HDFC Bank Stock Check: Down over 4% this year so far, is it a good time to buy?

While the Indian markets have been on a bull run this year, hitting multiple peaks, the same has not been the case with India's largest private sector lender HDFC Bank. For the lender, this year has been a very volatile one on the back of its merger with HDFC.

The stock has underperformed its benchmark both YTD as well as in the last one year. It has lost a little over 4 percent in 2023 YTD, giving negative returns in 6 of the 9 months so far. Meanwhile, it has gained just 3 percent in the last 1 year.

In comparison, the Nifty Bank has advanced around 5 percent in 2023 YTD and over 9 percent in the last 1 year.

The stock has shed around 1 percent in September so far, extending losses for the third straight month since July. In the 3 months between July and September, the stock lost over 8 percent. Apart from the last 3 months, it was also in the red in May (-4.5 percent), February (-0.24 percent), and January (-1.5 percent).

Even though Indian markets hit new peaks in September, the same was not the case with the lender. Currently trading at ₹1,563, the stock is now 11 percent away from its record high of ₹1,757.80, hit on July 3, 2023. Meanwhile, it has advanced 14.5 percent from its 52-week low of ₹1,365, hit on September 30, 2022.

According to a MintGenie poll of 42 analysts, 24 have ‘strong buy’, 15 have 'buy' and 3 have ‘hold recommendations on the stock.

Earnings

In the June quarter, the lender beat estimates to post a 30 percent jump in its net profit at ₹11,951 crore versus ₹9,196 crore in the year-ago period. Meanwhile, its net interest income also grew by 21.1 percent YoY to ₹23,599 crore in Q1FY24 from ₹19,481 crore for the quarter ended June 30, 2022. Core net interest margin was at 4.1 percent on total assets, and 4.3 percent based on interest-earning assets.

Asset quality of the lender also improved as the lender's gross non-performing assets (GNPA) ratio came at 1.17 percent, improving from 1.28 percent in the corresponding period a year ago. Similarly, its net NPA stood at 0.30 percent from 0.35 percent in the year-ago period.

On the deposit side, total deposit of the bank stood at ₹19.13 lakh crores, jumping by 19.2 percent on a YoY basis. Meanwhile, it clocked ₹16,15,672 crore in advances in the June quarter, up 15.8 percent YoY over ₹13,95,100 crore in the same quarter last year.

HDFC Bank-HDFC merger

HDFC Ltd and HDFC Bank merged, effective on July 1, 2023, creating a combined entity that solidifies its position as the largest player in the banking and housing finance sectors in India. With a net worth of over ₹4.14 lakh crore and a combined asset base of more than ₹18 lakh crore, HDFC Bank became the fourth largest bank globally in terms of market capitalisation.

Fundamental Views

Nomura: The brokerage has downgraded the stock to ‘neutral’ and reduced its target price to ₹1,800 ( ₹1,970 earlier), indicating an upside of 15 percent on the back of merger turbulence.

The brokerage has factored in the impact of a) lower medium-term NIMs (due to excess liquidity to be carried on the balance sheet), gradually normalising over FY25-26F and b) higher opex profile for the merged entity into our earnings estimates. As a result, it has cut FY24F EPS estimates by 9 percent in FY24F and by 5 percent each in FY25-26F. Further, its BVPS estimates for FY24-26F have also been reduced by 7 percent as it factors in the impact of networth adjustments (5-6 percent impact including interim dividend), as well as the impact due to earnings cuts (1-2 percent impact).

Nomura's FY24 RoA estimate for the lender is now at 1.7 percent (vs 1.9 percent earlier), gradually improving to 1.8 percent in FY25-26F (vs 1.9 percent earlier). FY24F RoEs have a negative impact of 80 bp, going down to 14 percent, which recovers to 16 percent over FY25-26F, it added.

"While we fully appreciate the strength of the franchise, we struggle to see the upside over the next 12 months on the back of RoA and loan growth pressures. We continue to prefer IndusInd Bank, Axis Bank and ICICI Bank as our top picks," it said.

