Buy HDFC Bank; target of Rs 2070: Motilal Oswal

Motilal Oswal's research report on HDFC Bank

HDFC Bank (HDFCB) has delivered an exemplary track record over the past two decades that only a few companies in the world can take pride in (27% earnings CAGR in past 20 years). The merged entity is set to extend its lead as the second-largest bank in the country, with a market share of 16% in loans and 11% in deposits. The merger will help the bank improve asset duration and enable sustainable growth over the long term, with mortgage mix rising to 33%. We estimate the loan book to grow to INR 34.7t by FY26E with a ~17% CAGR (B/s size of INR 49t). -About 70% of HDFC Ltd (HDFC) customers do not have a banking relationship with HDFCB, while out of total ~85m customers of HDFCB, only 5% of them have taken mortgages (2% from HDFC Ltd). This offers a significant cross-sell opportunity, and along with aggressive distribution expansion, it would enable healthy loan growth over the medium term. According to the bank, home loan customers have 7x higher deposit balance potential than those not availing home loans. Margins are likely to moderate to ~3.8% in FY24E; however, a gradual re-pricing of borrowings and high-cost deposits of HDFC will lead to a 15-20bp gain in NIM to ~4% by FY26E. We estimate the cost-income (C/I) ratio to moderate to 35% by FY26E, which will compensate for lower margins and will support earnings.

Outlook

We estimate PAT of INR646b/INR791b/INR963b over FY24/FY25/FY26, translating into RoA of 1.9-2.1%. We estimate RoE to decline in FY24 and thereafter gradually revert to pre-merger levels of 17%+ by FY26E. HDFCB (Buy) remains one of our preferred stocks in the sector with a TP of INR 2,070.