February 21, 2024

The bank’s loan growth was strong at 5 percent QoQ, but deposits grew moderately at 2 percent QoQ in Q3FY24

Analysts recommended that long-term investors consider capitalising on the HDFC Bank stock’s steep decline, and use this dip as a buying opportunity for the long term due to attractive valuation, recovery in lending portfolio mix, and merger gains. However, they warned that the lender’s shares could potentially extend their two-day drop of 11 percent.

HDFC Bank shares tumbled as investors were disappointed with flat margins, sluggish deposit growth, and lower earnings per share (EPS) in the fiscal third quarter. The stock was down 2 percent in the afternoon on January 18, extending the previous day’s 8 percent fall.

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HDFC Bank stock price falling on knee-jerk reaction, but long-term view positive

“Though HDFC Bank’s margins disappointed in Q3, we expect gradual recovery led by portfolio mix shifting to retail lending,” said Dnyanada Vaidya, Research Analyst – BFSI at Axis Securities.

Experts said the current decline in HDFC stock price was just a knee-jerk reaction to weak Q3 results. The stock has the potential to outperform in the long run as merger synergies play out, said independent market analyst Ambareesh Baliga.

“We expect HDFC stock to run up to Rs 1,750-1,850 per share in the long-term but do not expect any immediate bounce-back in the near term. If overall market breadth declines, we can see the stock decline up to Rs 1,350 per share,” he said.

HDFC Bank stock call: Current valuation attractive, a key source of comfort

“Valuations have turned attractive for the bank post this sharp correction and we maintain a ‘buy’ on the stock with a target price of Rs 1,975,” said Dnyanada Vaidya of Axis Securities.

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Having priced in all factors that could weigh down the earnings trajectory of HDFC Bank, Malani of Sharekhan by BNP Paribas said that the stock’s valuations appeared reasonable. “We remain constructive on the bank with a mid-to-long-term perspective and retain a ‘buy’ call with a price target of Rs 1,900 per share,” he added.

Analysts at Kotak Institutional Equities, too, noted attractive valuations at present, saying that the bank needs more time to deliver best-in-class return ratios. “We maintain a ‘buy’ rating for HDFC Bank with a target price of Rs 1,860 per share and value the bank at 2.5x book and 15x FY26E EPS for RoE at 16 percent and 15 percent CAGR,” they wrote in a post-result review analysis.

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Here’s why HDFC Bank stock fell after Q3 results: NIM falls flat

The key negative in HDFC Bank’s Q3 report card was its core operating performance, said Rahul Malani, Deputy VP – Fundamental Research, Sharekhan by BNP Paribas.

“The lender’s NIMs (net interest margins) were flat quarter-on-quarter (QoQ) versus expected improvement of 5-10 basis points (bps) as regulation on incremental cash reserve ratio (ICRR) was withdrawn. On the liability side, the key challenge was higher credit-to-deposit (CD) ratio as it was 110 percent — higher than the industry average,” he said.

An increase in the interest expenditure limited HDFC Bank’s net interest income (NII) growth to 4 percent QoQ in Q3FY24, while prudential provisions towards alternate investment funds (AIFs) limited profit growth to 4 percent QoQ. The lender’s higher cost of funds or borrowing costs constrained expansion in the margin, keeping that flat during the quarter.

ALSO READ: HDFC Bank: The worst may be over, but it’s tough to reclaim its past glory

Deposit step-up, NIM re-rating essential growth levers for HDFC Bank

On the other hand, while the bank’s loan growth was strong at 5 percent QoQ, the deposits grew moderately at 2 percent QoQ in Q3FY24. As a result, the loan-to-deposit ratio (LDR) rose to 110 percent versus 107 percent QoQ, which means that the bank needs to step up deposit growth to enable higher loan growth in the near-to-medium term.

An LDR of 80-90 percent is considered healthy for banks. A ratio higher than that means that the bank has to build reserves or in this case, deposits to meet unexpected contingencies.

HDFC Bank may see a gradual improvement in NIM, depending upon favourable loan mix, CASA accretion, and funding mix change, said analysts at ICICI Securities. The brokerage has an ‘add’ rating on HDFC Bank stock, with a target price of Rs 1,850 per share.

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