LKP Securities in its latest note said HDFC Bank Ltd price performance has been lukewarm in the last three years and that negatives relating HDFC merger are in the price. It sad the HDFC Bank stock trades at a trailing price to book value per share of 2.8 times, which is way below the 5-year median of 3.8 times.
LKP said due to merger overhangs, higher operating expenses (Cost-to-income ratio: 40 per cent of Q3FY24), reducing yields (owing to higher home loan of HDFC Ltd) and marginally reducing ROA (2 per cent for 3QFY24), the bank has underperformed the whole sector.
"We believe, the negatives are in price as trailing PBVS (2.78 times) is at comfortable level, whereas the 5-Year peak PBVPS (5.8 times) of the bank was on June – 19. The median PBVPS for last 5 –Years was 3.8 times. We opine a turnaround from this point as the ROA is likely to stay stable despite higher operating expenses," it said.
LKP has a target price of Rs 1,762 on the stock with a 'STRONG BUY' rating as it sees a potential upside of 22 per cent from the prevailing level.
LKP said the FY25E and FY26E return on asset (ROA) may stay at 1.9 per cent with return on equity (ROE) to stay above 15 per cent. The cost-to-income ratio is likely to narrowed down to below 40 per cent (38.8 per cent for FY25E and 38.5 per cent for FY26E).
"The bank’s NIM may improve to 3.9% in FY25E/ FY26E (against 3.6 per cent in 3QFY24) with the help of better loan mix (reducing portion of home loan book) and lower cost of fund (higher deposit growth with rapid branch expansion). We have incorporated YOA (calculated) of 9.2 per cent in FY25E/FY26E against FY24 YOA (calculated) of 9.1 per cent. The cost of fund is expected to stay stable given high interest rate scenario," it said.
In addition, LKP expects the HDFC Bank loan growth of 20 per cent and above, which would be way above the sector growth. Mostly the growth is expected to come from high yielding unsecured credit.
The current loan book composition has 30.4 per cent share of home loan (post-merger) which is likely to narrow down and profit & loss share (7.4 per cent in 3QFY24) is likely to improve. "Additionally, the domestic corporate book (33.8 per cent share) may improve further with strong underwriting process," it said.