Credit Growth Strategies And Fee Diversification Will Strengthen Future Prospects

Key Takeaways

• Strategic focus on boosting credit growth and reducing CD ratio could enhance revenue and earnings by leveraging improved liquidity conditions.
  
• Diversified fee income and retail expansion may stabilize revenue streams and enhance future earnings through increased customer engagement and product distribution.
  
• HDFC Bank's conservative strategies, high liquidity, and regulatory challenges may limit growth and impact financial performance and operational flexibility in the short term.

Catalysts

Engages in the provision of banking and financial services to individuals and businesses in India, Bahrain, Hong Kong, Singapore, and Dubai.

• HDFC Bank is observing macroeconomic improvements with increasing liquidity, which could enhance its ability to lower deposit rates in the future, potentially boosting net margins.
  
• The bank's strategic plan includes accelerating the reduction of the credit-deposit (CD) ratio, aiming for faster credit growth than the system by FY '27, which could lead to increased revenue and improved earnings.
  
• HDFC Bank's focus on enhancing its fee income through robust growth in third-party product distribution suggests a potential increase in revenue due to diversification and stability in fee income streams.
  
• Increased retail customer acquisition and branch expansion aim at sustaining deposit growth and enhancing customer engagements, potentially stabilizing revenue by enhancing the bank's deposit franchise.
  
• The bank's plans for the eventual listing of HDB Financial Services could unlock value and improve earnings visibility, contributing positively to the bank's future earnings growth.

HDFC Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HDFC Bank's revenue will decrease by -5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.1% today to 39.8% in 3 years time.
• Analysts expect earnings to reach ₹932.9 billion (and earnings per share of ₹122.23) by about December 2027, up from ₹691.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹802.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2027 earnings, up from 20.6x today. This future PE is greater than the current PE for the US Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.15%, as per the Simply Wall St company report.

HDFC Bank Future Earnings Per Share Growth

Risks

• The higher liquidity coverage ratio (LCR) maintained by HDFC Bank may indicate that the bank is holding onto excess liquidity, which could depress net interest margins in the short term, impacting earnings.
  
• Despite the bank's efforts to normalize the loan-to-deposit ratio (LDR) and increase deposit growth, the limited flexibility in repaying non-callable borrowings inherited from HDFC could restrict strategic financial optimizations that might affect short-term profitability.
  
• Elevated deposit rates remain sticky due to credit growth outpacing deposit growth in the system, potentially pressuring the bank's net interest margins and impacting revenue.
  
• The HDB Financial listing requirements and associated regulatory changes pose uncertainties that could delay strategic plans, affecting the bank's broader financial performance and regulatory compliance costs.
  
• A conservative underwriting stance in various segments, particularly with larger ticket-size loans due to stubborn pricing, might limit loan book growth in comparison to peers, impacting the bank’s revenue growth prospects in the competitive landscape.

Valuation

• The analysts have a consensus price target of ₹1948.58 for HDFC Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2550.0, and the most bearish reporting a price target of just ₹1554.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹2344.2 billion, earnings will come to ₹932.9 billion, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹1863.1, the analyst's price target of ₹1948.58 is 4.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.