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CLSA sees 30% upside in HDFC Bank despite mild moratorium hit on asset quality

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Amid fears of a spike in slippages and credit cost for financial players, HDFC Bank has earned a thumbs-up from global brokerage firm CLSA, which said the bank management expects a manageable impact on its asset quality at just 2 per cent of loans from 1.30 per cent earlier.

This forced CLSA to retain ‘buy’ rating on the private lender with a price target of Rs 1,450, indicating a 30 per cent upside from the current market price despite higher valuations. At the current market price of Rs 1,115, shares of HDFC Bank traded at a price-to-earnings (P/E) multiple of 22.27 times against its 10-year average of 25.72.

Commenting on the higher valuations, CLSA said, “HDFC Bank deserves a premium versus peers, given its higher profitability and stronger underwriting quality.” It also believes low corporate book risk, a high share of salaried or known-to-bank customers, a relatively improved rural economy and an expected bounce in the second half of FY21 underpin management expectations of manageable asset quality.

The bank’s cost-to-income ratio has fallen about 10 per cent and 5 per cent in the last 10 years and 5 years, respectively, to about 38 per cent. “Covid-19 has accelerated digital adoption and with increased straight-through processing and digital customer acquisition or servicing, management expects further cost improvement to the mid-30s in the medium term,” CLSA said in a report.

HDFC Bank has an impressive track record in corporate loans, with credit costs remaining at 20-40 basis points through the corporate credit cycle. “Growth has been higher in the recent past, been driven by lending to good-quality corporate or PSU companies,” CLSA added.

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