Sharekhan has reiterated its BUY recommendation for HDFC Bank, maintaining a price target (PT) of Rs. 1,900. The research highlights the bank’s robust deposit growth in Q2 FY2025, which exceeded expectations and signals a strong financial position. With term deposits driving this growth and a strategy aimed at normalizing the credit-deposit (CD) ratio, HDFC Bank is positioned to continue delivering consistent results, despite certain near-term challenges.

Strong Deposit Mobilization Outpaces Loan Growth

Deposit growth exceeds expectations HDFC Bank reported a significant growth in deposits, mobilizing Rs. 1,20,900 crore in Q2 FY2025, surpassing the projected Rs. 80,000-100,000 crore. This 15.1% year-on-year (y-o-y) growth (5.1% quarter-on-quarter) was largely driven by term deposits, which grew by 19.3% y-o-y and 6.7% q-o-q. While current account savings account (CASA) deposits grew by a moderate 8% y-o-y (2.3% q-o-q), the CASA ratio declined slightly to 35.3%, down from 36.3% in the previous quarter.

Loan growth remains calibrated Loan growth was measured, with gross advances increasing by 7% y-o-y and 1.3% q-o-q. Retail loans grew by 2.6% q-o-q, while commercial and rural banking loans saw a 4.7% q-o-q increase. However, corporate and wholesale loans witnessed a decline of 2.8% q-o-q, reflecting the bank’s cautious approach in pricing larger corporate deals. This strategic shift is in line with HDFC Bank’s broader objective of maintaining a balanced loan mix, with a focus on higher-yielding retail and commercial segments.

Focus on Normalizing Credit-Deposit Ratio

Managing the credit-deposit ratio (CDR) HDFC Bank’s CD ratio fell to 100.8% from 104.5% in the previous quarter, a reflection of the bank’s efforts to recalibrate its deposit and loan growth dynamics. The bank aims to continue improving this ratio by ensuring deposit growth outpaces loan expansion in the near term. This strategic approach is designed to support long-term sustainable growth.

Liquidity coverage ratio (LCR) remains strong The bank’s liquidity coverage ratio (LCR) increased to 127% in Q2 FY2025, up from 123% in the previous quarter, further underscoring its strong liquidity position. This robust liquidity, combined with a focus on retail deposit mobilization, will enable the bank to navigate near-term challenges while maintaining profitability.

NIMs Expected to Improve Gradually

Near-term rangebound, long-term improvement Net interest margins (NIMs) are expected to remain rangebound in the near term but could see gradual improvement of 25-30 basis points over the next 12-15 months. This is largely due to the replacement of high-cost wholesale funding from HDFC Ltd. with lower-cost retail deposits, as well as a strategic shift in the loan mix towards higher-yielding retail assets. The bank has raised yield thresholds on several asset products, further supporting its NIM trajectory.

Retail focus to drive future growth The bank’s strategy of focusing on retail deposits and high-yield retail assets is expected to contribute positively to its NIMs over the medium term. With a gradual shift away from lower-yielding corporate loans, HDFC Bank is poised to improve its overall asset yield, driving better returns for investors.

Valuation and Target Price

Maintained price target of Rs. 1,900 Sharekhan has maintained its BUY recommendation on HDFC Bank with an unchanged price target of Rs. 1,900. The stock currently trades at 2.2x its FY2025E core book value and 1.9x its FY2026E core book value. Despite near-term challenges, the bank’s long-term outlook remains strong, supported by its robust deposit franchise, improving NIMs, and a well-calibrated loan growth strategy.

Earnings growth expected to remain strong Over FY2024-2026, HDFC Bank is projected to achieve an earnings compound annual growth rate (CAGR) of 12%, with return on assets (ROA) stabilizing at 1.8%. The bank's solid execution capabilities, coupled with its focus on expanding retail deposits and improving operational efficiency, underpin its medium- to long-term growth prospects.

Key Monitorables for Investors

NIM progression and deposit mobilization For investors, key factors to monitor include the progression of the bank’s NIMs and its ability to continue mobilizing retail deposits. As the bank transitions its funding mix and refocuses on retail assets, these elements will be crucial in determining its future performance.

Risks to watch While HDFC Bank is well-positioned for growth, there are certain risks to consider. Slower-than-expected retail deposit mobilization, a potential economic slowdown, or technology outages could negatively impact the bank’s operations and financial results.

Peer Comparison and Market Position

Competitive advantage in a challenging environment HDFC Bank remains a market leader in terms of scale and operational efficiency. In comparison with peers such as ICICI Bank and Axis Bank, HDFC Bank’s valuation multiples are competitive, trading at a FY2025E price-to-earnings (P/E) ratio of 15.9x and a price-to-book (P/B) ratio of 2.2x. The bank’s consistent performance, combined with its strong retail deposit franchise, positions it favorably in the current market environment.

Market cap and stock performance With a market capitalization of Rs. 12,64,267 crore, HDFC Bank is one of India’s largest private sector banks. Over the past 12 months, the stock has delivered a return of 8.6%, reflecting its resilience in a volatile market. Despite some short-term headwinds, the bank’s long-term fundamentals remain intact.

Conclusion: A Strategic Play for Long-Term Investors

HDFC Bank continues to demonstrate its strength as one of India’s leading private sector banks, with a robust deposit growth strategy, improving NIMs, and a well-balanced loan portfolio. Sharekhan’s recommendation to maintain a BUY rating with a price target of Rs. 1,900 reflects confidence in the bank’s ability to navigate near-term challenges and achieve sustainable growth over the long term. Investors should keep an eye on key metrics such as NIM progression and retail deposit mobilization, while remaining aware of potential risks such as slower economic growth or operational disruptions. Overall, HDFC Bank remains a compelling investment option for those seeking long-term stability and growth in the financial sector.