On Monday, JPMorgan (NYSE:JPM) adjusted its stance on HDFC Bank Ltd (HDFCB:IN) (NYSE: HDB), downgrading the stock from Overweight to Neutral and reducing the price target from INR 1,800.00 to INR 1,700.00. The revision reflects the bank's slower than expected balance sheet growth and the anticipation of subdued loan growth in the future.
The bank is projected to experience a deceleration in loan growth, with forecasts for the financial year 2025 (F25) now at 9%, down from the previous estimate of 12%. The lower loan-to-deposit ratio (LDR) projections for F25 and F26, at 52% and 70% respectively, indicate a strategic shift towards enhancing the current and savings account (CASA) ratio and loan mix instead of focusing on loan and average balance sheet (BS) growth.
The CASA to asset ratio, a key metric for the bank, has shown a decline to 24% as of June 2024, compared to approximately 33% before the merger. This drop suggests that the bank's efforts to rebuild its CASA ratio could be a prolonged process, particularly in the current climate of overall weak CASA growth in the sector. Consequently, HDFC Bank's growth is expected to lag behind its peers over the next two years.
JPMorgan has also adjusted its earnings per share (EPS) estimates for HDFC Bank, with a slight decrease of 1-2% for the fiscal years 2025-2026. The new price target of INR 1,700 is derived from a dividend discount model (DDM), valuing the parent bank at two times and 14 times the one-year forward price-to-book (P/B) and price-to-earnings (P/E) ratios, respectively.
Despite the downgrades, the bank's core return on assets (ROAs), adjusted for trading gains and reserve drawdowns, is maintained at 1.8%, consistent with the reported 1.9%. JPMorgan suggests that HDFC Bank has operational levers that could sustain its ROAs between 1.9% to 2%, considering its flexibility in managing operating expenses, non-interest income, and credit costs.
InvestingPro Insights
Amidst the adjustments in HDFC Bank's financial projections by JPMorgan, data from InvestingPro reveals a mixed financial landscape for the bank. With a market capitalization of $149.28 billion USD and a Price/Earnings (P/E) ratio of 18.22, HDFC Bank appears to be trading at a premium relative to its near-term earnings growth. This is further supported by an adjusted P/E ratio for the last twelve months as of Q1 2025, standing at 18.33.
InvestingPro Tips highlight that HDFC Bank has been a prominent player in the Banks industry and has seen a high return over the last decade. Moreover, the bank has raised its dividend for 4 consecutive years, showcasing a commitment to shareholder returns. However, analysts anticipate a sales decline in the current year, which may be a point of concern for investors looking at the bank's growth prospects. Additionally, the bank's gross profit margins have been identified as weak, which might impact profitability.
Despite the bank's challenges, it remains profitable over the last twelve months and analysts predict it will continue to be profitable this year. These insights could be vital for investors considering HDFC Bank's stock, especially in light of the recent downgrade by JPMorgan. For a more comprehensive analysis, investors can find additional InvestingPro Tips for HDFC Bank, which offer deeper insights into the bank's performance and outlook.
Investors interested in exploring these metrics in detail can utilize the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. There are 9 additional InvestingPro Tips available for HDFC Bank at https://www.investing.com/pro/HDB, which might provide further guidance in making informed investment decisions.
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