India's largest private sector lender HDFC Bank can rise up to ₹1,955 in the next 1 year, believes domestic brokerage house ICICI Securities. The brokerage has a 'buy' recommendation on the stock with a target price of ₹1,955, indicating an upside of around 47 percent.
The private sector lender has lost over 8 percent in the last 1 year as well as in 2022 so far.
As per the brokerage, the lender's growth runway is huge and the merger adds an entirely different dimension to the future. There may not be any need to raise further funds to meet reserve requirements, it added.
ICICI, in its report, said that the management plans to nearly double its network in the next 3-5 years by opening 1,500 to 2,000 branches every year and will continue to invest in modern technology and talent, which are also big positives for the lender.
"Given the progress made on technology investments, processes and governance, the regulatory actions have been fully lifted. HDFC Bank has converted the challenge into an opportunity and has made substantial strides in the way it evaluates, manages and operationalise technology," the brokerage stated.
It has implemented a series of technology-led initiatives that include: i) Changes at the foundational level, ii) creating new digital solutions and iii) modernising the core, added ICICI.
The brokerage further pointed out that the bank's asset mix has shifted to high-rated, but low-yielding segments and NIMs (net interest margins) moderated to 4 percent. Nonetheless, the change in asset mix had a positive impact on the net credit margin that increased to 3.3 percent in FY22, noted ICICI.
Recently, the bourses gave a green light to the proposed merger of HDFC Bank with its parent HDFC. The company received a 'no objection' letter from NSE regarding the proposed merger, it said in a filing. The statement said that the amalgamation plan is still awaiting permission from a number of statutory and regulatory bodies, including the Reserve Bank of India, the National Company Law Tribunal, the Competition Commission of India, and the respective shareholders and creditors of the companies.
Commenting on the merger rationale, the brokerage said that HDFC Bank was missing out on an upcoming opportunity in mortgages.
"The bank is missing out on an opportunity with its home loans constituting merely 6 percent of advances. The housing sector has got an impetus with the launch of RERA. GST, etc. and the downcycle since FY13 seems to have ended in FY21 as transactions are rising. Housing is going to be a huge growth opportunity and one of the key drivers of India’s GDP over the next decade," it explained.
ICICI Further highlighted that HDFC Bank is not participating in this opportunity in its truest sense. Out of 71 million HDFC Bank customers, only 2 percent had HDFC home loans while only 5 percent of the bank customers have availed of mortgages externally, it added.
HDFC Bank has significant headroom for mortgage penetration as 70 percent of HDFC’s customers are not banking with HDFC Bank, presenting yet another addressable opportunity for the lender, stated the brokerage.
With the advantage of a lower cost of funds and the distribution muscle it has built, it is imperative to seize this opportunity, added ICICI. Also, regulatory convergence and market developments over time have improved the risk-reward equation and merger rationale now makes sense, it further noted.
In a recent filing, HDFC Bank announced that its advances totaled ₹13.95 lakh crore, up 1.9 percent from ₹13.68 lakh crore in the January-March 2022 quarter.
Compared to the year-ago quarter, retail loans increased by 21.5 percent, commercial and rural banking loans by about 29 percent, and corporate and other wholesale loans by about 15.5 percent.
The filing added that HDFC Bank's deposits stood at ₹16 lakh crore as on June 30, up 19.3 percent over ₹13.45 lakh crore in the year-ago quarter. Sequentially, deposits grew 2.9 percent.
Meanwhile, in the latest quarter, the bank's CASA deposits came in at Rs7.3 lakh crore, up 20 percent over ₹6.1 lakh crore from the previous year but down 2.2 percent from ₹7.5 lakh crore as of March 31, 2022.
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