HDFC Bank vs ICICI Bank vs Kotak Bank: Bernstein picks the first one. Here’s why

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Bernstein, which began coverage of India 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 favors HDFC Bank as it is the best deposit franchised private bank and has the potential to generate significant operating leverage ahead. The stock is valued at a 30 per cent discount to its long-term average prior to the merger with its parent HDFC. Bernstein said based on his assessment of the impact from the merger, the discount is inappropriate and looks set to reverse quickly.

Bernstein, on the other hand, said that ICICI Bank’s turnaround has been fully priced. It has been said that there is no room for any wrong move in execution. Going forward would require sustained profitability and growth lag compared to peers, which is unlikely.

Bernstein said Kotak Mahindra Bank was the star of the bear market, which is losing luster in a bull market: Weak deposit growth relative to peers is the key concern. Slow network expansion of Kotak Mahindra Bank has raised concerns. The brokerage sees limited potential for a 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 the valuation discount is inappropriate as it sees a less than 5 per cent impact on PBT and a gradual and manageable amount of incremental borrowings following the HDFC merger. The merger is not operation intensive considering HDFC Bank has 1,50,000 employees as against HDFC’s 3,000 employees. It added that evidence of successful execution, ie ability to service debt and other requirements, would be visible in the first few quarters following the merger.

For ICICI Bank, it said higher profitability will be challenging, with limited room to further grow the share of retail loans and potentially higher opex as the bank is forced to catch up with peers on network expansion. “And the high valuation multiple (vs its historical average) leave no room for any mis-execution,” it said.

On Kotak, Bernstein said that as larger peers are aggressively expanding networks, the gap may soon become too wide to bridge. Given the tenured top management team and continuity of promoter ownership in the bank, it expects the upcoming CEO transition to be smooth. But a meaningful re-rating for the stock would require a step back in growth, it said.

Bernstein has a target price of Rs 2,200 on HDFC Bank, suggesting a potential upside of 36 per cent from Thursday’s intraday price of Rs 1,622.45. It has a target of Rs 1,000 for ICICI Bank and Rs 2,100 for Kotak Mahindra Bank.

Meanwhile, the brokerage has a target price of Rs 1,000 on Axis Bank.

“We see green shoots of a turnaround – deposit market share gains are back, and a healthy pace of branch addition growth provides comfort on the sustainability of these gains; NIM vs peers gap also closing Its RORWA is being brought closer to that of HDFC Bank and ICICI. These green shoots combined with the less demanding valuations of the stock make Axis attractive,” it said.

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