Foreign broker Morgan Stanley believes HDFC Bank is an available compounder at an attractive valuation. The brokerage has continued its overweight stance on the stock with a target of Rs 2,110, which suggests a 24 percent upside potential going forward.
Morgan Stanley said the HDFC-HDFC Bank merger is synergistic, in which HDFC Bank gains access to safe and long tenor retail mortgage products as well as a large customer base. HDFC Bank’s product suite, direct access to insurance and geographic reach are superior to most private banks, said the foreign broker.
Morgan Stanley expects a re-rating for HDFC Bank next year as it sees post-merger profitability (RoA) remaining in the 1.9-2 percent range and expects loan growth to increase to 18 percent over next year, compared to current pro forma combined loan growth. by 15-16 percent.
“We value the bank at 17 times one-year earnings and add Rs215 for subs (after parent company’s 20 per cent discount). The main catalyst for the re-rating will be strong execution on deposit growth. Key downside risks could be higher than expected competitive intensity in deposit/loan pricing,” said Morgan Stanley.
Morgan Stanley said strong trailing investment and improving macro conditions should help accelerate combined entity loan growth from 15-16 percent current to 18 percent YoY over the next year.
Strong branch expansion and increased focus on cross-divisional cross-selling will drive faster deposit growth than ever
loan growth. Increasing the real deposit rate over the past year will also help, said Morgan Stanley.
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Brokers expect a steady trend for margins after the merger. After an initial 20-30 bps moderation, margins are expected to remain within a tight band, helped by a shift in the lending mix away from corporate loans, a gradual shift from higher-cost loans to retail deposits and a slow repricing of the fixed-rate lending book.
Morgan Stanley said the combining entity’s strong asset quality and low credit costs will help accelerate investment and enable better management of merger-related challenges.
“HDFC Bank has accelerated the pace of branch expansion, which has also been helped in part by low credit costs. We believe this can continue over the next few years. In our view, this should help maintain its lending and deposit market share gains in the medium term,” he said .
In addition, as HDFC Bank exits the investment cycle and productivity and cross-selling improve, Morgan Stanley expects a continued moderation in its expense ratio over the next few years.
“Shares are trading at 16x EPS one year ahead, which we find very attractive,” he said.
“Strong cyclical withdrawals and execution should help better navigate merger-related challenges. We expect EPS growth to be 18 percent YoY post the first year of the merger. Asset quality is strong, given strong underwriting capabilities and lending to key borrowers across segments. Capitalization good with an independent Tier-1 ratio of 17.1 percent and will increase even more when combined,” he said.
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