Citi cuts HDFC Bank stock price target and FY25/26E forecast

On Monday, Citi revised its price target for HDFC Bank Ltd (HDFCB:IN) (NYSE: HDB) to INR 2,020 from the previous INR 2,050, while keeping a Buy rating on the stock.

The adjustment follows HDFC Bank's recent financial metrics, which showed a positive surprise in net interest margin (NIM) and net interest income (NII), as they rose by 3 basis points and 2.6% quarter-over-quarter, respectively. This performance was contrary to Citi's expectation of a 3 basis points decline and was helped by a reduction in borrowings and stable yields.

The bank's earnings were also supported by controlled credit costs, which stood at 42 basis points, and operating expenses relative to assets, which were at 1.85%. Management's focus appears to be on maintaining a balance between NIM, the loan-to-deposit ratio (LDR), and return on assets (RoA), rather than pursuing aggressive growth. The end-of-period deposit accretion remained flat quarter-over-quarter, which management ascribed to short-term current account flows.

In light of the bank's strategies and recent performance, Citi has adjusted its loan growth forecast for HDFC Bank. The estimates for the financial years 2025 and 2026 have been moderated to 11% and 14%, respectively, down from the earlier projections of 13% and 16%.

This revision takes into account an expected deposit increase of INR 4.0 trillion for FY25 and INR 4.9 trillion for FY26. Consequently, the earnings estimates for these years have been slightly lowered by 1-2%, and projections for FY27 have been introduced.

The bank's management has indicated a strategic shift toward improving the quality of growth by lowering the LDR and targeting profitable expansion. This approach seems to be a move to prioritize stability and efficiency over rapid expansion.

In other recent news, HDFC Bank has seen a series of developments. JPMorgan has downgraded HDFC Bank from Overweight to Neutral and lowered the price target from INR 1,800.00 to INR 1,700.00, citing slower than expected balance sheet growth and anticipated subdued loan growth. The bank's earnings per share estimates for fiscal years 2025-2026 have also been slightly reduced by 1-2%.

In addition, the bank has fulfilled its regulatory obligations to the United States Securities and Exchange Commission (SEC) by filing the required Form 6-K for June 2024. This action demonstrates HDFC Bank's commitment to maintaining transparency and compliance with international financial reporting standards.

Furthermore, HDFC Bank has announced the outcomes of a recent board meeting and scheduled another for July 20, 2024. While the specifics of these meetings have not been disclosed, they are part of the bank's ongoing corporate governance and strategic planning.

These are the recent developments surrounding HDFC Bank, as reported in various press releases and statements.

InvestingPro Insights

As HDFC Bank Ltd (HDFCB:IN) (NYSE: HDB) navigates through its strategic shift towards profitable growth, current metrics from InvestingPro provide a deeper understanding of the bank's financial health. With a market capitalization of $149.56 billion and a P/E ratio of 18.25, the bank is positioned as a prominent player in the banking industry. Notably, analysts predict that HDFC Bank will remain profitable this year, supported by its performance over the last twelve months. InvestingPro Tips highlight that the bank has raised its dividend for four consecutive years, suggesting a commitment to shareholder returns despite a recent decline in gross profit margins.

Investors should note that while HDFC Bank has been experiencing a rapid revenue growth rate of over 120% in the last twelve months as of Q1 2023, the bank is also quickly burning through cash, and some analysts anticipate a sales decline in the current year. These contrasting indicators underscore the importance of closely monitoring the bank's financial strategies and execution. For a more comprehensive analysis and additional insights, investors can explore more InvestingPro Tips, which include the company's high return over the last decade and its trading at a high P/E ratio relative to near-term earnings growth. There are 8 more InvestingPro Tips available for HDFC Bank, which can be accessed along with real-time metrics by using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.

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