Emkay Global Financial has given Buy recommendation for HDFC Bank with a target price of Rs. 2050 in its research report issued on Oct 17, 2021

Emkay Global Financial’s report on HDFC Bank

HDFCB reported a slight miss on profits at Rs88bn (est: Rs89bn) in Q2FY22, mainly due to lower NIMs (4.1%), higher staff expenses and accelerated contingent provisions (Rs12bn). The headline NPA ratio improved by 12bps qoq to 1.4% due to lower slippages and better recoveries, but higher restructuring at 1.7% of loans (mainly in PL) was slightly disappointing. Credit growth improved to 15.5% yoy/4.5% qoq due to better traction in retail loans (up 13% yoy) and commercial loans (up 28% yoy). Wholesale loan growth moderated to 6% yoy, but the bank sees improving growth opportunities in the corporate segment. It expects NIM to improve in H2FY22 as retail growth accelerates led by strong demand and receding risk aversion. On-time Recovery (OTR) has improved to pre-Covid levels at 97.5%, leading to moderate net slippages. HDFCB has adopted liberal restructuring (borrower-wise) in the retail segment, but expects a low relapse rate (10-20bps of overall loans). It carries reasonably healthy contingent + floating provisions at 0.8% of loans, which should keep incremental LLP in check.

Outlook

We believe growth acceleration and the lifting of an embargo on the credit card business are positive factors, while further relief on Digital 2.0 initiatives is awaited. Retain Buy with a revised TP of Rs2,050 (valuing core bank at 3.5x Dec’23E ABV and subs at Rs65/share), given its ability to deliver superior return ratios across cycles.

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