Nirmal Bang: The brokerage has retained a ‘buy’ call on the stock with a target price of ₹1,935, indicating an upside of 24 percent.

As per the brokerage, HDFC Bank's merged entity NIM (on total assets) has declined to 3.7-3.8 percent from 4.1 percent for the standalone bank in 1QFY24. Further, due to the impact of excess liquidity of ₹1 lakh crore in e-HDFC’s balance sheet towards June-end and ICRR, the NIM is expected to see further compression of 25-30 bps. The bank expects NIM to improve in a few quarters, noted the brokerage. It also pointed out that HDFC Bank’s merged entity loan growth has moderated to 13 percent due to an 18 percent YoY decline in e-HDFC’s wholesale book. Management has guided about reducing this book further in FY24 before it starts growing again in the coming years.

After incorporating these developments, the brokerage has cut FY24E and FY25E earnings estimates by 11.9 percent and 7.9 percent, respectively. While in the near term, the bank’s financials face volatility due to merger-related adjustments, the brokerage is positive about HDFC Bank over the long-term due to top management’s stability, good capital position, higher specific & standard provision buffer and historically lower valuation.

Prabhudas Lilladher: The brokerage has retained its ‘buy’ call on the stock with a target price of ₹2,025, indicating an upside of almost 30 percent.

The brokerage noted that post the merger, the creation of excess liquidity could affect Q2FY24 NIM, although margins should bounce back in H2FY24E as credit growth picks up and liquidity is utilised. FY24 NIM could contract YoY from 3.8 percent to 3.6 percent, however, as higher cost liabilities of HDFC are replaced, NIM could enhance over FY24-26E from 3.6 percent to 3.8 percent, it forecasted.

While core earnings growth is expected to be muted in FY24 (+5.2 percent YoY) owing to lower NIM and opex drag, as funding cost benefit accrues driven by replacement of high-cost liabilities, NIM is expected to enhance over FY24-26E resulting in healthy earnings CAGR of 19.4 percent, it estimated. As a result, core RoA/RoE should improve from 1.78 percent to 1.86 percent and 13.7 percent to 15.3 percent over the same time frame, added PL.

Technical Views

Aditya Gaggar, Director of Progressive Shares

HDFC Bank is in the primary uptrend but for the past couple of months, the stock has been stuck in the range of ₹1,560-1,700. The level of ₹1,560 is not only a lower end of the consolidation but also a long-term trendline support area from where the stock has recently reversed. On the daily chart, the stock is forming a continuation pattern known as the Cup and Handle Pattern, and the trend following indicators suggest positivity in the stock where MACD is all set to give a positive crossoverwhile ADX has already given. Post the consolidation breakout, the target is ₹1,840.

Rajesh Palviya, SVP - Technical and Derivatives Research, Axis Securities

Since 2020, the stock has been consolidated within a broad range from 1750-1280 levels representing short, medium and long-term sideways trends. However, this consolidation was observed in a narrow range within 1750-1540 levels, along with huge volumes for the past year. Rising volumes in the recent past signify increased participation and accumulation phase. This consolidation is also supported with 200-day SMA support (1630), which remains a positive sign. The weekly and monthly strength indicator RSI has turned flat, indicating a lack of strength on either side. “Our bias stands positive on the larger time frame with an expected upside of 1750-1900 levels. The crucial support zones are placed around 1540-1500 levels, and any violation may cause weakness. We recommend traders and investors hold long positions with the stop loss of the mentioned support zone.”

Ashwin Ramani, Derivatives Analyst, SAMCO Securities

The banking major has been consolidating in the 1,550-1,700 range since November 2022. Prior to November 2022, price rejection from the upside levels of 1,700 was observed in October 2021 and April 2022. Hence, a decisive breakout and a strong close above 1,700 levels are required to drive the next leg of the rally in the stock. Currently, the stock is trading close to the downside support level of 1,550. A break below this level can lead to the creation of fresh short positions, which can take the stock until 1,500 levels, where its next visible support is placed.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.