HDFC Bank Ltd. needs a meaningful improvement in loan growth, margins and return on assets for its stock to reverse its recent underperformance, according to HSBC Global Investment Research, which downgraded the lender to Hold from Buy.
HSBC also cut its target price on HDFC Bank to Rs 830 from Rs 990. The new target implies 15.2% upside from the bank's share price of Rs 720.30 as of Aug. 28.
The brokerage said the stock is unlikely to see a sustained recovery simply because its valuation has become more attractive. It said a reversal in the bank's operating performance is needed to support a broader recovery in the shares.
"We do not believe a mean reversion would happen just because valuations are attractive," HSBC said. "History has no standing if the fundamental performance does not improve."
HSBC said HDFC Bank's structural issues remain unresolved. It expects loan growth to remain weak because of the lender's high deposit growth, while margin recovery will depend on deposit repricing and the pace of loan growth.
The brokerage said the bank's net interest margin could remain under pressure. It expects NIM to be around 3.26% in the first quarter of fiscal 2027, followed by a recovery towards 3.5% in the second quarter.
HSBC also expects return on assets to improve only gradually. It said the bank will need to focus on improving ROA while protecting asset quality.
CEO transition adds another uncertainty
HDFC Bank's leadership transition remains an additional issue for investors after Managing Director and CEO Sashidhar Jagdishan decided not to seek reappointment.
HSBC said the board will have limited time to suggest candidates to the Reserve Bank of India and obtain its approval before Jagdishan's term ends on Oct. 26.
The brokerage said an internal candidate, Deputy Managing Director Kaizad Bharucha, is the most obvious option. It said Bharucha is eligible to remain at the bank until the end of 2029.
HSBC added that an external candidate could also be considered, although the bank has an internal candidate with a "stop-gap" arrangement that would allow it to search for a long-term CEO.
"Any new CEO will not have it easy," HSBC said, adding that the bank's structural issues remain intact.
Loan growth, margins remain key
HSBC said HDFC Bank needs to accelerate loan growth despite its high deposit growth. It said the lender's loan-to-deposit ratio has fallen to 93%, while its credit growth is expected to remain below deposit growth in the near term.
The brokerage said the bank's credit growth is expected to improve only gradually, while its net interest margin could remain below 3.5% in the near term.
HSBC said the new CEO will have to address both loan growth and margins while improving ROA.
"New CEO will have to fix issues of loan growth, margins and ROA, while contending with the past issues as well," the brokerage said.
HSBC also retained its view that HDFC Bank is one of the least preferred stocks among large private banks.
At its revised target price of Rs 830, HSBC values HDFC Bank at about 1.2 times its estimated price-to-book value for March 2028. The brokerage said this valuation is below the bank's historical average and reflects its view that a sustained recovery requires improvement in fundamentals.
HSBC's key risks
HSBC identified four key downside risks to its view: slower loan growth, higher net interest margins, a delay in CEO succession and higher credit costs.
It also flagged higher credit growth, NIM expansion and better-than-expected cost control as potential upside risks.
The report was dated Aug. 31 and prepared by HSBC Securities and Capital Markets (India) Private Ltd.
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