Stock market outlook
The current market price of the share is Rs 2,445.65 each. The stock’s 52-week low is Rs 2,026 each and the 52-week high is Rs 3,021.10 each, respectively.
Returns over the past 5 years
Over the past week the stock has returned a positive 1.12%, while over the past month it has returned a negative 0.89%. Over the past 3 months and 1 year, it has given 19.15% positive return and 13.44% negative return, respectively. Over the past 3 and 5 years, it has given positive returns of 23.87% and 39.56%, respectively.
Increased intensity of branches to collect deposits
Due to HDFC Bank’s extensive distribution network and strong processes, there has historically been a natural influx of CASA, which is expected to continue. However, due to the impending merger, the focus is on Term Deposit (TD) collection and the RM dashboards and related incentives have been adjusted accordingly to target DFs. The bank does not intend to increase deposits by raising rates. While tighter liquidity could compress deposit growth, as rates rise, money would flow back into FDs. Assuming 10% system deposit growth, HDFC Bank should consistently capture approximately 25% market share in incremental system deposits over the medium term, to fund HDFC Ltd’s organic growth and liability maturities. In our view, this may not be difficult given a sharp focus on branches to garner TD, increased productivity of existing branches, and targeted expansion of branches from 1,000 to 2,000 per year. Historically, the bank has achieved incremental market share in TD of 42% in FY18, 21.5% in FY20 and 26.1% in FY22. In the first quarter of FY23, the bank has already added ~600 billion rupees in TND.
Grandfathering of bank loans may be authorized
One concern was whether grandfathering of HDFC’s bank loans could be licensed for the bank. While the application to the RBI is pending approval, from a regulatory perspective, interbank borrowing is permitted under RBI standards, which may suggest that grandfathering of bank borrowing might be permitted in this case. Therefore, as expected, HDFC’s global borrowings can be repaid under the maturity model and HDFC’s ALM suggests that approximately 20% of liabilities would mature each year after the merger.
The unsecured loan book should be limited
Another question from investors was that, as the share of unsecured loans would reduce after the merger from 16% to 11%, could there be additional room to develop unsecured loans and increase their contribution to 16%, thus giving a boost at the margins. Management interaction suggests that the unsecured share would remain at 11-12%, as the size of tickets in accommodation would be larger than in PL/CC. Additionally, the bank would be cautious about expanding into unsecured, given that a rising interest rate environment typically witnesses an increase in retail delinquencies.
Risk to NIM due to lack of PSL, partially mitigated
One of the main risks for NIM is that any shortfall in PSL, even after purchasing PSLC, would result in an investment in NABARD/SIDBI bonds which yield only 3.0-3.5%, which would result in a decline from 10 to 15 basis points of NIM. Interaction with banks suggests that this cost can be recovered through price adjustments in other products. Also, now PSL’s deficit on a stand-alone basis for HBFCB may narrow as the loan mix shifts towards retail. The PSL requirement is higher in a corporate heavy wallet, while as retail increases, its requirement decreases.
Margins to be gradually improved
On a stand-alone basis, NIM might not grow dramatically, as the change in mix from books to retail would be gradual and the proportion of fixed rate books is higher for the bank due to a lower housing. From a loan portfolio perspective, the linked EBLR is 30%, the MCLR is 9%, the T-Bill is 11% while the fixed rate is 43%. The retail contribution could increase by 1-2% per quarter. The bank would aspire to maintain its margins between 3.8 and 4.2%. In a scenario of rising rates, the share of fixed rate loans would increase.
Opex should remain high in the short term
The brokerage said: “We had assumed that HDFCB would add 1,200 to 1,400 branches in the medium term, while management maintained its guidance of adding 1,000 to 2,000 branches per year. at S2FY23. Consequently, opex would remain high and could grow, similar to our estimates (CAGR of 22% on FY22-25E). Feedback suggests that 50% of new branches would be opened at SURU sites. »
Prabhudas Lilladher recommends buying for a target price of Rs 1,800 each
The brokerage said: “Our update published on July 6, 22 (link) had covered aspects related to the merger such as the gradual trajectory of liabilities, asset mix, regulatory requirements and profitability. Discussions with investors on this merger update have brought to light certain issues, following which we met with HDFC Bank management to allay these concerns, namely 1) gaining a higher market share in the deposits of the system, 2) grandfathered HDFC bank loans, 3) share of unsecured loans in the merged entity, 4) curb NIM due to PSL deficit and 5) outlook on NIM/opex.”
The brokerage added: “We believe that a faster increase in deposits for HDFC Bank from a systemic perspective may be achievable, while grandfathering of bank borrowings may be allowed. The unsecured portion in the l merged entity could stay 11-12% as mortgage portfolio (higher note size) grows aggressively Standalone NIM could gradually improve (4.2% in FY22) as retail share would increase, which could also protect the NIM due to lower PSL requirements Operating expenses could remain high in the medium term As we slightly increase the NII for FY24E/25E, our PAT increases on average by 2.5%. Therefore, we are increasing the target price based on the SOTP from Rs1740 to Rs1800 based on the September 24 base ABV, but we are maintaining “BUY”.
Disclaimer
The stock was picked from Prabhudas Lilladher’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.
