Motilal Oswal, Kotak Equities bullish on HDFC Bank, see over 13% upside potential

Over the past two years, HDFC Bank has reduced its borrowings by Rs 60,000 crore

HDFC Bank, India’s largest private lender, has underperformed over the past year, prompting questions about its future returns and growth potential following its merger with erstwhile HDFC Ltd. With the banking industry grappling with a high credit-to-deposit (CD) ratio, analysts are closely watching how the bank navigates this challenge to maintain profitability.

In its annual report, HDFC Bank emphasized its commitment to achieving sustainable growth in the medium term by continuing to invest in both its physical infrastructure and digital capabilities. The report highlighted the bank’s narrowing margins due to higher liability costs and loan mix, but also noted stable asset quality and strong performance across various subsidiaries.

Analysts at Kotak Institutional Equities and Motilal Oswal have issued 'buy' ratings for HDFC Bank, setting target prices of Rs 1,850 each, suggesting an upside potential of over 13 percent from current levels. Motilal Oswal acknowledged that the bank’s near-term growth may remain soft due to the high CD ratio, but believes that an increased threshold on loan pricing, an improved asset mix, and the gradual exit from high-cost borrowings will help expand margins.

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Over the past two years, HDFC Bank has reduced its borrowings by Rs 60,000 crore, with more expected to mature by FY25 and be replaced by deposits. This strategic shift is expected to strengthen the balance sheet and support margin expansion, according to Motilal Oswal.

Asset quality has remained stable post-merger, with gross non-performing assets (GNPA) and net non-performing assets (NNPA) at 1.3 percent and 0.4 percent, respectively. The bank also maintains a strong provision buffer of Rs 26,900 crore, equivalent to 1.1 percent of loans.

Challenges for HDFC Bank include mobilizing a larger deposit base, increasing loan growth relative to peers, and delivering resilient margin performance.

However, Motilal Oswal projects a loan compound annual growth rate (CAGR) of around 10 percent over FY24-26, with deposit CAGR expected to sustain at approximately 16 percent over the same period.

Kotak Institutional Equities, too, expects the bank to gradually move away from its de-rating phase and enter a period where re-rating becomes possible. The pace of this transition will depend on the management of liabilities, they added.

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