CLSA downgrades HDFC Bank, cuts target price; stock down 1%

Foreign brokerage CLSA has downgraded HDFC Bank's stock rating from 'Buy' to 'Outperform' and slashed the target price of India's largest private lender from ₹2,050 to ₹1,650. Reacting to the development, shares of HDFC Bank fell 1% during today's session to ₹1,429 on the BSE. The stock has crashed 16% in 2024 and 9% over the past year.

Analysts at CLSA expect HDFC Bank's net interest margin (NIM) recovery to be more U-shaped rather than V-shaped.

Following its merger with parent HDFC, the net interest margin (NIM) of HDFC Bank has shrunk from a peak of 4.6% to 3.4% in Q3 FY24.

"We expect the improving yields to offset muted CASA accretion, thereby keeping NIM recovery gradual," the brokerage says, trimming its FY25/26 earnings per share (EPS) estimates for the lender by 5%.

CLSA analysts highlighted that the lender is facing twin challenges on deposits -- a high ask rate and a challenging economic environment.

"HDFC Bank's expectations of high loan growth, and not deposits, are at core of the debacle. Lowering the loan growth may be beneficial for the stock. It would be positive for its net interest margin (NIM) or return on asset (RoA) outlook," the foreign brokerage says.

In February, HDFC Bank received the Reserve Bank of India (RBI) approval to acquire an "aggregate holding" of up to 9.50% of the share capital or voting rights in Axis Bank, Suryoday Small Finance Bank, ICICI Bank, Bandhan Bank, Yes Bank, and IndusInd Bank.

On January 25, the Reserve Bank of India (RBI) gave the nod to LIC of India to buy an additional 4.8% shares in HDFC Bank, taking its stake to 9.99%. With this, LIC of India will become the largest shareholder in the private lender.

The private lender reported lower-than-expected earnings for the quarter ended December.

Net profit of the private lender rose 33.5% year-on-year to ₹16,370 crore in the third quarter. The bank's net interest income (NII) - interest income earned from loans after knocking off interest paid on deposits - witnessed a growth of 23.9% to ₹28,470 crore as against ₹22.990 crore in the corresponding period of the previous year.

The bank's net revenue surged 25.8% to ₹39,610 crore for the quarter ended December 31, 2023, from ₹31,490 crore in the year-ago period. The core net interest margin for the quarter stood at 3.4% on total assets and 3.6% based on interest-earning assets. The bank earned ₹11,140 crore as "other income" during the quarter against ₹8,500 during the year-ago period.

HDFC Bank's operating expenses for the quarter were recorded at ₹15,960 crore, an increase of 28.1% over ₹12,460 crore during the corresponding quarter of the previous year. The bank's cost-to-income ratio stood at 40.3% during Q3 FY24.

Provisions and contingencies for the quarter were at ₹4,220 crore against ₹2,810 crore in the year-ago period.