HDFC Bank eyes 21% upside after merger

At its Analyst Day meeting, HDFC Bank's management highlighted to analysts how the private lender was getting future-ready by focusing on expanding its digital capabilities and enhancing its sustainable growth after the planned HDFC merger while still maintaining the return on asset RoA at the current level. Post its meeting, a couple of brokerages proposed price targets of Rs. 1,925 - 1,960 on the stock, up to 21 percent of the potential upside for the stock.

HDFC Bank, Nuvama Institutional Equities, said its core strategy of digitalisation, distribution and strong risk control was reaffirmed.

Despite the high base, the bank is confident that it will gain market share in deposits and loans driven by mortgages, personal loans and MSME. The bank believes that it will be able to sustain RoA of 2 per cent even in the FY24 merger year, but merged RoE will take three four years to restore to stand-alone levels. Cost-to-income ratio will improve to below 30 percent in 8-10 years from 40s now, Nuvama said.

This brokerage has reaffirmed its buy on HDFC Bank arguing that its strong deposit franchise should become more valuable in FY24 when balance sheet growth rather than margins will be a key driver. The merger will make the franchise more powerful, the company said in a statement. Motilal Oswal Securities, which also attended the analyst meet, suggested a similar price target of Rs 1,950 on the stock.

HDFC Bank said that the merger process is on track and will be completed in about five weeks. The bank is taking advantage of new growth opportunities in mortgage assets, more cross-selling as customer loyalty improves, and faster growth in debts. Investments in branches and digital infrastructure will continue to support growth over the long term, it said.

The bank added that tha demand remains strong in the secured retail sector and that 40 - 50 crore people are yet to be tapped by the banking system. While competition has been fierce, HDFC Bank has said it has been able to maintain pricing discipline.

HDFC Bank expects to double the CRB portfolio for commercial and rural banking over the next three years, supported by robust distribution and growing branch presence. Motilal Oswal, a banker, said that the bank is already at the number one position and is looking at 3 times business potential over the next five years.

Kotak Institutional Equities reported that HDFC Bank's management was optimistic about growth prospects across all business sectors and willing to invest in the franchise for the long term.

Kotak said the HDFC merger would have a negligible impact on return ratios. Deposit mobilisation remains one key area that is likely to be monitored closely, Kotak said, adding that one needs more than a few quarters to establish a trend.

We maintain the BUY with a fair value of Rs 1,925 unchanged valuing the bank at 2.7 times book for RSEs at 16-17 per cent levels, the company said in a statement.