HDFC’s price-to-earnings (PE) derating story from the last 3 years:
(Source: Finology Ticker)
Over the past 3 years, HDFC Bank’s stock has been trading within a range-bound territory.
- the stock has struggled to sustain levels above ₹1,800
- it repeatedly approached the ₹1,750 mark but failed to break through
- on the downside, the stock has received strong demand around the ₹1,450 level
Earnings Growth vs. Price Performance
From March 2021 to March 2024, HDFC Bank’s Earnings Per Share (EPS) significantly increased from ₹56.8 to ₹85.83. That’s an impressive growth of ~50%.
Despite this notable earnings growth, the stock’s 3-year price return is -2.61%.
According to financial theory, stock prices are heavily dependent on earnings growth.
- this scenario of HDFC Bank illustrates a classic example of P/E derating
- it only happens when the industry is facing strong near-term headwinds
Let’s Explore what are the Odds against HDFC
HDFC Bank is India’s biggest bank in terms of market cap. However, the strong pressure in the banking sector might be contributing to its inability to sustain levels above ₹1,750.
The average advances increased with small numbers:
- it rises from ₹19.0 trillion in Q4 FY24 to ₹19.2 trillion in Q1 FY25
- while the YoY growth declined from 21% to 17%
On the other hand, the average deposits increased slightly:
- from ₹20.3 trillion to ₹21.3 trillion
- and YoY growth also declined from 20% to 17%
In Q1 FY25, the growth fell short of expectations:
- due to deposit growth shortfalls and
- management expressing dissatisfaction
Seasonal variations and unexpected outflows from current accounts have also adversely affected deposit stability. While average deposits have remained steady, liquidity constraints have become a significant concern. They are witnessed by a shift of funds from fixed deposits to the Indian share market as investors pursue higher returns in equities.
Recently published data by CRISIL indicate that the household savings rate (net household savings/GDP) fell to a six-year low of 18.4% in fiscal 2023.
- this trend reduces the pool of stable deposits available to banks
- it is forcing them to compete with higher interest rates on term deposits
As a result, the overall profitability gets impacted due to increasing the cost of funds and leading to the Net Interest Margin (NIM) contraction.
Another major concern is the imbalance between loan and deposit growth. HDFC Bank’s deposits grew by 26.4% in the previous year, compared to a 55.2% expansion in the loan book. This disparity raises regulatory concerns.
The Reserve Bank of India (RBI) worries about the narrowing gap between loan and deposit growth rates. Thus, it is posing challenges for HDFC Bank to sustain its loan book growth without adequate deposit growth.
The liquidity challenges and competitive cost of funds affect not just HDFC Bank but also the entire private banking sector.
Banks play a critical role as the backbone of the economy. Yet, the recent Q1 FY25 GDP growth slowdown to 6.7% from 8.2% a year ago underscores the urgency for action.
It’s just a matter of time before the RBI and the Indian government implement a revival plan to address these structural liquidity issues. Although near-term pressures are expected to persist, they could be resolved within the next two to three quarters.
The real question is: will HDFC Bank seize the opportunity?
If the stock has to break and sustain above the crucial level of ₹1,800, it will require a solid quarterly result and an above-average deposit growth rate that outpaces its peers.
The stage is set, but time will only tell whether HDFC Bank rises to the challenge.
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