Buy HDFC Bank; target of Rs 1800: Emkay Global Financial

Emkay Global Financial's research report on HDFC Bank

HDFCB reported lower than expected credit growth – up 20% YoY/2% QoQ, in Q3 (vs 24% YoY/6% QoQ, in Q2). This was mainly due to de-growth in the corporate book (down 1% QoQ/up 20% YoY), while Retail continued its strong growth momentum (up 21.5% YoY/5% QoQ), as did Commercial Banking (at 30% YoY/5% QoQ). We believe, this should support margins amid rising funding costs. Credit growth, gross of IBPCs and bill rediscounted, also stood low, at 24% YoY/3% QoQ in Q3 vs 26% YoY/7% QoQ in Q2. The Mortgage-Book purchase from HDFC Ltd continued to be high, at Rs88.9bn in Q3 (vs Rs91.5bn in Q2). Deposit growth of the bank remains healthy at 20% YoY/4% QoQ, while other banks continue to struggle. Overall CASA growth was slower at 12% YoY/ flat QoQ (Retail CASA grew 14%YoY/1% QoQ), which led to a slight decline in CASA ratio, at 44% vs 45% in Q2. We believe slippages could remain elevated in Q3 due to seasonal stress in the Agri portfolio (including KCC) which, coupled with slower credit growth, could keep NPA ratios largely flat. With the bank sitting on healthy, specific + contingent provisions, we expect LLP to moderate, which should thereby support net profitability.

Outlook

We believe that slower credit growth coupled with lower fees and elevated opex in the run-up to the merger could keep core-profitability growth in check. Post the recent uptick, the stock is currently trading at 2.7x FY24E ABV (ex-subs valuation). We retain our long-term BUY rating on the stock, given healthy return ratios, strong capital comfort and reasonable valuations. We will revise our estimates/TP post the results, once we attain better clarity on the growth/margin outlook and the merger process from Management.