Analysts see up to 27% upside in HDFC Bank after Q3 earnings beat

Analysts see up to 27% upside in HDFC Bank after Q3 earnings beat

NEW DELHI: HDFC Bank’s third quarter results impressed analysts, who said that the profit beat was led by healthy treasury gains and recoveries. They noted a slight recovery in net interest margin (NIMs) and said the restructuring of 0.5 per cent of loans was in line with expectations.

The bank’s management expects a faster asset quality normalisation and better credit growth outlook, said analysts, who suggested a target price as high as Rs 1,860 for the stock. This suggests a potential upside of 27 per cent over Friday’s closing price of Rs 1,466.35.

On Monday, the scrip was up 1.51 per cent at Rs 1,488.45 on BSE.

Emkay Global said it values the core banking operations at 3.6 times the FY23 price to adjusted book value and assigns subsidiaries a value of Rs 57. It said that the bank has the best cross-cycle asset quality, strong franchisee/capital profile, better growth outlook and superior return ratios.

“However, sustaining its historic management premium will be key amid recent adverse events,” it said, assigning a value of Rs 1,850 on the stock.

The bank is in discussion with the RBI on a remedial plan to resolve the tech-outage issue, but awaits response as to when the regulator would lift its restrictions on new card acquisitions.

“Slippage ratio stood at 1.86 per cent for Q3 and 1.67 per cent for the first nine month of FY21. Restructuring was also low at 0.5 per cent. New stress formation including slippage plus restructuring stood at 2.36 per cent in Q3 against the Street estimates of 4.3-5 per cent. A sequential NIM expansion, strong traction in savings deposits, a strong beat on fees and lower than expected stress loan formation are the key positives,” Elara Capital said, suggesting that there was no negative surprise in any line item.

This brokerage has a target of Rs 1,860. Antique Stock Broking sees HDFC Bank at Rs 1,675. The asset quality performance is panning out better than expected. It expects the stress flow to stay high for the next couple of quarters, but suggested it would still stay at manageable levels.

Kotak Securities said there is now clear evidence that the impact of Covid for the bank is less on credit

costs or slippages but mostly on revenues.

The bank said it has seen further evidence of improvement in other softer signals such as collections.

“On the other hand, revenue impact has been partly negated by the solid growth in the corporate segment whose impact on NIM has been quite negligible,” said Kotak, which upgraded its earnings estimates by 5-12 per cent for FY 2021-22. “The headroom for disappointment is far lower today,” it noted.

The bank reported a 18.1 per cent rise in its net profit for the December quarter to Rs. 8,758.3 crore, which is higher than Street’s estimates.

The lender reported growth of 15.1 per cent in its net interest income for the reported quarter to Rs. 16,317.6 crore, which was also above estimates. HDFC Bank’s gross non-performing assets ratio for the quarter stood at 0.8 per cent. The lender said that without accounting for the Supreme Court’s standstill, the gross NPA ratio was at 1.38 per cent in December, and the net NPA ratio was at 0.4 per cent.

The credit cost ratio stood at 1.25 per cent in the October-December period, down from 1.41 per cent in the previous quarter. Provisions stood at Rs 3,414 crore, including Rs 2,400 crore for pro forma NPAs.

Motilal Oswal has a target of Rs 1,720 on the stock.

“Uncertain times put a premium on resilience, which is what HDFC Bank offers—a strong balance sheet and likely higher residual capital than most. This higher residual capital ensures that its best-in-class franchise can support an adequately large balance sheet after this crisis and fulfil its earnings potential,” Edelweiss said.

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