BackICICI Securities gives 'Buy' rating on HDFC Bank, positive on post-merger growth
The merger is expected to sustain the growth momentum of HDFC Bank. The bank's senior management team has shared better visibility on the strategic merger and its benefits during their analysts' meet.
PremiumThe largest private sector lender, HDFC Bank is well placed ahead after its merger with parent HDFC. The merger is expected to sustain the growth momentum of HDFC Bank. The bank's senior management team has shared better visibility on the strategic merger and its benefits during their analysts' meet. ICICI Securities has given a 'Buy' rating on HDFC Bank shares as analysts here are optimistic about the acquisition deal.
In their research note, ICICI Securities Research Analysts Kunal Shah, Renish Bhuva, and Chintan Shah, stated that the senior management team of HDFC Bank (HDFCB) shared their perspective and thoughts on - 1) Why this is an opportune time to fructify the merger given housing loan growth opportunity with deeper penetration, regulatory convergence, conducive market development, pricing convergence, portfolio rebalancing, enhanced cross-sell, etc. 2) What gives them confidence on merger being approved in the proposed form and structure. 3) How the merged entity will continue to grow well above industry average as demonstrated in the past. 4) Reversion in RoE is estimated to be quick as capital is consumed and 5) How it will significantly accelerate its deposit engine through deeper and broader network expansion, reactivating front-end team aggression and not being an outlier on deposit rates.
In May last year, 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. The analysts revealed that during its May’21 strategy session, the housing segment was presented as a growth theme for the country and the bank realised it is missing out on an opportunity with its home loans constituting merely 6% of advances.
Further, they said that since then, real estate inventory levels have fallen substantially (>20% from their peak), developers’ balance sheets have strengthened (through deleveraging), affordability has improved and housing demand is rising in Tier-2/3 cities. Also, they highlighted that real estate is expected to bolster economic growth, but HDFC Bank is not participating in this opportunity in its truest sense. And hence, the merger scenario was becoming an ideal choice for penetrating the housing segment in its fullest forms.
Of its 71 million HDFC Bank customers, only 2% opted for HDFC home loans while ~5% of the bank customers have availed of mortgages externally. Meanwhile, the majority of the HDFC's customers, somewhat about 70%, are not banking with HDFCB which presents yet another addressable opportunity.
Also, it was understood that the conversion of a mortgage from an agency product to an in-house product was required. Regulatory convergence and market developments over time have improved the risk-reward equation.
As per the analysts, HDFC Bank's business heads highlighted franchise strength, opportunities, initiatives, and strategies in their respective domains. Here are the key highlights of the benefits HDFC Bank will be able to achieve from the merger as per the analysts.
1. Corporate banking strategy is to increase its share of wallet and product holdings for existing-to-bank (ETB) clients. It has reimagined the supply chain landscape. Identified growth opportunities include - i) new-to-bank (NTB) corporate clients, ii) corporates looking to tap PLI scheme benefits, and iii) becoming the largest and most preferred bank for MNCs.
2. Commercial & rural banking segment, an enabler for 60-70% of the bank’s PSL requirement, has the potential to grow at 25-30% in FY23 targeting to achieve FY23 disbursements equivalent to outstanding book as of FY22. It will double its revenues by FY25 and can consistently deliver more than 3% RoAs. Strategy is oriented towards geographical expansion, market share gain, customer acquisition and deeper village penetration.
3. In retail banking, the bank has launched India’s first digital end-to-end car loan disbursing engine. It is looking to launch digital end-to-end solutions for NTB customers for personal loans by Q3FY23. Bank will also increase its distribution presence for gold loans by 3x and offer the product pan-India by Q4FY23.
4. Bank differentiates on digital/tech landscape by delivering technology at a global scale (7x UPI switch volumes in 3 years, 3x growth in core banking transaction volumes, 4.4bn ATM switch transactions in FY22) through assisted (rural) and unassisted (urban) journey experience.
5. Bank will launch Payzapp 2.0 mobile commerce payment app, which will facilitate frictionless customer onboarding and accept all payment forms (UPI, cards, BNPL, wallet, etc.) across offline and online merchant acceptance points for all spend categories. Other digital initiatives include Turbo No Touch Digital Card Program, a self-service digital platform to access and service card payments, and SmartHub Vyapaar 2.0.
They said, "Garnering liability will be key and the bank will accelerate its deposit engine. Bank would not be an outlier on rates and pricing will not be a strategy to garner deposits. Expansion in-network and reactivating front-end team aggression will be key to push the liability engine."
ICICI Securities analysts said, "The interaction addressed some of the queries relating to the merger and provided better visibility on strategic intent and how synergy benefits would more than offset any statutory drag. Maintain BUY."
The analysts have set a target price of Rs1,955 apiece on HDFC Bank going forward.
On Thursday, HDFC Bank shares closed at ₹1385.10 apiece down by 0.80% on BSE. The bank's market valuation stood at ₹7,69,007.43 crore. It continues to be the third largest company in terms of market capitalisation on stock exchanges.
Taking into consideration the target price and June 2nd stock exchange closing price, HDFC Bank has the potential to jump by more than 41% ahead.
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