Top Gainer on Nifty: HDFC Bank Share price up by 4.5%; Jefferies maintains BUY

Jefferies said that HDFC Bank was confident of expanding market share in loans from 10% to 15%, implying 18-20% CAGR over medium term. This shouldn't impact underwriting quality & profitability. Jefferies maintains Buy rating on HDFC Bank with a price target of Rs 1860

HDFC Bank Management is focussing on reducing levels & intensity of customer complaints as well as increasing Net Promoter Score (endorsement by existing clients): Reuters

Jefferies said that HDFC Bank was confident of expanding market share in loans from 10% to 15%, implying 18-20% CAGR over medium term. This shouldn't impact underwriting quality & profitability. Jefferies maintains Buy rating on HDFC Bank with a price target of Rs 1860.

At the same time, it is strengthening bank's two key softer issues:

(1) customer service
(2) staff attrition & accountability

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On ESG, focus is on scalable & measurable initiatives. Jefferies see 20% CAGR in profit over FY20-23 and maintain their Buy call on HDFC Bank

HDFC Bank is well-placed to gain market share and grow at 18-20% CAGR:

HDFC Bank’s Management believes that the bank is well-placed to expand market share in loans from 10% now to 15% over 5-7 years. This could imply 18-20% CAGR in loans over this period without compromising on underwriting and profitability.

HDFC Bank’s Growth will be led by:

(1) deepening of presence in non-urban markets
(2) ability to leverage market share gains in Casa deposits with better capital
(3) growth prospects like Govt. led capex and uptick in retail credit demand

Enhancing engagement with clients and employees of HDFC Bank:

HDFC Bank Management is focussing on reducing levels & intensity of customer complaints as well as increasing Net Promoter Score (endorsement by existing clients). This will help to deepen existing relationships and acquire new clients. Bank is also focusing on increasing engagement with employees across all levels. Out of the bank's 100k+ employees, 10,000 are managerial and going forward, their goals and scorecards will involve scaling-up their team-members from the perspective of business growth as well as compliance & governance. Attrition levels were 16% in FY20 (ex sales officers) and historically HDFC Bank had also seen higher attrition at mid-management levels. A reduction in attrition can help smoother execution as well as compliance.

Focus on ESG:

On ESG, HDFC Bank's focus is on scalable and measurable initiatives. Bank has limited funding to projects with negative ozone impact; loans above ticket-size & tenure are scrutinized under the Social and Environment Management System (SEMS). While emission levels are low, it still targets to reduce its emission levels/ energy intensity by 3-10% by 2022. HDFC Bank's gender diversity ratio was at 21% in FY20 and it targets to achieve 24% by FY23. At board level, emphasis is to build strong and independent directors and clearly identify roles/ specialisations of the members.

Maintain Buy on HDFC Bank:

Jefferies see 20% CAGR in profit over FY20-23 and ROE of 18% in FY22. Valuations at 3.5x adj P/B FY22 look reasonable and maintain Buy rating with a price target of Rs 1860 based on 3.8x Mar-23 adjusted PB. Jefferies target price on ADR is US$93.

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