In a recent report, CLSA has maintains ‘Buy’ rating on HDFC Bank, with a target price of Rs 1,536.90 per share. The analysis delves into the nuanced discussion surrounding the equilibrium between deposit growth and Net Interest Margin (NIM).
CLSA’s assessment, grounded in interactions with over 20 clients post HDFC Bank’s Tuesday results, reveals a mixed sentiment among domestic and foreign investors. While some domestic clients expressed dissatisfaction with the results, foreign investors, in contrast, indicated a belief that the “EPS cuts” cycle may be nearing its end.
The report focuses on a critical concern surrounding deposits and Net Interest Margin (NIM) in the context of HDFC Bank. Regarding deposits, certain clients attribute the challenge to macroeconomic factors rather than being intrinsic to HDFC Bank alone.
CLSA anticipates the Reserve Bank of India (RBI) addressing the $20 billion liquidity deficit through a combination of foreign exchange (FX) purchases, a potential 50 basis points Cash Reserve Ratio (CRR) cut, and Open Market Operations (OMOs). Notably, a durable liquidity injection of Rs 1 tends to generate Rs 4.6 in deposits over 6-12 months.
During the conference call, HDFC Bank’s management attributed weaker deposit growth to an overall liquidity deficit in the banking system. The RBI’s infusion of US$17 billion via FX intervention, falling short of CLSA’s US$42 billion estimate, is contributing to the money market liquidity deficit.
CLSA anticipates the RBI implementing measures to alleviate the deficit, including FX interventions and a possible CRR cut. The report suggests that a $10 billion FX intervention in 4QFY24 could help reduce the liquidity deficit, simultaneously allowing the RBI to recoup $22 billion FYTD of FX reserves sold. Additionally, a 50 basis points CRR cut, if executed, could inject $10 billion of liquidity into the system.
While CLSA acknowledges being approximately 5% below consensus on FY25/26 EPS estimates, the report attributes this variance to lower operating profit resulting from cuts in deposit and loan growth. The revised assumptions include a forecast of 15% loan growth, 22% deposit growth, and a 20 basis points NIM improvement from exit-FY24 levels.
Shares of HDFC Bank Ltd. extended their decline on Tuesday, emerging as the foremost contributors to the Nifty 50’s downturn with a 2% drop. The substantial impact on the index is evidenced by the deduction of 56 points attributed to the decline in India’s largest private lender. Furthermore, HDFC Bank’s market capitalization has slipped below ₹11 lakh crore, marking a significant retreat from its pinnacle of ₹12.97 lakh crore achieved on December 29. The persistent negative trend underscores the challenges faced by the banking giant in the current market scenario.
