BNP Paribas, which has HDFC Bank as its top banking pick, said the private lender has additional tailwinds to its margin expansion story post rate cuts on account of the currently low CASA and high-cost legacy liability-laden current merged balance sheet. It said rate cuts are actually a medium-term positive for banks and HDFC Bank has unique tailwinds.
The foreign brokearge suggested a target price of Rs 2,550 on the stock. This is 44 per cent higher than the prevailing stock price of Rs 1,778.40 apiece.
BNP Paribas said most of the Street sees rate cuts as a pressure point on bank margins. For its coverage private banks, BNP Paribas said the margin impact of rate cut is already built into estimates and is not terribly high with H2FY25 earnings likely slower by 3-6 per cent than they would otherwise be. Besides, it said an easing cycle comes with delayed benefits of fixed deposit repricing, increased CASA momentum or likely loan mix shift.
"HDFC Bank specifically has the additional tailwinds of expiries of higher-cost NCD and FDs that it inherited from its parent entity, in its margin journey.
It expects NIM for HDFC Bank to reach 4 per cent by Q4FY26, even without building in likely operating leverage benefits. The brokerage sees return on asset (RoA) of 1.9 per cent and return on equity (RoE) of 16 per cent.
"Despite a low base, our CASA growth assumption is a moderate (given low base) 13.4 per cent over FY24-27, implying a far lower system growth ask given HDFC Bank's incremental market share gain performance. A positive surprise on CASA is far more influential than a negative one, a pleasing convexity," it said.
BNP Paribas said the incremental CASA market-share gains would swing the needle on actual CASA percentage only when the system CASA improves on account of easier liquidity and lower fixed deposit rates.
"This ensures that HDFC Bank's NIM would bottom out in Q3FY25 and gradually improve at 3-4 bps per quarter, on our estimates. Despite limited operating leverage assumptions, the cost-to-income ratio should improve from the expansion in margins, in our view," BNP Paribas said.
This 16 per cent RoE would be within touching distance of the 17 per cent steady-state RoE of HDFC Bank in its pre-merger avatar – approximately equal to the FY17-22 (pre-merger) average RoE.