Buy HDFC Bank; target of Rs 2000: Motilal Oswal

Motilal Oswal's research report on HDFC Bank

HDFCB's 1QFY18 PAT grew 20% YoY (2% miss) to INR38.9b, driven by 29% YoY PPoP growth (3% beat), partly offset by provisions. HDFCB delivered robust loan growth, strong cost control, QoQ improvement in margins and best-in-class asset quality. Loans grew 5% QoQ and 23% YoY to INR5.81t. Incremental growth in 1QFY18 was driven by retail loans (75% incremental share; 66% of overall loans). In retail loans (+3.5% QoQ, +25% YoY), the main drivers were business banking/personal loans, which grew 8%/11% QoQ and 27%/37% YoY. Fee income picked up in the quarter (+30% YoY). However, adjusted for one-off fee income from OMCs and exceptionally strong credit card sales, fee income growth came in at ~18%-20%. CASA growth was strong at 29% YoY, led by 26% YoY SA growth and 34% YoY CA growth. CASA ratio stood at 44%, down 400bp from one-off high of 48% in 4QFY17. Asset quality stays robust, with NSL at 54bp. However, HDFCB incurred increased provisioning for NPAs resulting from farm loan waivers and also from additional provisions created against stressed sectors.

Outlook

HDFCB is well positioned in the current environment, with 44% CASA ratio, opportunities for significant loan market share gains and least asset quality risk. With tier 1 capital of 13.6%, strong capacity amid the moderate growth cycle and significant digitization initiatives, the bank is well placed to benefit from the expected pick-up in the economic growth cycle. RoE is expected to be ~19-20% in FY18-20. We arrive at an SOTP-based valuation of INR2,000 for the bank (4x June 2019E BV for the bank at INR1,900 and INR100 for subsidiaries) and maintain Buy.