Jefferies sees 27% rise in HDFC Bank in bull case; what's driving optimism?

HDFC Bank may soon announce its next CEO, which could address recent concerns around leadership transition, with a timely reorganisation expected to not only aid earnings but also help rerating, believes global brokerage Jefferies.  The brokerage has a 'Buy' call and a target price of ₹880 on HDFC Bank in a base-case scenario, signalling a 20 per cent upside. Meanwhile, in the bull case, it has a target price of ₹935, suggesting a 27 pr cent gains.

 

HDFC Bank remains among the worst-hit Nifty 50 stocks this year, having lost 27 per cent on a year-to-date (YTD) basis. Concerns around poor performance following the reverse merger of HDFC with the lender, margin pressure, governance woes, and the latest being the succession overhang.

 

 

A Business Standard report said that the Reserve Bank of India (RBI) is considering two names proposed by the lender — an insider, most likely Kaizad M Bharucha, and an outsider, most likely Anup Bagchi. The succession process comes against the backdrop of a string of governance concerns at HDFC Bank. READ MORE

 

What's behind Jefferies' bullish view?

 Jefferies said a CEO tends to reorganize the top team and business structures to better achieve growth, profitability, and governance objectives. "We hope that the new CEO can complete any reorganisation promptly, allowing the team to focus on execution in terms of gaps to be covered."

 

These include restoring growth in LCR retail deposits despite competitive rates. HDFC Bank's growth at 12 per cent has lagged peers ICICI Bank (15 per cent) and SBI (14 per cent). It had a slower start on FCNR-B deposits, but made a strong comeback, mobilising $11-12 bn within two months. This, Jefferies said, should help the bank to refinance high-cost deposits/borrowings at slightly lower rates. 

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Improved fee growth is another factor driving Jefferies bullish view. Although the merger offered the bank a larger client base to cross-sell financial products, fee growth (CEB-terms) in the past two quarters has lagged, at 8 per cent and 11 per cent YoY.

 

It further pointed out that HDFC Bank has seen higher growth in corporate & secured lending segments and share of loans to PSUs in total credit has risen over the past year. "These, along with repricing of loan rates downwards, have been a drag on NIMs. Like most large banks, HDFC Bank could benefit from any rate hikes as c.70 per cent of loans are linked to EBLR/floating, but a recalibration of the risk profile towards higher risk-adjusted segments could support ROA expansion," it said. 

Earnings estimate: Base vs bull case

In a bull-case scenario, Jefferies sees loan CAGR of 14 per cent over FY25-29E compared with 13 per cent in base case. Meanwhile, NIMs are seen slightly elevated at 3.4 per cent during the same period in bull case as against 3.3 per cent in base case.

 

Gross NPAs (GNPAs) are seen moderating to 1 per cent and NNPA to 0.3 per cent in FY27. In base-case the GNPA is seen at 1.2 per cent and NNPA at 0.4 per cent.

 

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