Brokerages bullish on HDFC Bank post steady Q1 earnings

After HDFC Bank reported stable earnings for the April-June quarter on July 17, the brokerage announced positive growth prospects for the bank.
Shares of HDFC Bank also reacted positively to the optimistic growth outlook, trading at Rs 1,697.55 on the National Stock Exchange as of 9:18 am, up 1.1% from the previous close.
The company posted a net profit of 11.951 billion rupees for the April-June quarter, up nearly 30 percent from 9.196 billion rupees in the same period last year. The net profit was also slightly higher than market expectations, as at least four brokerage firms had forecasted a net profit of about 11.581 billion.
Net interest income from Japan’s largest private bank also increased by 21.1% year-on-year to 2359.9 billion yen. Lenders’ gross non-performing assets (GNPA) ratio also rose to 1.17% from 1.28% in the same period last year, and asset quality also improved. Similarly, net NPA was 0.30 percent for him, compared to 0.35 percent for the same period last year.

The stable numbers reported by lenders also generated healthy growth prospects for HDFC Bank.
At least five foreign brokerages – Citi, JP Morgan, HSBC, Jefferies and Morgan Stanley – have recommended either buying or overweight above their 2,000 rupee target price.
Citi attributed the company’s better-than-expected first-quarter earnings to favorable borrowing costs, Treasury yields and solid net interest margins. The brokerage firm also expects the combined company’s return on invested capital (ROA) to be around 1.9% to 2.0% after the merger of the HDFC twins. JPMorgan also praises the solid asset quality of lenders, even as growth in personal deposits slows. Meanwhile, HSBC expects HDFC Bank to achieve its ambitious targets in the coming quarters through effective cross-selling and business expansion. The brokerage also supports Citi’s estimate that the combined company’s ROA will be between 1.9% and 2.0%, while also viewing HDFC Bank’s stand-alone valuation as attractive.
In line with consensus, Morgan Stanley also expected lending growth to accelerate in the coming quarters and forecasted healthy growth prospects for HDFC Bank.
Another overseas brokerage, Jefferies, believes HDFC Bank’s stable NII will hold up better than its peers. The firm expects lender loan growth to slow in the first quarter, but expects to pick up in the coming quarters as HDFC lending stabilizes. Growth in personal deposits has also been sluggish, and Jefferies believes a recovery in this sector will be key to wealth growth.
As a result, the company will merge in the second quarter of fiscal 2024. Jefferies delivered a compound annual growth rate (CAGR) of 17% and a return on equity (ROE) of 16% for fiscal years 23-26.
Motilal Oswal Financial Services has also provided guidance to the combined company, with net profit estimated at Rs 6,540 billion / Rs 7,980 billion / Rs 9,570 billion for FY2024-26, which equates to ROA.
1.9 to 2.1 percent. “Thus, we expect the combined company’s return on assets (ROE) to return to pre-merger levels of over 17% by FY26,” the brokerage said in a report.