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Buying this banking stock now will give you outsized returns, according to Morgan Stanley

Buying this banking stock now will give you outsized returns, according to Morgan Stanley

Buying this banking stock now will give you outsized returns, according to Morgan Stanley
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By Ajay Vaishnav  Sept 6, 2019 6:42:08 AM IST (Updated)

In a bull-case situation, the stock could rise to Rs 3,585 apiece from the current market levels.

Morgan Stanley has set a base-case price target of Rs 3,000 on HDFC Bank, with an 'overweight' call on the private sector lender on attractive valuations and strong asset quality. HDFC Bank remains "a compounding machine", said the global investment firm in a research report on September 3.

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Shares of HDFC Bank have an upside potential of 36 percent in a base-case scenario as the bank is expected to grow at 18-20 percent despite some quarterly hiccups given its size, it said. In a bull-case situation, the stock could rise to Rs 3,585 apiece from the current market levels.
The stock was trading 0.78 percent higher at Rs 2,265.30 on the NSE on Thursday, after opening at Rs 2,249. So far this year, the scrip has returned 6.8 percent to investors, while the one-year return is almost 11 percent. In the last ten years, HDFC Bank has returned over 679 percent to investors.
HDFC Bank's strong product suite, investment in technology and increase in rural penetration amid weak competition keep it favourably placed to sustain and increase its already high market share, said the Morgan Stanley report.
In fact, the bank has 28 percent share in transaction values in credit cards; over 42 percent share in merchant acquisition.
"Historically, HDFC Bank has been a compounding story with the stock tracking earnings growth trajectory (stock price and EPS have both registered 20 percent CAGRs since F2010). There are occasions when the stock price has not tracked earnings over one to two years, and buying the stock during these periods has historically generated outsized returns. We believe that the stock currently offers such an opportunity," analysts tracking HDFC Bank wrote in the report.
A major concern for HDFC Bank last year was the loan to deposit ratio picking up sharply, raising doubts around the lender's ability to continue strong loan growth, the report said. But, HDFC Bank was able to meaningfully accelerate its retail term deposit growth. The bank's retail deposit growth accelerated to 22 percent in FY2019 focusing on growing retail term deposits, it added.
HDFC Bank's profitability will remain largely stable, the Morgan Stanley report said.
"Cost/assets at HDFC Bank is dropping quickly as it deploys technology across businesses/processes. This compensates for any funding cost increase and at ~2% of assets still has a long way to fall. This should help PPoP margins to stay strong over next the few years, which coupled with strong asset growth we expect to help the bank continue to deliver ~20% earnings
growth," the analysts wrote in the report.
However, the risks of achieving a base-case price target of Rs 3,000 per share are also significant. Slower-than-expected loan growth is the biggest risk along with greater-than-expected competition in retail hampers asset repricing/margin progression.
A sharp increase in provisioning owing to the RBI's dynamic provisioning policy and a significant deterioration in asset quality could further create obstacles in shareholder value creation, the report said. The bear-case price target is at Rs 1940 apiece.
 
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