CLSA has maintained its ‘Hold’ rating on HDFC Bank with a target price of ₹1,725, indicating limited upside from the current market price of ₹1,651.25. The brokerage compared HDFC Bank’s current situation to the dilemma in Shakespeare’s Hamlet, where the bank had two choices: either sell down loans to moderate its high loan-to-deposit ratio or take a more passive approach.
HDFC Bank chose the former, selling down loans equivalent to 100 basis points (bps) of the total, as a strategy to bring down its loan-to-deposit ratio. However, CLSA suggests that frequent sell-downs are unlikely to repair the balance sheet quickly.
The brokerage also pointed out that the securitization market in India is not very large, and reducing the loan-to-deposit ratio (LDR) comes at the cost of profits. HDFC Bank recently securitized vehicle loans worth ₹9,000 crore at rates between 8.02% and 8.2%, which is more expensive compared to the bank’s incremental wholesale deposits and maturing non-convertible debentures (NCDs). Essentially, the bank has swapped one type of debt with another, but at a higher cost.
CLSA believes that HDFC Bank’s strategy involves substituting its debt with more expensive alternatives, which may not be the most cost-efficient solution in the long run. Consequently, the brokerage maintains a cautious outlook with a ‘Hold’ recommendation.
Disclaimer: This information is for informational purposes only and should not be considered as investment advice.
