HDFC Bank shares have not lived up to their name so far this year as the second wave of the pandemic has exacerbated fears about banks' asset quality.
HDFC Bank shares are up just 10 per cent since the beginning of the year (YTD), compared with a 24 per cent jump in the benchmark Sensex.
However, brokerage firm Motilal Oswal Financial Services now sees a 14 per cent upside potential for its shares from this point onwards.
The brokerage firm has backed an offer to buy the shares with a target price of Rs 1,800 crore.
India's largest private sector bank by assets and market capitalisation, HDFC Bank has now received relief from RBI, which has partially lifted the restrictions imposed on it and allowed the bank to get new credit cards .
According to Exness, the bank is now looking to regain lost market share in the card segments in the next three to four quarters .
"This addresses a key weakness as HDFC Bank is the largest credit card issuer in the country and this segment is key to the overall profitability of the bank," Motilal Oswal said.
"In recent quarters, HDFC Bank has reported moderating fee income or net profit affected by the restriction as this segment generates 25-33 per cent of its total fee income. Thus, the removal of the restriction before the festive season is a positive development. "HDFC Bank is usually aggressive at this time, offering various discounts on consumer goods," Motilal Oswal said.
In the April-June quarter of FY2022 (FY22), the bank has shown significant growth in advances despite the challenging conditions associated with the second wave of COVID-19.
Brokerage Motilal Oswal expects strong growth in the second half of FY22, though growth in the first half may remain weak.
"According to our estimates, loans will grow by 15% and 17.5% in FY22 and FY23 respectively. Deposit growth remains strong, led by CASA, which will support the margin trajectory. Its fee income has been impacted by low business activity in Q1 FY22. ", said Motilal Oswal.
Strong cost control, driven by further digitalisation, is likely to lead to an overall improvement in the bank's profitability. While margins have declined, the brokerage firm expects a gradual increase due to lower cost of funds and a strong and detailed liability franchise.
"The high level of capitalisation and liquidity should help HDFC Bank maintain its growth momentum over the next few years. This gives the bank more scope to overcome the crisis and increase market share," said Motilal Oswal.
Motilal Oswal expects growth trends in retail, especially in the unsecured lending segment, to recover in the coming quarters.
The bank is aware that the threat of COVID-19 still exists and has taken steps to mitigate the impact of a future pandemic wave.
"HDFC Bank continues to build additional contingent reserves to further strengthen its balance sheet against any potential impact of COVID-19 and expects the stress to remain under control," said Motilal Oswal.
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