LKP recommends 'strong buy' on HDFC Bank; says private sector lender to overcome its merger overhangs gradually

Domestic brokerage LKP Securities is bullish on HDFC Bank shares as it expects the private sector lender to overcome its merger overhangs gradually and to remain one of the best among all the lending businesses. The brokerage has recommended a 'strong buy' with a target price of Rs 1,762 apiece for a period of 12 months. 

As per LKP Securities, the bank will overcome the merger overhangs gradually on the back of the following:

1) Healthy balance sheet growth, 

2) Much higher provision than the regulatory requirement in the balance sheet.

3) Best-in-class underwriting and risk management practices. 

LKP believes that all merger-related negatives are in price and expects a re-rating in valuation with improvement in return on asset (RoA), a metric that indicates a company's profitability in relation to its total assets.
 
"We believe, the negatives are in price as trailing P/BVPS (2.78x) is at a comfortable level, whereas the 5-Year peak P/BVPS (5.8x) of the bank was on June – 19. The median P/BVPS for the last 5 –Years was 3.8x. The trailing P/BVPS (2.8x) is way below the 5-year median of 3.8x. We opine a turnaround from this point as the ROA is likely to stay stable despite higher operating expenses," the report read. 

Further, analysts at LKP peg HDFC Bank's ROA for FY25E and FY26E at 1.9 per cent with a return on equity (ROE) above 15 per cent.

The bank's net interest margin (NIM) is expected to improve to 3.9 per cent in FY25E/ FY26E against 3.6 per cent in 3QFY24 on the back of a better loan mix and a lower cost of funds, which is the interest rate that financial institutions pay on the funds they use in their business. 

Moreover, analysts peg loan growth of 20 per cent and above, where most of the growth is expected to come from high-yielding unsecured credit. Additionally, HDFC Bank's non-performing asset (NPA) numbers are estimated to stay steady barring a few seasonal hiccups from the retail book. 

Shares of HDFC Bank traded flat with a negative bias as of 12:43 p.m. at Rs 1442.5 apiece. In a year, the shares of HDFC Bank have declined over 11 per cent against Nifty50's rise of over 25 per cent.  
 
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