HDFC Bank shares rise despite NII, NIM concerns; brokerages remain bullish
Following the weak core operations reported in the first quarter after its merger with Housing Development Finance Corporation, HDFC Bank witnessed a rise in its share price on October 17. Despite falling short of analyst estimates on net interest income (NII) and net interest margins (NIM) for the September quarter of the current financial year, the bank’s net profit experienced an upturn, bolstered by increased other income and a reduced tax rate.
The bank’s loan growth in the second quarter of the fiscal year 2023-2024 was notably robust, primarily driven by growth in the retail segment and sustained traction in commercial and rural banking. However, the asset quality ratios suffered a setback, attributed to a 22 basis point impact stemming from Housing Development Finance Corporation’s (HDFC Ltd) non-retail portfolio. Despite this, HDFC Bank managed to maintain a healthy provision coverage ratio (PCR), reflecting its commitment to managing potential credit risks and maintaining prudent provisioning practices.
The market’s response to the reported performance signals a mixed reaction, with the share price of HDFC Bank rising despite the challenging aspects of its financial results. This reaction suggests that investors may be considering various factors beyond the immediate financial data, such as the bank’s long-term growth prospects, its strategic positioning in the Indian banking sector, and the overall sentiment in the market.
As the financial landscape continues to evolve, market participants will closely monitor how HDFC Bank navigates these challenges and capitalizes on growth opportunities to sustain its position as a leading player in the Indian banking industry.
According to the analysis provided by the analysts at Motilal Oswal, HDFC Bank has exhibited a positive start, indicating promising prospects for future growth. The significant pace of capacity building undertaken by the bank has established a strong foundation for sustained momentum and potential expansion.
The brokerage’s assessment suggests that the bank’s margins are anticipated to experience a gradual recovery, potentially contributing to an overall improvement in return ratios. This projection is supported by the expectation of improved operating leverage, indicating that the bank’s operational efficiency is expected to enhance over time.
The acknowledgment of the bank’s proactive measures and its capability to manage capacity expansion aligns with the notion that HDFC Bank is strategically positioned to capitalize on emerging opportunities within the Indian banking sector. The positive outlook presented by Motilal Oswal highlights the potential for the bank to leverage its current growth trajectory and bolster its overall performance in the coming periods.
Overall, this positive sentiment from the brokerage underscores the bank’s ability to navigate challenges and capitalize on its strengths to further strengthen its market position. As the bank continues to execute its strategic initiatives and leverage its operational capabilities, it is expected to sustain its growth momentum and deliver enhanced value to its stakeholders.
The assessments and recommendations from various brokerage firms underscore the positive outlook and growth potential of HDFC Bank, one of India’s leading private sector banks. Here’s a summary of the insights provided by these firms:
1. Motilal Oswal estimates HDFC Bank to deliver a Compound Annual Growth Rate (CAGR) of 18 percent and 20 percent in loans and deposits, respectively, over the period of FY24 to FY26. Additionally, the brokerage anticipates a 21 percent CAGR in earnings over the same period. This growth trajectory is expected to translate into Return on Assets (RoA) and Return on Equity (RoE) of 2 percent and 17.4 percent, respectively, by FY26E. Motilal Oswal maintains a “buy” rating on the stock, setting a target price of Rs 1,950 per share.
2. Citi analysts have highlighted HDFC Bank’s encouraging deposit accretion and other significant performance metrics. The firm emphasizes that sustaining this positive momentum will be crucial for the bank. With an optimistic view, Citi also maintains a “buy” call on the stock, setting a target price of Rs 2,100 per share.
3. Similarly, Morgan Stanley holds an “overweight” rating on the stock, aligning with the positive sentiments shared by other firms. The international brokerage house expects HDFC Bank’s Net Interest Income (NII) growth to reaccelerate from the current levels, indicating confidence in the bank’s potential to further drive its revenue growth. The firm has set the same target price of Rs 2,100 for HDFC Bank.
These assessments collectively emphasize the bank’s strong potential for growth and performance, highlighting the key aspects of its business operations, including loan and deposit growth, earnings projection, and the expected acceleration in key financial metrics. As HDFC Bank continues to execute its growth strategies and maintain its operational momentum, it is poised to further strengthen its position in the Indian banking sector.
On October 16, HDFC Bank’s stock closed at Rs 1,532 on the National Stock Exchange, showing a slight decline of 0.24 percent from the previous closing price. However, the performance of HDFC Bank’s stock in 2023 has been lackluster, with a nearly 6 percent decline, positioning it among the underperforming banking stocks for the year. In contrast to larger-cap bank stocks, the stock has notably underperformed when compared to mid-cap and small-cap peers, suggesting potential challenges specific to the bank’s operations or market perception.
The decline in HDFC Bank’s share price over the past six months, by over 8 percent, contrasts sharply with the 11 percent gain in the Nifty index during the same period. This discrepancy underscores the significant struggles HDFC Bank has faced in maintaining investor confidence and market competitiveness. Reports concerning the merged entity’s (HDFC Bank-HDFC) net worth, Net Interest Margin (NIM), and Return on Assets (RoA) have possibly contributed to market apprehensions and impacted the stock’s performance.
These recent market trends indicate the necessity for investors and market analysts to closely scrutinize the dynamics influencing HDFC Bank’s stock performance. Assessing the bank’s strategic initiatives, financial metrics, and responses to broader market shifts will be crucial in comprehending the potential trajectory of HDFC Bank’s stock in the foreseeable future.
