HDFC Bank Is 'Sexy And It Knows It', Says CLSA; Continues To Be Bullish Despite Recent Pullback

Global brokerage CLSA has struck an unusually confident tone on HDFC Bank in its recent note. Headlined "I’m sexy and I know it," the report argues that most of the concerns weighing on the stock are either misunderstood or temporary — and that the recent correction has turned a high-quality franchise into a compelling risk-reward play. For this reason, the brokerage maintains its Outperform rating and Rs 1,200 price target.

Since its Q3FY26 operational update, HDFC Bank’s shares have fallen 6–7%, driven by investor anxiety over slowing deposit growth and a sharp rise in the loan-deposit ratio (LDR) to 99%. CLSA pushes back firmly, saying the narrative has run ahead of the numbers. In its words, this is less a broken story and more a classic case of 'great franchise, noisy transition.'

The brokerage notes that HDFC Bank’s LDR rose 350 basis points over the past two quarters largely because deposit growth slowed from 16% to 12%, driven by a deliberate reduction in wholesale deposits. Importantly, quarterly-average CASA growth has improved from 6% to 10%, with 3QFY26 marking the first sequential improvement in the Quarterly average CASA ratio.

CLSA also points to the 100-basis-point CRR cut by the Reserve Bank of India, which mechanically inflated reported LDRs across the system. As long as liquidity and capital ratios remain well above regulatory thresholds, LDR alone, CLSA argues, 'doesn’t really matter' — a view the RBI itself has reinforced by saying it does not prescribe an LDR limit.

Another common criticism that HDFC Bank has failed to benefit from refinancing wholesale bonds with deposits doesn’t hold up, according to CLSA. Since the merger, the bank’s net interest margins are down just 13 basis points, far less than the 25–40 bps compression seen at peers such as ICICI Bank and Axis Bank, and about 70 bps at Kotak.

With roughly Rs 350 billion of bonds maturing or callable in FY27 at a weighted average cost of 7.5%, CLSA expects a 20–25 bps reduction in cost of funds over the next year as deposit repricing kicks in.

After heavy investments in FY23 and FY24, expense growth is moderating. Core Pre-Provision Operating Profit (PPOP) growth has already improved to 5–7% year-on-year, despite loan growth of about 10%. CLSA expects high-teens core PPOP growth over the next two years as hiring slows and productivity improves.

At around 1.7x FY28 price-to-book, HDFC Bank trades at a 10–12% discount to ICICI Bank. While some discount is warranted due to lower ROE, CLSA believes the current gap is excessive. The message is clear: the franchise knows its strengths—it’s sexy, and it knows it.