Nirmal Bang Institutional Equities recently hosted the management of HDFC Bank Ltd to seek answers to queries by its institutional clients and gain insight into the business outlook of the private lender.
Among the key highlights, it said the bank has got some stress at the bottom of the pyramid, but for HDFC Bank this is not a cause of concern as it stayed away from providing loans to customer segment, where it felt that cash flows are not adequate. The bank highlighted deposit growth may stay be above the system growth because of branch addition and improved productivity of low vintage branches.
But it sees credit growth to be below the system growth in FY25 and in line with system growth in FY26, which will lead to a further decline in the C/D ratio. From FY27 onwards, HDFC Bank expects to start gaining market share on the credit side, by growing better than the industry.
In the Commercial and Rural Banking (CRB) segment, HDFC Bank has expanded its presence from 65,000 villages around four years ago to 2,30,000 villages.
Once it reaches 2,50,000-2,60,000 villages, which will form 70 per cent of the rural economy, it will focus on deepening its penetration in these villages. Besides, HDFC Bank maintained its long-term return on asset (RoA) guidance at 2 per cent.
"As of now, 44 per cent of the branches have a vintage up to 5 years and 38 per cent of the branches have a vintage up to 3 years. The opex of the branch is decided based on the activity level of the respective branches. Newer branches are relatively smaller in size and hence have lower opex cost," Nirmal Bang quoted the HDFC Bank management as saying.
Nirmal Bang said while the higher deposit growth is likely to impact net interest income (NII) growth in the near term, it is positive on HDFC Bank for the long term due to its best-in-class asset quality, growth potential because of a good capital position and merger synergies in the long term. A non-specific provision buffer at 1.5 per cent of loan book provides comfort, the brokerage said.
It values the HDFC Bank's core business at 2.5 times September 2026E adjusted book value. Post adding subsidiary value per share of Rs 215.50 at 15 per cent holding company discount, it has derived a target price of above Rs 2,000 level (at Rs 2,026) for HDFC Bank.
The HDFC Bank stock closed at Rs 1,736.00 on BSE. Nirmal Bang's target suggests a 16.70 per cent upside over the prevailing price. Its target multiple of 2.5 times September 2026 book value is at a 13.7 per cent discount to the bank's past 5-year average multiple of 2.9 times.
"We believe this target multiple adequately captures a loan and earnings CAGR of 11.5 per cent and 11.9 per cent, respectively over FY24- FY27E, which results in RoA/RoE of 1.9 per cent/ 15 per cent in FY27E," Nirmal Bang said.