HDFC Bank Share Price Rally: 'Safe Haven' Buying Behind Outperformance, Says JPMorgan

Recent outperformance in share price of HDFC Bank Ltd. is due to a 'safe haven' trade, despite the bank reporting muted earnings in the first half of the fiscal, according to a report by JPMorgan.

"We believe the stock's rise is attributable to a 'safe haven' trade following 1H earnings, as markets trade asset quality over all else, as rising delinquencies in unsecured retail loans and slowing nominal GDP growth risks a deepening retail credit cycle," the brokerage said.

HDFC Bank's modest growth in its unsecured book over the past two years and lower risk-weighted asset density compared to private peers highlight its lower risk profile, it added.

In the last three months, the stock has risen around 8%, compared to a 1.2% rise in Nifty Bank, and a 4% fall in the benchmark Nifty 50. The brokerage has kept its target price at Rs 1,750, implying 6% downside, with a 'neutral' rating.

Lower risk profile, according to the brokerage, is evident in its lower gross slippage rates, although credit costs are similar to other large-cap private banks due to corporate recoveries. "We expect the 'risk-off' trade to persist until Q3," it said. "By Q4, if credit conditions improve, the stock may lose some of its recent gains. Conversely, if the asset quality cycle worsens, valuations could expand due to a safety premium."

Given cyclically high levels of household debt in India and low levels of corporate debt, the brokerage prefers capex over consumption as a thematic and likes the state owned banks. "We think growth will be the main constraint to solve and hence within large cap privates we prefer ICICI Bank and Kotak Mahindra Bank, which are delivering higher average asset growth and better ROA/ RORWA profile," it said.

An adverse macro is good for the stock, according to the brokerage, as slowing nominal GDP growth and risks of a deepening credit cycle in retail are positive for HDFC Bank, it said.

The main bearish arguments on the bank have been slower growth over next two-three years, given need to reduce LDR, and downward reset in ROA post merger driven by lower NIM. "We believe adverse macro turns both, as HDFCB's relative growth gap to system comes off sharply, and regulators' focus on LDR as a policy tool reduces and in-fact liquidity could be turned positive. "

Conversely, an improving macro in fiscal 2026 may lead to the stock giving up gains. "If the growth slowdown is temporary in nature and similar to history, the current retail credit cycle turns out to be a shallow one given no major job market stress, then by FY26 market focus could come back to growth, where HDFCB will likely lag peers given CASA growth and LDR constraints," the brokerage said.

"The bank's flex to manage credit is high and a possible IPO of HDB with associated gains could open up potential for higher reserving, thus keeping credit costs lower for longer," JPMorgan said.