Resuming its 'Overweight' stance on the counter, global brokerage Morgan Stanley said India's largest private lender, HDFC Bank is a compounder available at attractive valuations. Morgan Stanley has a target price of Rs 2,110 on HDFC Bank, implying a 23 percent potential upside for the stock.

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Shares of HDFC Bank, one of the top gainers on the Nifty 50 index, were trading nearly 2 percent higher at Rs 1,729.05 apiece during Monday's deals. The stock hit a fresh 52-week high after the private lender announced completion of merger with its parent HDFC Ltd.

HDFC Bank shares have gained 8 percent in the last one month while it was up 6 percent on a year-to-date basis. In the last one year, HDFC Bank shares have risen 28 percent.

The global brokerage said that the merger of HDFC Bank and HDFC is synergistic, with the former getting access to secured and long tenor retail mortgage product as well as a large customer base. The bank's product suite, its direct access to insurance, and geographical reach are superior to those of most private banks, it said.

Morgan Stanley said that strong trailing investments and cyclical tailwinds (benign asset quality and improving real deposit rates) will help it navigate merger challenges better and return to 17-18 percent EPS (earnings per share) growth after Year 1.

Margins – expect steady trends after the merger

Following an initial moderation of 20-30 basis points, Morgan Stanley expects margins to remain in a tight range, helped by loan mix shift away from corporate lending, gradual shift of higher-cost borrowings into retail deposits and lagged repricing of the fixed rate loan book.

The global brokerage said the merged entity's strong asset quality and low credit costs should help accelerate investments and enable better management of merger-related challenges.

"HDFC Bank has already accelerated the pace of branch expansion, which is also aided in part by low credit costs. We believe this can continue over the next few years. In our view, this would be helpful to sustain loan and deposit market share gains over the medium term," it said.

Strong branch expansion and increased focus on cross-selling across divisions should drive deposit growth faster than loan growth, Morgan Stanley said, adding that improving real deposit rates over the past year will also help.

Also, as HDFC Bank exits the investment cycle and productivity and cross-selling improve, Morgan Stanley expects sustained moderation in cost ratios for multiple years.

The global brokerage expects a re-rating for HDFC Bank over the next year as it sees post-merger profitability RoA (return on assets) to remain in the 1.9-2 percent range and expects loan growth accelerates to 18 percent over the next year, compared to current pro forma merged loan growth of 15-16 percent.

The key re-rating catalyst, as per the brokerage, would be strong execution on deposit growth. Key downside risk could be high than expected competitive intensity on pricing of deposits or loans, Morgan Stanley said.

The HDFC Bank-HDFC mega merger took effect from July 1 after a 15-month integration process. The record date for the share swap has been set as July 13. Shareholders of HDFC will get 42 shares of HDFC Bank for every 25 shares they hold as of the record date.

First Published:Jul 3, 2023 1:27 PM IST