Buy HDFC Bank; target of Rs 1250: Motilal Oswal

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Motilal Oswal 's research report on HDFC Bank

HDFCB's Annual Report underscores structural improvement in the bank's profitability, driven by a 20bp increase in RoRWA, higher than a 7bp improvement witnessed in RoA. For FY20, NII/PPoP grew by 17%/23% while PAT grew by 25% YoY to INR263b with the bank reporting a RoE of 16.4%. - The bank has gained market share across multiple digital channels, with 17% market share in POS terminals, ~8%/~29% share in debit/credit card spend, and a credit card base of 14.5m (25.1% share). ~95% of transactions happen digitally, owing to which the bank has shown continuous improvement in its cost ratios. - On the asset quality front, agri slippages stood elevated and segmental GNPA in the priority sector increased to 4.3% v/s 1.3% for the bank. The bank further witnessed a GNPA increase in the Services segment at 1.4% v/s 1.1% in FY19. Furthermore, the concentration of the top four NPA accounts increased to ~10% v/s 6.5% in FY19. - In FY20, RWA density improved 560bp, driven by a reduction in risk weights on personal loans (to 100% from 125%) and focused lending to better rated corporate/retail customers. The concentration of the top 20 advances increased 100bp to 11.6% on higher growth in wholesale assets, and the concentration of the top 20 depositors improved ~210bp to 4%. - We note that attrition among the top employees (salaries of >INR10m) has increased over the past two years, with ~10% of such employees leaving the bank in FY20 after an average of ~14 years of service. This remains a key monitorable as the bank would also soon witness a CEO change. -

Outlook

We expect HDFCB to deliver strong business growth, led by improved digital offerings. On the asset quality front, although slippages are likely to remain elevated, impacted by COVID-19, strong provisioning buffers should limit the overall impact on earnings. The CEO's succession remains an important observable in the near term. Maintain Buy, with TP of INR1,250 (3.0x FY22E ABV).

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