Bernstein, which has initiated coverage of India’s financials this week, prefers HDFC Bank over private lenders such as ICICI Bank and Kotak Mahindra Bank. In its latest note, the brokerage said it rates HDFC Bank, Axis Bank and SBI as ‘outperform’ while it has ‘Market-Perform’ ratings for ICICI Bank and Kotak Mahindra Bank.
Bernstein said it strongly favours HDFC Bank as it is the private bank with the best deposit franchise and has the potential for significant operating leverage ahead. The stock is valued at a 30 per cent discount to long-term average ahead of the merger with its parent, HDFC. Bernstein said based on its assessment of the impact from the merger, the discount is unwarranted and set to reverse quickly.
On the other hand, Bernstein said ICICI Bank’s turnaround is priced in fully. That, it said, leaves no room for any execution missteps. Further upside will require a sustained profitability and growth gap vis-à-vis peers, which is unlikely.
Bernstein said the Kotak Mahindra Bank was the bear market star, which is losing lustre in a bull market: Weakening deposit growth against peers is the key worry, it said. The worry has been exacerbated by Kotak Mahindra Bank’s slow network expansion. The brokerage sees limited potential for re-rating in the absence of a major organic or inorganic boost to its growth trajectory.
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On HDFC Bank, Bernstein said that the valuation discount is unwarranted as it sees less than 5 per cent impact on PBT and a gradual and manageable quantum of incremental borrowings post HDFC merger. The merger is not operationally intensive given HDFC Bank’s 1,50,000 employees against HDFC’s 3,000 employees. It said the proof of successful execution, i.e. ability to meet borrowing and other requirements will become visible within the first few quarters after the merger.
For ICICI Bank, it said higher profitability would be challenging, given the limited room for increasing the share of retail loans any further and the likely higher opex as the bank is forced to catch up with peers on network expansion. “And the high valuation multiples (vs. its historical average) leave no room for any execution missteps,” it said.
On Kotak, Bernstein said that since larger peers are expanding network aggressively, the scale gap might soon become too wide to bridge. It expects the upcoming CEO transition to be smooth, given the tenured top management team and the continuation of promoter ownership in the bank. But a meaningful re-rating for the stock would require a step jump in growth, it said.
Bernstein has a target of HDFC Bank at Rs 2,200, which at Thursday’s intraday price of Rs 1,622.45 suggests a 36 per cent potential upside. It has a target of Rs 1000 for ICICI Bank and Rs 2,100 for Kotak Mahindra Bank.
Meanwhile, the brokerage has a target of Rs 1,000 on Axis Bank.
“We see green shoots of a turnaround — the deposit market share gains are back, and a healthy pace of branch additions provides comfort on the sustainability of these gains; the NIM gap versus peers is closing too, bringing its RoRWA closer to that of HDFC Bank and ICICI. These green shoots combined with the stock’s not so demanding valuation, make Axis attractive,” it said.
