HDFC Bank - Company Update - Merger challenges transitory - BUY

Mr. Gaurav Jani - Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- Deposit growth of 20%/23% in FY23/24E to be achieved by RTD from existing branches, WTD and AH bonds; funding cost benefit accrue from FY24.

- CRR/SLR requirements may be fulfilled as HDFCB would keep surplus SLR. PSL shortfall factored in at 50%, could be lower.

We remain constructive on HDFCB as merging of two systemically important financial institutions would boost balance sheet size, access to a larger client base and cross sell opportunities. Our interaction with the management of HDFC Bank and HDFC Ltd reinforced our confidence in the ability of the merged entity to garner deposits, meet regulatory requirements and improve profitability. While we don't foresee any shortfall on CRR/SLR, a deficit of 50% is projected on PSL needs, although it could be lower.

NIM may initially dip post-merger but improve thereafter and core RoE might enhance over FY23E-25E from 15.1% to 16.8%. Due to lower NII and higher opex we trim our PAT for HDFCB in FY23E/24E by average ~6.4% and lower multiple to 3.0x from 3.2x. With combined core market cap at Rs9trn, valuation is attractive at 2.3x core FY24 ABV. We roll forward to Sep'24 core ABV and our TP is unchanged with SOTP based TP of Rs1740. Maintain BUY.

Deposit growth achievable; Execution a key: Banks's objective is to build a deposit base to replace HDFC Ltd's liabilities and capitalize on domestic growth opportunities. We expect deposits of the merged entity to grow by 20%/23% in FY23E/24E, that would largely depend on the growth strategy of HDFCB and ALM bucketing of HDFC Ltd. Although standalone bank would need to grow deposits by Rs3.2trn in FY23 (vs Rs2.24trn in FY22) it may not pose a challenge, as deposits can be garnered more aggressively from existing branches. Due to the merger, quantum of incremental liabilities that HDFCB may have to raise for HDFC Ltd. would be a summation of liabilities maturing in 1-year and additional asset growth required in FY24E. Raise could happen through a combination of RTD/WTD and affordable housing bonds.

No CRR/SLR impact; PSLC cost budgeted: Additional CRR/SLR for HDFCB merged may not be required, since HDFC Ltd. has adequate cash for CRR, while HDFCB may carry excess SLR to serve overall SLR needs. PSL requirement would be applicable within 12 months from effective merger date. For PSL we have budgeted 50% shortfall which may entail a cost. However actual shortfall if any would be lower, as major CRB portfolio of HDFCB and 50% of HDFC Ltd's assigned portfolio qualify for PSLC. Post-merger, 4000+ SURU branches of HDFCB may also start sourcing home loans and further support PSL.

Certain adjustments to capital; RoE to mean revert post FY23: On assets side, a portion of HDFC Ltd. loans (5-7%) may not form part of the merged entity (which would release capital and create additional liquidity). Further, investment of the corporation in HDFCB (Rs141bn) would also be reduced from equity. Although, NIM of the combined entity may compress initially post-merger and may retrace back in FY24/25E (since liabilities of HDFC Ltd. would be replaced with bank deposits), it will help in reducing funding cost. Hence core RoE of HDFCB merged could enhance from 15.1% to 16.8% over FY23-25E.

Shares of HDFC Bank Limited was last trading in BSE at Rs. 1371.50 as compared to the previous close of Rs. 1352.00. The total number of shares traded during the day was 332854 in over 9488 trades.

The stock hit an intraday high of Rs. 1373.50 and intraday low of 1348.60. The net turnover during the day was Rs. 453713755.00.

Source : Equity Bulls

Keywords

HDFCBank INE040A01034 HDB PrabhudasLilladher