HDFC Bank Q1: Brokerages remain positive but flag loan growth, asset quality concerns

Brokerages have retained their positive stance on the stock on strong operating performance and expect stock to return 14-16 percent over a period of one year.

Shares of HDFC Bank fell nearly 3 percent intraday on July 22 after moderate weakness in Q1 asset quality and slow down in retail loan growth, but brokerages remain positive on the stock.

The private sector lender registered a 21 percent year-on-year increase in profits and 23 percent rise in net interest income with loan growth at 17 percent for the quarter ended June 2019, which all came in line with analyst expectations.

The loan growth was moderated due to a consistent slowdown in retail book and auto segment.

However, on the asset quality front, gross non-performing assets and net non-performing assets increased 4bps each sequentially to 1.4 percent and 0.43 percent, respectively.

Provisions for bad loans also increased significantly by 38.3 percent sequentially and 60.4 percent year-on-year to Rs 2,613.7 crore in the June quarter due to unsecured book and NBFC accounts.

The stock has lost 7 percent in the last 15 trading sessions. It was quoting at Rs 2,312.45, down Rs 63.50, or 2.67 percent on the BSE at 0931 hours IST.

Here is what brokerages say: 

Morgan Stanley

While maintaining overweight call on the stock, global brokerages said core pre-provision operating profit was 2 percent above its estimate, helped by strong NII.

The research house further said loan growth moderation was broad-based, led by corporate banking. Morgan Stanley is positive on bank's strong balance sheet.

Jefferies

The brokerage has retained its buy call on the stock with a target price at Rs 2,755, implying 16 percent potential upside from current levels.

Retail loan growth has slowed down for two quarters. Management has likely taken a counter-cyclical approach on unsecured loans and didn't indicate any early 'red flags', it said.

But it is still one of the best managed banks out there and rise in provisions compensated by higher other income, Jefferies added.

Credit Suisse

The brokerage has an outperform rating on the stock with a target price at Rs 2,700, implying 14 percent potential upside from current levels.

Growth has moderated but core profitability is intact. Credit Suisse cut its FY20/21 EPS estimates by 3 percent.

Motilal Oswal

HDFC Bank's operating performance remained strong, although business growth has shown moderation, reflecting weakness in the consumption-linked lending segments and cautious stance on unsecured loans, Motilal Oswal said.

It lowered its growth estimates marginally. The brokerage expects the bank to deliver 19/20 percent loan book/PAT CAGR over FY19-21, led by stable margins and a continued improvement in operating leverage.

It maintains buy call on the stock with a target price of Rs 2,750, implying 16 percent potential upside from current levels.

Prabhudas Lilladher

Bank continues to deliver on most of its core operating metrics with a well-managed portfolio mix, Prabhudas Liladher said.

Hence, HDFC Bank remains its most preferred pick in banking universe. The brokerage retained buy call with a target price at Rs 2,700, implying 14 percent potential upside from current levels.

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