On Monday, JPMorgan updated its outlook on HDFC Bank Limited (HDFCB:IN) (NYSE: HDB) stock, lifting the price target to INR1,750 from INR1,700 while maintaining a Neutral rating on the stock.
The adjustment follows HDFC Bank's second-quarter profit after tax (PAT), which reached Rs168 billion, marking a 5% year-over-year increase and surpassing JPMorgan's estimate by 3%. The bank's performance was bolstered by a reversal of provisions related to Alternative Investment Funds (AIF).
The bank's net interest margin (NIM) remained stable quarter-over-quarter, with gains in loan and liability mix counterbalanced by the bank's decision to hold higher liquidity in anticipation of new regulations.
Net Interest Income (NII) saw a 10% year-over-year increase, while core Pre-Provision Operating Profit (PPOP) rose by 13%, driven by a significant recovery in fees, which increased by 17% year-over-year, and a moderate growth in operating expenses.
HDFC Bank exhibited a strong asset quality with net slippage contained at 0.7%. The reported Return on Assets (ROA) was 1.96%, higher than JPMorgan's core estimate of 1.8%.
However, the bank's loan growth was muted at 7% year-over-year, and the bank signaled it would grow below the system in the financial years 2025 and 2026 as it aims to address its balance sheet post-merger.
The bank's Current Account and Savings Account (CASA) growth, although better than peers, was relatively slow at 8% year-over-year, which could limit future growth. The CASA to asset ratio has declined by nearly 900 basis points to 24% following the merger, and the bank acknowledges that improving this ratio will be crucial for future margin and ROA enhancement.
JPMorgan has revised its earnings per share (EPS) forecast for HDFC Bank for fiscal years 2025 and 2026, reducing estimates by 3% and 4% respectively, to reflect the anticipated slower loan growth.
Despite this, the bank's credit risk is considered relatively lower compared to other private sector banks due to its controlled book growth and a gross slippage rate of 1.3%. The firm anticipates that balance sheet repair, particularly in terms of the Loan to Deposit Ratio (LDR), could take approximately 18 to 24 months.
In other recent news, HDFC Bank has been highlighted for its robust deposit growth, with Goldman Sachs reaffirming its Conviction Buy rating on the bank. The bank's deposit growth outperformed other major banks, reporting a 15% year-over-year increase.
On the other hand, Bernstein SocGen Group retained its Outperform rating on HDFC Bank, despite the bank's strategic move to sell portions of its auto and home loans portfolio, aiming to rebalance its balance sheet amid tight market liquidity.
However, CLSA downgraded HDFC Bank from Outperform to Hold, reflecting the bank's focus on profitability over loan book expansion. In contrast, Citi maintained its Buy rating on the bank but revised its price target following the bank's recent financial metrics, which showed a positive surprise in net interest margin and net interest income.
JPMorgan also adjusted its stance on HDFC Bank, downgrading the stock from Overweight to Neutral and reducing the price target due to slower than expected balance sheet growth and anticipated subdued loan growth.
Despite the downgrades, JPMorgan maintains that HDFC Bank has operational levers that could sustain its return on assets. These are the recent developments surrounding HDFC Bank.
InvestingPro Insights
HDFC Bank's recent performance, as highlighted by JPMorgan's analysis, aligns with several key metrics and insights from InvestingPro. The bank's market capitalization stands at $157.31 billion, reflecting its significant presence in the banking sector.
An InvestingPro Tip notes that HDFC Bank is "Trading near its 52-week high," which corresponds with the recent positive performance and JPMorgan's increased price target. This suggests investor confidence in the bank's prospects despite the challenges mentioned in the report.
The bank's P/E ratio of 19.32 indicates that investors are willing to pay a premium for its shares, possibly due to its strong market position and potential for growth. However, another InvestingPro Tip cautions that HDFC Bank is "Trading at a high P/E ratio relative to near-term earnings growth," which investors should consider in light of JPMorgan's revised EPS forecasts.
HDFC Bank's revenue growth is impressive, with a 120.79% increase over the last twelve months. This robust growth, coupled with an operating income margin of 31.05%, underscores the bank's ability to generate profits efficiently, supporting JPMorgan's observation of strong asset quality and contained net slippage.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and metrics that could provide further insight into HDFC Bank's financial health and future prospects.
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