Bernstein has maintained its Outperform rating on HDFC Bank with a target price of Rs 1,150 per share, saying the leadership transition at India's largest private sector lender appears to be progressing as expected and could help address investor concerns around governance.
The brokerage said HDFC Bank's franchise quality, including its deposit franchise and asset quality, has remained resilient over the past few years. However, a series of often-unexplained disappointments has weighed on investor confidence and resulted in a sharp compression in the bank's valuation premium.
Bernstein noted that HDFC Bank, which historically delivered more than 20% earnings-per-share growth, has struggled to sustainably generate double-digit earnings growth in recent years. The relative deterioration has also been significant, with loan growth and return on equity now broadly in line with the banking system, compared with the bank's earlier advantage of around 11-12 percentage points.
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According to Bernstein, the CEO succession now appears to be “largely playing out along expected lines”, with several key boxes checked. The brokerage believes that a few quarters without any major “kitchen-sinking” exercise, along with greater stability in the senior management team, could help ease governance concerns that have contributed significantly to the stock's derating.
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Beyond the leadership transition, Bernstein sees several potential positives for the bank. One key area is improved investor communication. The brokerage said the lack of clarity around the reasons behind weaker performance and the path to recovery has been more damaging than the deterioration in operating metrics itself.
Bernstein highlighted the puzzling decline in HDFC Bank's loan yields relative to the system despite significantly slower loan growth. It believes that a clear articulation of the bank's current constraints, a credible recovery plan and one or two measurable indicators to track progress could help rebuild investor confidence.
Overall, Bernstein believes several factors could go right for HDFC Bank from here, supporting its Outperform call and Rs 1,150 target price, implying an upside potential of more than 63% from Monday's closing price.
On Monday, HDFC Bank share price ended 1.99% lower at Rs 705.00 apiece on the BSE.
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