Maintain ‘buy’ on HDFC Bank with TP of Rs 2,070

Key takeaway: HDFC Bank UPFed in 2021 as it fell short of investors’ expectations due to slower topline, set-backs on tech & compliance, ramp-up by ICICIB (which was trading at substantially lower vals.) & HDFCB’s clean OWT in FII portfolios. 2022 can be a comeback year if it can maintain momentum on retail/SME loan growth that will aid topline & tighten processes to avoid self-goals. Risk-reward is attractive and it is among our top sector picks with target price of Rs 2,070.

2021 was a year of UPFance: In comparison with Banking Index 2021 returns of 14%, HDFC Bank’s return at 4% was underwhelming. It was a forgettable year for the bank due to slower top-line growth (reflecting weaker retail/SME loans), set-back on tech & compliance aspects, ramp-up by ICICIB that was seen as a better & cheaper bank and HDFCB’s clean OWT in FII portfolios (as it is not part of key benchmark indices).

2022 can be a comeback year: 2022 can be a comeback year for HDFC Bank if it can maintain the momentum on retail/SME growth that will aid topline and tighten processes/compliance. Growth momentum in the retail/SME segment had picked-up since 2QFY22 with 5-7% QoQ growth and further by 4-6% QoQ in 3Q. We believe momentum has largely held up, which should aid improvement in NII growth from 12% YoY in 2Q towards 17% in FY23. Tightening of internal processes as well as technology aspects will help avoid self-goals in the form of RBI’s action and/or customer experience. Lifting of RBI’s restrictions on new digital initiatives will help roll out new platforms, many of which are near-ready for launch.

Investors will evaluate against ICICI Bank: Since 2021, we believe ICICI Bank has emerged as a better bank/stock to investors on the back of improved growth, fruition of investments in SME and tech platforms and much-less set-backs on tech/regulatory issues. We believe that HDFC Bank will continue to be compared with ICICI Bank through 2022 as well, especially as ICICI Bank trades at 20-25% discount to HDFCB. We expect HDFC Bank to narrow the gap on growth and sustain its higher ROE, these will be key to compounding-led returns from HDFC Bank.

Maintain Buy: We had recently included HDFC Bank among top-picks in the sector, as its valuation at 3x 12m forward adjusted PB is now at a discount to 5yr average and 18% CAGR in earnings and ROEs of 17-18% will offer healthy compounding. Our target price of Rs 2,070 is based on SOTP that includes the value of bank at 3.7x Sep-23 adjusted PB and US$92 on ADR.