Buy HDFC Bank; target of Rs 2100: Edelweiss

Edelweiss' research report on HDFC Bank

HDFC Bank reported yet another strong performance with sustained traction in core operating profitability—jumped 30% YoY—in Q2FY18. NIMs settling at 4.3% (upper end of guided range) coupled with robust traction in loan growth (domestic book up >26%) led to 20% plus NII spurt. Improvement in core fee income (up >24% YoY) and contained opex (up <14% YoY) lent further support. Liability franchise continues to be strong—CASA at 43% (savings accounts (SA) moved up ~24% YoY). Asset quality remained healthy with limited stress addition, though provisions were elevated due to higher general provisions (made conservative provisions towards 1 account under 5:25 while it is under discussion with RBI regarding classification). Best-in-class liability franchise and marginal stress baggage place the bank in a sweet spot to capitalise on emerging opportunities. Maintain ‘BUY’.

Outlook

Best-in-class liability franchise, expansion of rural/semi-urban branches and improvement in productivity owing to digital focus will ensure the bank delivers above-industry earnings growth—23-25% CAGR over FY17-19E— and sustains superior return ratios (RoA of 2%). At CMP, the stock is trading at 4.0x FY19E P/ABV and 21.7x FY19E P/E. We maintain ‘BUY/SO’ with TP of INR2,100 (valuing it at 4.5x FY19E P/ABV).