Macquarie Capital rates HDFC Bank a ‘buy’, sees this potential near-term trigger

Suresh Ganapathy, a banking analyst at Macquarie Capital Securities, has a ‘buy’ recommendation on HDFC Bank.

He sees a potential near-term trigger: its possible inclusion in the MSCI index in August.

The Street will eagerly await the release of the shareholding pattern as of June 30, Ganapathy noted.

The MSCI inclusion, he believes, could potentially lead to $4 to $5 billion in buying activity.

Despite tempered expectations for loan growth over the next few years, Ganapathy suggests that improved margins could drive 14% to 20% earnings per share (EPS) growth, making HDFC Bank’s stock currently attractively priced.

Shares of HDFC Bank have gained 2% so far this year.

Ganapathy is positive on the banking sector overall.

Private sector banks, he noted, have underperformed for a long time, and now present attractive valuations with stable returns.

However, he prefers to avoid PSU banks as of now given several significant developments expected within the financial year.

The Reserve Bank of India’s plans to introduce expected credit loss (ECL) guidelines and project finance guidelines, and a rise in populist measures such as farm loan waivers, and potential announcements in the upcoming Budget.

PSU banks like Indian Overseas Bank, Punjab National Bank, UCO Bank, Bank of Maharashtra and Canara Bank have given 100-160% returns over the past year. Their returns are around 35 to 47% even year-to-date.

Ganapathy pointed out that low credit costs cycle is ending, and we may see a lower recovery environment in the second half of the year.

This combination of factors suggests a more normalised outlook for credit costs, particularly impacting public sector banks.

Consequently, the previous strong performance of PSU banks is expected to reverse.

While all banks must adhere to priority sector lending norms, private sector banks manage these requirements more effectively.

He highlighted that non-performing loan (NPL) levels in the agricultural sector are significantly lower for banks like HDFC Bank and Axis Bank, around 2% to 3%, compared to SBI’s 10%.

This disparity underscores the superior lending practices of private sector banks in the agricultural space compared to public sector banks.

He is cautious on the insurance sector, as competitive pressures and regulatory adjustments are expected to exert downward pressure on margins over the next 12 to 18 months.

This scenario could potentially reduce value of new business (VNB) growth to single-digit or low-double-digit levels, prompting anticipated VNB downgrades across the insurance sector. Therefore, Ganapathy is negative on insurance stocks in general.

SBI Life, however, may be an exception and see a valuation upgrade due to minimal impact from IRDA regulatory changes,

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Also Read | Focus will shift back to the private sector banks, says Macquarie Capital’s Suresh Ganapathy