Buy HDFC Bank; target of Rs 1350:Motilal

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26 Aug, 2025 12:21

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Motilal research report on HDFC BankStructural drivers in place with (1) CASA ratio of ~40%, (2) growth outlook of at least 1.3x the industry growth, (3) improving operating efficiency led by digitalization initiatives, (4) expected traction in income due to strong expansion in branch network, and (5) best-in-class asset quality. Retail loan growth is seeing a strong revival with the contribution from high ROE retail products like unsecured personal loans, LAS and Credit cards going up. Despite the moderate growth in underlying assets like Auto, CV and CE loans – HDFCB is seeing the strong loan growth-Indicating a market share gain. Base rate will continue to be the lowest in the system, helped lowest cost of funds (funded by retail liabilities), which will lead to market share gain in wholesale business. Impact of Base Rate cut will be significantly lower for HDFCB as only 30% of book linked to base rate v/s 65-70% for peer bank.Led by strong loan growth revenue growth remains very healthy at ~22% over last five quarter, which is giving bank avenues to expand aggressively (branches up 17% YoY, headcount up 11% YoY) and invest in the digitalization without much impact on cost ratios (C/I ratio remains in the range of 45-47%). With growth momentum remaining healthy, core revenues are expected to remain 20%+ from hereon.Despite pricing pressure, NIMs are expected to remain at the current levels as a) CASA growth will pick up, ) benefit of falling rate cycle will occur due to high share of fixed rate retail loans (~70% of book) and c) high-yielding retail loans contribution will rise.The biggest risk to earnings for private financials is the implementation of dynamic provisioning by RBI, wherein HDFCB is best placed due to floating provisions created during the last three years. HDFCB carries floating provisions of ~INR17b—created to smoothen earnings growth led by better-than-factored credit cost on retail loans.Earnings CAGR of 20% (best amongst the large private banks), with core income growth pick-up led by healthy loan growth, superior NIMs, gradual improvement in fee income and operating efficiencies led by digital initiatives .Over the last 12 years, HDFCB’s market share has increased significantly in (1) retail loans, (2) low-cost deposits and (3) profitability, indicating the strength of its franchisee. Strong fundamentals and near-nil stress loans would enable the bank to gain market share. RoEs are expected to be the best amongst private banks at ~20%. The stock trades at FY17 PBV/PE of 3.3x/18.5x.We maintain Buy with the target price of INR1350 (4x PBV FY17) based on the residual income growth model. Our key assumptions are a) Risk free rate of 7.5% b) Risk premium of 5% c) Beta of 0.9x d) average growth of ~15% over FY15-35E and e) terminal growth rate of 5%.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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