Buy HDFC Bank, target price Rs 1,379: ICICI Securities

ICICI Securities has given a buy rating to HDFC Bank with a target price of Rs 1,379. The share price moved up by 0.44 per cent from its previous close of Rs 1084.60. The stock’s last traded price is Rs 1089.40.

According to the brokerage, strong core operating profit (3.5 per cent of assets) supported creation of a contingency buffer of Rs 15.5 billion towards Covid-19 related issues (over and above other contingency provisions of Rs 14.5 billion and floating provisions of Rs 14.5 billion). Despite credit cost running relatively higher than historical averages, the RoA trajectory is sustained in the range of 1.8-1.9 per cent.

Investment Rationale


According to the brokerage, HDFC Bank with CET-1 capital of 16.4 per cent and contingency buffer of 45 bps has enough loss absorption capacity in a pandemic phase. The recent news about HDFC Bank planning to tap Rs100-130bn through fresh equity raise (QIP + ADR issuance) implying 2-3 per cent equity dilution, will shore up CET-1 further by 100-130 bps to 17.5 per cent plus. It will be book value accretive by 5 per cent and at the same time, will not be too earnings or RoE dilutive. Also, on the cost front, the bank has been agile about consistently bringing down cost to assets by more than 40 bps and it still has a further buffer to manage it by 15-20bps to cushion any earnings volatility.

According to the brokerage, superior metrics, granularisation of deposits with top 20 depositor concentration going down to 4 per cent), improving RWA profile to 67 per cent, capital buffer (tier-1 of 17 per cent), cost efficiency and 45bps contingency buffer, will help the bank rebound quicker offsetting near-term weakness. The brokerage maintains a buy rating with a target price of Rs 1,379.

Source: ICICI Securities

Financials

For the quarter ended March 31, 2020, the company reported consolidated interest income of Rs 25919.24 crore, up 2.59 per cent from last quarter interest income of Rs 25265.90 crore and up 14.04 per cent from last year's same quarter interest income of Rs 22727.60 crore. The bank reported net profit after tax of Rs 7296.71 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 21.2 per cent stake in the company as of the financial year ending March 31, 2020, while FIIs held 48.6 per cent, DIIs 17.9 per cent and public & others 12.4 per cent.