ICICI Securities Upgrades HDFC Bank to Buy with Rs 1,850 Target

ICICI Securities has issued a positive outlook on HDFC Bank, upgrading its rating to buy with a target price of Rs 1,850. This recommendation was detailed in a research report released on April 21, 2024, reflecting the broker's confidence in the bank’s prospects following its recent merger.

The merger has led to notable changes in HDFC Bank’s financial structure. There has been a significant rise in the loan-to-deposit ratio (LDR), a decrease in the share of current and savings accounts (CASA), and a marked increase in borrowings. These shifts reflect the evolving dynamics of the bank’s balance sheet as it integrates its operations and adapts to the competitive banking environment.

One of the key outcomes of the merger is the expansion of HDFC Bank’s loan market share, which surged by 330 basis points to reach 14.5 percent. In contrast, the growth in the bank’s deposit market share was more modest, rising by 110 basis points year-on-year to 11 percent. ICICI Securities forecasts an 18 percent compound annual growth rate (CAGR) in deposits between fiscal years 2024 and 2026, translating to an annual increase of around Rs 4 to 5 trillion. This projection takes into account the shifting competitive landscape in the banking sector.

Despite expectations of strong deposit growth, the bank is anticipated to maintain a balanced approach to its loan-to-deposit ratio and gradually substitute borrowing with deposits. Consequently, ICICI Securities has revised down its loan growth estimate to a 13 percent CAGR for the period of FY24 to FY26. The LDR is expected to ease to approximately 100 percent in FY25 and 96 percent in FY26, compared to the current level of 104 percent. The incremental LDR implied by these figures is estimated to be between 74 and 75 percent. The rate of deposit accretion remains a crucial factor influencing overall growth and net interest margins (NIM).

Regarding quarterly performance, the bank’s net interest margin for the fourth quarter of FY24 was slightly higher than anticipated, though the improvement may be partly due to seasonal effects. Reflecting these developments, ICICI Securities has lowered its earnings per share (EPS) estimates by 5 percent for both FY25 and FY26, primarily driven by the tempered loan growth forecast.

The report projects that HDFC Bank will maintain a solid return on assets (RoA) of 1.7 percent in FY25 and FY26, alongside a return on equity (RoE) in the range of 14 to 15 percent. The target price of Rs 1,850 remains unchanged despite the downward revision in earnings estimates.

ICICI Securities’ decision to upgrade HDFC Bank’s stock to a buy rating is influenced by the notable correction in the share price, which has declined by approximately 10 percent year-to-date. The broker expects the re-rating process to be gradual, given that although deposit growth is robust, credit growth is likely to trail the broader system, and the replacement of borrowings with deposits will occur steadily.

HDFC Bank is one of India’s leading private sector banks with a strong retail franchise and extensive branch network. The bank’s recent merger has positioned it as a larger entity in the Indian banking space, prompting analysts and investors to reassess its market position and growth outlook. The banking sector overall remains a key pillar of India’s economy, with credit growth, deposit mobilization, and asset quality continuing to be critical metrics for investors.

Investors considering HDFC Bank shares should weigh the implications of the merger-related changes alongside broader economic conditions and sectoral trends. The bank’s ability to sustain deposit growth while managing its loan book and borrowing levels will be important determinants of its financial performance in the coming years.

For further details and updates on ICICI Securities’ recommendations and other market insights, investors are encouraged to consult certified financial advisors and stay informed through reputable financial news sources.