Emkay believes that HDFC Bank will continue to command premium valuations, given its strong franchisee, healthy capital adequacy and quality management profile.
HDFC Bank shares gained 1.5 percent in morning on Friday after research house Emkay has maintained its buy call on the stock and expects to gain 18 percent to its price target to Rs 2,500 apiece.
The broker believes that the bank will continue to command premium valuations, given its strong franchisee, healthy capital adequacy, quality management profile, sustained growth momentum, and consistent delivery of strong return ratios (RoA/RoE of 1.8-1.9 percent/16-18 percent).
It said the benefits of digitisation are reflecting in lower operating expenses ratios and could be the new normal, which could gradually contribute to better return on assets (1.9 percent versus 1.8 percent).
The bank has considerably slowed down branch expansion (96 in 1 year/277 in 2 years), as it is gaining traction in digital sourcing and servicing. This is also reflecting in the cost ratio that slipped below 40-41 percent and will be the new normal, contributing to better RoAs, it added.
The bank's loan book grew 24 percent YoY and can sustainably grow at 1.5-2x of system growth, driven by its strong retail book and working capital-dominated corporate book, according to the broker.
HDFC Bank expects net interest margin to remain healthy (4.2-4.3 percent), led by strong growth, lagged transmission of the MCLR hike, and tail-end benefits of heavy capital infusion.
The bank believes that barring loan against property (LAP), there is no systemic credit risk in the retail book on the horizon for the banks, and HDFC Bank's LAP is more in the nature of a business loan, where cash flows and personal guarantees find prominence over property as collateral and thus no meaningful risk.
The bank does not have any exposure to Lodha's and IL&FS (not meaningful and no provision required).
Emkay said farm loan waiver will have some impact on HDFCB's agri portfolio, but the bank believes that it is an embedded cost of banking business in India and is still better than locking funds in low-yielding RIDF bonds for meeting the priority sector lending (PSL) requirement.
Allaying concerns around the recent exit of DMD Paresh Sukhtankar — who is planning to pursue teaching and is not joining any competitor — and the retirement of current MD and CEO Aditya Puri slated for October 2020, the bank claims that great leaders have left it in the past without a trail of disruption, thanks to its process-driven business model and strong leadership back-up.
In fact, the bank has been increasingly adding leaders to its already strong leadership bench. For example, Vinay Razdan as Head HR, Rahul Shukla to Corporate Bank, and Arvind Vohra as Group Head, Retail Branch Banking.
"This strategy has worked well for the bank so far. If regulatory changes raise the term of MD and CEO to 75 years from 70 currently, Aditya Puri may look at extending his term; however, he is not keen on becoming Chairman Emeritus and creating multiple power centers," Emkay said.
The country's second largest private sector lender had reported a healthy 20.6 percent year-on-year growth in Q2FY19 profit and net interest income. Its asset quality was also stable as gross non-performing assets (NPAs) stood flat at 1.33 percent sequentially and Net NPA fell to 0.4 percent in Q2 as against 0.41 percent in the June quarter.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.