Hot stock alert! Aditya Puri led HDFC Bank gets buy rating from CLSA; here is reason why

HDFC Bank, CEO & MD Aditya Puri, during a meet with analysts, highlighted key developments for the lender going forward. Some of the pointers discussed were digital platforms, mid-market clients, NBFC, deposits and lending performance. Puri shed some light upon deposit and lending interest rate cuts going forward. Citing that, rating agency CLSA has put out a 'Buy' call on HDFC Bank with a target price of Rs 2,850 per piece. On Wednesday, the share price of HDFC Bank was trading at Rs 2,420.15 per piece down by Rs 3.90 or 0.16% at around 13:32 hours. However, so far, HDFC Bank has touched an intraday high and low of Rs 2,431.55 per piece and Rs 2,410 per piece. 

CLSA in its research note stated that, Puri indicated scope for a cut in deposit rates is limited by tight liquidity.

“Easing will be key for a cut in deposit and lending rates; we believe that a fall in cash-with-public can help. The bank remains cautious on riskier loans such as unsecured retail and business banking, due to high growth over the past three years (30% Cagr), increased competition, and leveraging among borrowers. This trend needs to be watched as other private banks plan to scale up here,” said CLSA’s note. 

At the same time, the note explains that, the bank has indicated potential scope for a cut in risk weight for unsecured retail loans, which are higher than developed markets. Puri highlighted that while NBFCs are out of crisis, they are not out of the woods – normalisation can take about a year. On consumption, management believes that slower demand in auto sector can stay for a while, but consumer-durables are seeing steady growth.

Further, HDFC Bank highlighted its initiatives to ramp up client base in non-urban markets and also mid-income clients. Interestingly, it shared targets such as: (1) doubling branch openings from c.300 in FY19 to 600 annually,mostly in non-urban areas; (2) quadrupling POS network from 1m to 4m by March 2021; (3) virtual relationship managers (VRM) to double managed clients to 20m in three years; and (4) tie-up with government service outlets (CSC) to deepen presence for low-income clients. The bank has seen Casa ratio fall c.500bps to 42% of deposits over 5-6 years; a pick-up here will be key to its ability to underwrite low-risk loans at high NIMs, as in the past.

Following the above, CLSA’s note says, “The bank is turning cautious on riskier loans such as unsecured retail and business banking, due to high growth over the past three years and increased competition/leveraging among borrowers. Digital platforms and mid-income clients will drive the next leg of growth – management shared ambitious targets on branch additions, POS network, virtual relationship managers, andCSC-tie-ups. We see 21% Cagr in earnings over FY19-21 and retain our BUY call and Rs2,850 target price.”