Nirmal Bang Gives Bullish Call on HDFC Bank; Target ₹1,020
- Rating: Buy
- Target price: ₹1,020
- Brokerage: Nirmal Bang
- Expected ROA: 1.8%-1.9%
Nirmal Bang says HDFC Bank may see a gradual improvement in profitability on the back of steady credit demand, lower funding costs and stable asset quality.
The broking has maintained its Buy rating on HDFC Bank and assigned a target price of ₹1,020, citing a few factors that could drive the bank's financial performance in the next few quarters.
Loan growth remains a key driver
Nirmal Bang believes that strong demand for credit will help HDFC Bank maintain its pace of growth in loans.
The broking also considers productivity improvements throughout the bank an important source of operating leverage. The lender could manage expenses more efficiently with better efficiency as its business grows.
“Strong credit demand, improving efficiency and stable asset quality could support HDFC Bank's profitability.”
Stable asset quality
Asset quality of HDFC Bank remains comfortable, the broking said.
Nirmal Bang feels that the current provisions with the bank should be adequate enough to support the transition to the Expected Credit Loss (ECL) framework. Nor does it expect a material rise in credit costs due to the transition.
This view takes one of the key potential pressures off the bank's earnings, especially as it continues to grow its loan book.
Margins may gradually recover
HDFC Bank's margins to improve over time aided by combination of lower funding costs and changes in the bank's deposit and lending mix, says broking.
Lower borrowings could lower the bank's funding cost, while rising CASA ratio could provide access to relatively cheaper deposits.
Nirmal Bang also expects the share of retail loans in the overall loan portfolio to be higher, which could add to the support to margins.
HDFC Bank: Key numbers
Outlook for profitability
HDFC Bank has scope to improve return on assets driven by sustained loan growth, margin recovery, cost discipline and stable asset quality, said Nirmal Bang.
The broking expects ROA to improve to 1.8%-1.9%, implying an improvement in the bank's core profitability.
What investors are watching
Loan growth, net interest margins, CASA growth, funding costs and asset-quality trends will be key metrics for investors.
If these are played out as anticipated, HDFC Bank could see a gradual improvement in earnings and profitability.
Nirmal Bang has maintained its Buy call and target price of ₹1,020 for the stock with this view.