HDFC Bank to overcome merger overhangs gradually; LKP recommends ‘strong buy’, sees 22% upside at TP of ₹1,762

HDFC Bank is expected to overcome its merger overhangs gradually, said domestic brokerage LKP Securities as its recommended a ‘strong buy’ on the private lender's stock and sees a potential upside of 22 per cent. At a current market price (CMP) of ₹1,443, LKP sees an upside of 22 per cent on HDFC Bank stock at a revised target price of ₹1,762 for the next 12 months.

According to the brokerage, HDFC Bank is expected to overcome the merger overhangs gradually led by:
- A healthy balance sheet growth
-Much higher provision then regulatory requirement in the balance sheet
-Best in class underwriting and risk management practices. 

Also Read: HDFC Bank raises its MCLR, base rate, prime lending rate. Check the latest interest rates here

‘’Given these strengths, we expect HDFC Bank to remain one of the best among all the lending businesses. Thus, we continue to maintain BUY rating (given historical lower valuation) on the bank with revised target price of ₹1,762,'' said LKP Securities.

Re-rating expected on RoA:

The brokerage believes that all merger related negatives are in price and a re-rating is expected with an improvement in FY25 return on assets (RoA), which is a profitability ratio that provides how much profit a company can generate from its assets.

HDFC Bank’s price performance was lukewarm for previous three years. With merger overhangs, higher operating expenses, reducing yields and marginally reducing RoA (~around two per cent for 3QFY24); the bank has underperformed the whole sector. 

However, LKP Securities believes that the negatives are in price as trailing P/BVPS (2.78x) is at comfortable level, whereas the five-year peak P/BVPS (5.8x) of the bank was on June – 19. 

‘’The median P/BVPS for last five–years was 3.8x. The trailing P/BVPS (2.8x) is way below the five-year median of 3.8x. We opine a turnaround from this point as the RoA is likely to stay stable despite higher operating expenses,'' said the brokerage.

‘’We expect the FY25E and FY26E RoA to stay at 1.9 per cent with ROE to stay above 15 per cent. The C/I ratio is likely to narrowed down to below 40 per cent (38.8 per cent for FY25E and 38.5 per cent for FY26E),'' it added.

The bank’s net interest margin (NIM) is likely to improve to 3.9 per cent in FY25E/ FY26E (compared to 3.6 per cent in 3QFY24) with the help of better loan mix (reducing portion of HDFC book) and lower cost of funds (higher deposit growth with rapid branch expansion).

Also Read: HDFC Bank, ICICI Bank, SBI among top banking picks as analysts say most negatives already priced in

Credit growth to remain robust: 

LKP Securities expects HDFC Bank's loan growth of 20 per cent and above (way above the sector growth) and the growth is expected to come from high yielding unsecured credit. The domestic corporate book of the private lender (33.8 per cent share) may improve further with strong underwriting process, according to the brokerage.

‘’The bank’s asset quality is best in the industry given strong underwriting practices'', said LKP Securities. The brokerage expects the NPA numbers to stay steady barring few seasonal hiccups from retail book. On Thursday, shares of HDFC Bank settled 0.31 per cent higher at ₹1,446.35 apiece on the BSE.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.