Buy HDFC Bank Stock, Target Price Set at Rs 1,900: Sharekhan

Sharekhan recommends buying HDFC Bank shares with a target price of Rs 1,900, based on their report dated October 4, 2024.

Strong Deposit Growth in Q2FY25

HDFC Bank has shown strong growth in deposits during the second quarter of FY2025. Deposits increased by 15.1% year-on-year (YoY) and 5.1% quarter-on-quarter (QoQ), driven mainly by term deposits, which surged by 19.3% YoY and 6.7% QoQ. CASA (Current Account Savings Account) grew by 8.0% YoY, though its ratio slightly dropped to 35.3% compared to 37.6% last year. The bank’s gross advances grew 7% YoY, but loan growth has been slower as the bank focuses on adjusting its credit-to-deposit ratio (CD ratio) during this transition period.

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Focus on Growth and Profitability

HDFC Bank is working to bring down its CD ratio steadily while maintaining profitable growth. The bank expects loan growth to be moderate in the near term, with deposits growing faster than loans. This is part of the strategy to shift towards higher-yielding retail loans, which offer better returns.

NIMs to Gradually Improve

Net interest margins (NIMs) are expected to improve by 25-30 basis points over the next 12-15 months as HDFC Bank replaces high-cost wholesale funding from HDFC Ltd. with lower-cost retail deposits. The shift toward more profitable retail loans will also help boost margins.

Strong Outlook for Future Growth

HDFC Bank reported robust deposit mobilization during Q2FY25, with Rs 1,20,900 crore in new deposits, exceeding the expected Rs 80,000-100,000 crore. The bank’s management is focused on enhancing customer relationships and service quality rather than using pricing to attract more deposits.

In terms of loans, retail loans grew by 2.6% QoQ, while commercial and rural banking grew by 4.7%. However, corporate loans fell by 2.8%. The bank expects corporate loan growth to remain slow as it focuses on maintaining pricing discipline.

Valuation and Investment Strategy

Sharekhan maintains its “Buy” rating on HDFC Bank with a target price of Rs 1,900. Despite muted loan growth in the near term, the bank is expected to return to strong growth once this transition phase is over in the next 12-15 months. Earnings are projected to grow at a compound annual growth rate (CAGR) of 12% between FY24 and FY26, with a return on assets (ROA) of 1.8%. The stock currently trades at 2.2x and 1.9x its estimated book value for FY25 and FY26, respectively.

Conclusion

HDFC Bank is well-positioned for long-term growth, with strong fundamentals and a focus on building its retail deposit base. Its transition following the merger with HDFC Ltd. is expected to strengthen the bank’s growth trajectory, making it a solid investment option. The key factors to watch include NIM performance and retail deposit growth.