HDFC Bank stocks in focus: Private sector lender HDFC Bank has weathered a lukewarm performance in its stock prices over the past three years, reflecting negative trends across various timelines, analysts noted. 

With negative returns of 1.72 per cent over three years, 11.53 per cent over one year, 11.13 per cent over six months, and a year-to-date decline of 15.6 per cent, the bank has faced notable headwinds in the market.

The challenges confronting HDFC Bank include merger-related uncertainties, heightened operating expenses accounting for 40 per cent of the cost/income ratio in the third quarter of financial year 2024 (Q3FY24), diminishing yields due to increased exposure to housing loans from HDFC Ltd, and a marginal reduction in return on assets (ROA) to approximately 2 per cent for the same period, LKP Securities said in a note.

However, analysts believe that these concerns are already factored into the stock price, evident from the trailing price-to-book value per share (P/BVPS) currently resting at 2.78 times.

Comparatively, the bank's P/BVPS peaked at 5.8 times in June 2019, while the five-year median stands at 3.8 times. This suggests that HDFC Bank's current valuation offers potential for re-rating, particularly as its ROA is expected to stabilise despite ongoing operational challenges, the brokerage said.

The turnaround narrative is further fuelled by optimistic projections for the bank's financial performance. Analysts anticipate that HDFC Bank's ROA will remain stable, with expected improvements in return on equity (ROE) and a narrowing of the cost-to-income ratio to below 40 per cent for the financial year 2025 estimate (FY25E) and financial year 2026 estimate (FY26E). 

Additionally, the Net Interest Margin (NIM) is forecasted to improve to approximately 3.9 per cent in the same period, aided by a favourable loan mix and lower cost of funds (COF).

Meanwhile, the credit growth is expected to remain robust, with HDFC Bank set to achieve loan growth rates exceeding 20 per cent, primarily driven by high-yielding unsecured credit, LKP Securities added.

Furthermore, the bank's asset quality remains a cornerstone of its operations, characterised by strong underwriting practices and a low level of non-performing assets (NPAs).

LKP Securities analysts are optimistic about HDFC Bank's ability to overcome merger-related challenges gradually. Factors such as healthy balance sheet growth, adequate provisions exceeding regulatory requirements, and robust risk management practices position the bank favourably within the lending landscape.

Considering these factors, analysts maintain a ‘buy’ rating on HDFC Bank, with a revised target price of Rs 1,762 per share.

As of 9:30 am, shares of HDFC Bank were trading 0.43 per cent higher at Rs 1,448 per share.