HDFC Bank's share price down, should you worry?

Analysts are of the view that long-term investors could continue to hold the stock, irrespective of the MSCI development.

A lower-than-expected increase in weight by MSCI, in its August rebalancing, dragged HDFC Bank's share price down on Tuesday by over 3.5 per cent.

Analysts are of the view that long-term investors could continue to hold the stock, irrespective of the MSCI development. This is because the lender is one of the largest banks in India.

In the near term, however, investors should expect a sideways movement in the stock.

"The stock's initial negative reaction post the MSCI news is largely a traders' reaction. It will recover as the announcement is positive, notwithstanding the weight percentage.

"The stock, however, may trade sideways in the near term as HDFC Bank has raised fixed deposit rates.

"This may affect its margins over the next few quarters," said Anwin Aby George, research analyst tracking the banking sector at Geojit Financial Services.

The benchmark index ended the day 693 points (0.87 per cent) lower at 78,956 levels.

The decline in the share price came after MSCI announced that the weight of HDFC Bank will be gradually increased in two tranches to the full weight of 1.

In the upcoming rebalancing on August 30, it will be increased by just 25 basis points (bps) against market expectations of 50 bps.

"The remaining increase of the adjustment factor from 0.75 to 1 would be implemented as part of the November Index Review in the event the foreign room continues to be at least 20 per cent at that time," MSCI said.

According to Nuvama Alternative and Quantitative Research, the current increase in weight could lead to an inflow of $1.8 billion, equivalent to 93 million shares, in HDFC Bank stock.

Analysts said HDFC Bank's weight increase in the November review is subject to foreign ownership levels, while flows after the August review are lower-than-anticipated, which knocked down the stock.

Fundamentally, HDFC Bank faces challenges in near term and investors must brace for choppy road ahead.

"HDFC Bank's medium-to-long term challenges are fundamentals. The industry-wide credit growth has declined compared to last year.

"Deposit mobilisation has become a challenge for most banks. Within this, HDFC Bank has a credit-to-deposit ratio (CDR) of over 100 per cent.

"This means the bank will have to go slow on its loan growth," said G Chokkalingam, founder and head of research at Equinomics Research.

As HDFC Bank is the market leader in the banking space, industry-wide challenges will dent its loan growth and margin trajectory.

The stock is expected to underperform or, at least, trade sideways for the next two-three quarters, he added.

Credit growth of all commercial banks expanded 13.7 per cent as of July 26, from a year earlier.

It outpaced deposits, which rose 10.6 per cent during the same period, reports suggest.

Within deposits, term deposits grew fastest at 19 per cent, outpacing savings deposits, which grew 6 per cent during the period.

HDFC Bank, during the April-June quarter of FY25 (Q1 FY25), had reported a loan growth decline of 0.9 per cent quarter-on-quarter (Q-o-Q) to Rs 24.63 trillion.

It was led by a 5 per cent Q-o-Q fall in corporate and wholesale books.

Deposit growth was flat, while the current account-savings account (Casa) ratio declined 200 bps Q-o-Q to 36 per cent.

CDR stood at 103.5 per cent at the end of the quarter -- the highest among peers.

"Continued systemic challenges in deposits will likely result in slower loan growth for HDFC Bank in the near term," said Sameer Bhise, managing director (MD) and co-head of research at JM Financial, in his Q1 result review note.

Feature Presentation: Ashish Narsale/Rediff.com