HDFC Financial institution: Medium-Time period Catalysts Bode Nicely For The Inventory



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Funding thesis

HDFC Financial institution (NYSE:HDB) just lately introduced a merger with HDFC Ltd. This mega-merger between HDFC Ltd. and HDFC Financial institution is ready to deliver a plethora of synergies and provides start to a monetary behemoth. The financial institution additionally bought constructive information from the Reserve Financial institution of India (RBI) final month which lifted the restrictions on HDFC financial institution’s Digital 2.0 programme on March 11, 2022. The financial institution can now roll out its new digital initiatives. HDFC can also be benefiting from the restoration within the Indian financial system. Final quarter, the corporate reported a sturdy year-over-year development of 16.5 % and 13.8 % prematurely and deposits, a excessive liquidity protection ratio of 123 % and 10.5 % yr over yr development in standalone pre-provision working revenue. Within the mortgage portfolio, apart from the two-wheelers section, all different mortgage segments have skilled both high-single-digit or double-digit development on a year-over-year foundation (see desk beneath), indicating how the financial institution is benefiting from the recovering Indian financial system. The financial institution is positioned nicely to capitalize on the expansion alternative because the financial system recovers from the Covid associated slowdown. We’ve assigned a purchase score on the inventory.

HDFC Bank Product wise growth in advances

HDFC Financial institution Product sensible development in advances (Firm Information, GS Analytics Analysis)

Final Quarter Earnings Recap

HDFC is the #1 personal sector financial institution in India and is positioned nicely to learn from a restoration within the Indian financial system. Earlier this yr, HDFC Financial institution reported third-quarter outcomes for the interval ending December 31, 2021, with standalone web income rising by 12.1 % yr on yr from INR 23,760.8 Cr to INR 26,670 Cr., owing to general advance development of 16.5 % and the deposit development of 13.8 %. On a year-on-year foundation, web curiosity earnings elevated by 13 %. At 4.1 %, the web curiosity margin stays unchanged. Different earnings, which accounts for about 30.7 % of web income, elevated by 9.9 % from INR 7,443.2 crores in the identical quarter final yr to INR 8,183.6 crores. Charges and fee accounted for two-thirds of different earnings, up 2 % yr over yr, pushed by a 17 % enhance in charges, excluding fee merchandise partly offset by decrease charges on card mortgage merchandise, money advances, and overdraft charges reflecting the financial institution’s cautious strategy to card-based lending. Working bills elevated 14.9 % over the earlier yr owing to a 20 % enhance in employee-related prices and 12.6 % in different working prices. Elevated income and decrease provisioning partially offset a rise in working prices, leading to an 18.1 % enhance in web revenue to INR 10,342.2 crores.

Transformational merger of HDFC financial institution with HDFC Restricted

The board of administrators of HDFC Financial institution Restricted, on the assembly held on April 04, 2022, accepted a composite scheme of amalgamation of (i) HDFC Investments Restricted and HDFC Holdings Restricted, into Housing Improvement Finance Company Restricted (“HDFC Restricted”); and (ii) HDFC Restricted into HDFC Financial institution. Shareholders of HDFC Restricted will obtain 42 shares of HDFC Financial institution for 25 shares of HDFC Restricted. The deal is anticipated to deliver a plethora of synergies like cross-selling to a big and rising buyer base, leveraging the facility of distribution in city, semi-urban, and rural geographies, multi-decade mortgage underwriting experience throughout credit score cycles, underwriting of bigger ticket dimension loans, together with infrastructure loans, and final however not least, this merger goes to make plenty of sense for purchasers of each the group who may have extra entry factors and might profit from complimentary product and companies. The deal is anticipated to finish inside 18 months topic to completion of regulatory approvals. Submit-merger, present shareholders of HDFC Restricted will personal 41 % of HDFC Financial institution. The merged entity might turn into the third-largest listed firm in India by way of market capitalization with a major weighting within the nation’s benchmark NSE Nifty Index.

Restrictions on the Digital 2.0 program lifted

The RBI lifted the restriction on HDFC Financial institution’s enterprise producing actions deliberate beneath the Financial institution’s Digital 2.0 program as of March 11, 2022. Due to repeated expertise outages, the RBI had suggested the financial institution towards sourcing new card clients and likewise prohibited the financial institution from launching new digital initiatives in an order dated December 2, 2020. Though the RBI in August 2021 allowed it to situation new bank cards, the ban on introducing new digital initiatives remained in place. The financial institution has issued 9.5 lakh playing cards within the final quarter and 13.7 lakh playing cards since August. Bank card print and debit card printing have elevated by 22% and 14% on a yr on yr foundation. We imagine that this momentum will proceed sooner or later as HDFC Financial institution is well-positioned to realize market share within the card enterprise because of its sturdy retail, CASA, and wage account franchise. Additional, with the lifting of the ban on digital initiatives now, the financial institution’s buyer acquisition will speed up and add to the momentum that it’s seeing within the playing cards enterprise.

Sturdy mortgage and deposit development to drive NII

HDFC Financial institution’s whole deposits have been INR 14,45,918 Cr. as of December 31, 2021, up 13.8 % from the earlier yr. Present and Saving Account (CASA) deposits elevated by 24.6 % from the earlier yr. CASA deposits account for 47 % of whole deposits as of December 2021. Whole advances as of December 2021 have been INR 12,60,863 Cr, up by 16% from the earlier yr. As proven within the chart beneath, advances grew quicker than deposits over the past three quarters, indicating an acceleration in lending actions because the financial system recovers post-Covid. This bodes nicely for future NIMs of the financial institution.


HDFC Financial institution’s Y/Y development prematurely and deposits (Firm Information, GS Analytics Analysis)

Business and Rural banking advances outpaced general development in advances final quarter, indicating underlying financial exercise and continued market share positive factors. Retail and wholesale advances elevated by 13.3 % and seven.5 % respectively. The online curiosity margin has remained flat at 4.1% this fiscal yr. Regardless of financial coverage tightening by main central banks in response to world excessive inflation, RBI has thus far taken a contrarian stand and prioritized development over inflation. We imagine that after a few quarters RBI can change its stance and start elevating rates of interest, on account of which NIM might regain its misplaced momentum from the pre-pandemic stage.


HDFC Financial institution’s Internet Curiosity Margins (Supply: Firm Information, GS Analytics Analysis)

Valuation and Conclusion

HDFC Financial institution Restricted is at present buying and selling at 23.44x FY22 EPS and 19.33x FY23 EPS. The inventory has a number of catalysts which might drive earnings development within the coming years together with merger synergies, accelerating mortgage development because the Indian financial system recovers, and momentum from digital initiatives and card development after the lifting of RBI’s restriction. The inventory value has seen some upside after RBI lifted restrictions on digital initiatives and the announcement of the merger of HDFC Ltd. into HDFC Financial institution. We imagine it’s a good play on the secular development potential of India with a number of medium-term catalysts and an inexpensive valuation.


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