from the low of Rs 739 hit in March 2020, and has climbed 98 per cent to reach its fresh lifetime high. The stock has surpassed its previous lifetime high of Rs 1,445 hit on November 24, 2020.

In a note dated November 24, analysts at CLSA raised their target price on the stock to Rs 1,700 from an earlier target of Rs 1,525 per share and maintained their ‘positive’ stance on the stock as it believes the lender deserves a premium versus peers, given its higher profitability and stronger underwriting quality. 

Here are the top 5 factors that are keeping the foreign brokerage bullish on the stock:

Improved macro-economy

Aided by recent festive demand, healthy monsoon, and unlocking of the economy, the management expects 5-6 per cent credit growth and 10 per cent deposit growth for the current year – largely in line with current run rates.

"Rural economy was more resilient from pandemic impact, and therefore the management expects GDP growth to turn positive in Q3FY21 and expect double digit growth in FY22. Besides, the lender expects policy rates to come down by 25-40bp provided inflation cools down from current levels," the brokerage said.

Semi-urban and rural geographies constitute 35-50 per cent CD ratio (credit-deposit ratio) for HDFC Bank compared with 77 per cent for the country as a whole indicating significant under-penetration and the bank can take advantage of its scorecards methodology, wide range of products, and wide distribution to gain share here, CLSA added.

Digital push

Analysts at CLSA remain positive on the bank’s digital push in the wake of Covid-19 pandemic. The lender’s latest digital ecosystem platforms, currently being developed for pharma and autos, will house various stakeholders in the respective value chain and will provide them value added services.

"Through this, the bank will benefit from insight into cash flows which will eventually lead to higher loan/deposits accretion," it said.

Stable retail asset quality

CLSA noted that the retail borrowers' behaviour during the on-going pandemic is much better than what was seen during the global financial crisis (GFC) as it is driven by growing penetration of credit bureaus/scores.

"The bank was already building buffer provisions pre-Covid-19 to strengthen balance sheet and management seems comfortable with around 75bp provision buffer. That apart, the management expects low restructuring and there are very few restructuring requests on its table right now," it noted.

Cost improvement

CLSA expects HDFC Bank to report net interest margin (NIM) between 4 and 4.5 per cent going forward, tracking its historical narrow range of 4.1-4.4 per cent seen over the last several years. The bank, the brokerage noted, is looking at optimizing or re-engineering processes instead of the technology, which should lead to further efficiency benefits. Also, the management has reiterated its guidance of achieving 35 per cent Cost-to-income ratio in the long term giving comfort to the analysts on the cost front.

Capital accretive growth

Given that the bank organically generated 200bp+ capital since the last capital raise (which contributed 230bp capital), the management does not see a need for capital raise in near future.

Word of caution

A slower-than-expected pickup in India’s economic growth amid ongoing Covid-19 outbreak could affect demand for retail loans, margins and asset quality, say analysts at the brokerage.

"HDFC Bank faces relatively low risk in its corporate exposure as it focuses on higher-rated companies and less on infrastructure loans. However, higher exposure in unsecured retail and SME credit may pose risk in a tough macroeconomic environment emanating from Covid-19 disruption," they note.

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