HDFC Bank Shares Decline After BofA Downgrades Ratings Of India's Largest Private Lender; Buy Or Not?

HDFC Bank shares faced a turbulent trading session on Thursday, dipping into the red after a notable downgrade from global brokerage firm Bank of America (BofA). This adjustment saw the bank's stock recommendation slip from 'buy' to 'neutral', reflecting a shift in investor sentiment and expectations.

BofA's downgrade included a modest reduction in the target price, from Rs 1,850 to Rs 1,830 per share. Analysts at BofA argue that most of the positive developments for HDFC Bank are already factored into the current price. This perspective follows a significant rally since February, driven by investor concerns over deposit figures following the bank's merger with the former HDFC.

BofA analysts predict a constrained risk-reward range for HDFC Bank's stock over the coming 12 months. This outlook comes after the stock saw a 20% increase from its February lows, buoyed partly by optimism around its index weight.

"We are navigating a tricky FY25 - wherein risk-reward is capped in the near-term. We expect catalysts to start playing out only in FY26. Moreover, a shallow rate cut cycle would delay NIM recovery for HDFC Bank," stated BofA analysts. They emphasize that a shallow rate cut cycle will defer the recovery of Net Interest Margin (NIM), with significant growth drivers likely emerging only in FY26.

Recently, HDFC Bank released its business update for the quarter ending in June (Q1FY25). The private sector lender reported a 24.4% year-on-year increase in its deposit base, reaching Rs 23.8 lakh crore in Q1. However, this figure remained flat sequentially. Excluding the merger's impact, deposits grew by 16.5% over the past year.

The bank highlighted a robust 4.6% quarter-on-quarter increase in average deposits, while the average assets under management (AUM) rose by 0.8% quarter-on-quarter. This growth is largely attributed to a significant accumulation of deposits towards the end of the previous quarter (Q4), a typical trend for Q4. Consequently, the average base figure for deposits should be considered somewhat inflated.

As of 11:25 am on Thursday, HDFC Bank shares were trading down over 1% at Rs 1,607.50 per share on the National Stock Exchange (NSE). Over the past year, the stock has delivered a slightly negative return, down by just over 1%. This recent downgrade by BofA adds to the challenges faced by HDFC Bank.

For investors, the current scenario presents a mixed outlook. On one hand, HDFC Bank has demonstrated growth in its deposit base and maintained steady AUM growth. On the other hand, the downgrade by BofA and the forecast of a narrow risk-reward range suggest a cautious approach in the near term.

Investors should consider the potential delays in NIM recovery and the broader economic factors, such as the anticipated shallow rate cut cycle. Those with a long-term investment horizon might find value in HDFC Bank, given the expected catalysts in FY26. However, short-term investors may want to stay vigilant, keeping an eye on upcoming financial reports and market conditions.