HDFC Bank shares: Valuation gap with ICICI Bank widens; 3 triggers for rerating, target

The valuation gap of HDFC Bank Ltd with peers including ICICI Bank Ltd, Kotak Mahindra Bank Ltd, Axis Bank Ltd and State Bank of India (SBI) has been disrupted. But Jefferies believe that clarity on CEO succession, team reorganisation and improved execution could aid a rerating.

It maintained 'Buy' call on HDFC Bank with target of Rs 880 based on 1.6 times estimated September 2028 book value. Its bear case target at Rs 690 implied 6 per cent potential downside while its bull case target of Rs 937 suggested 27 per cent upside from the prevailing levels.

Jefferies said HDFC Bank is now valued at 26 per cent discount to ICICI Bank on a price-to-book value basis against 11 per cent discount on March 18. It said when a new CEO takes charge, they tend to reorganise the top team and business structures to better achieve growth, profitability, and governance objectives. It hopes that the new HDFC Bank CEO is able to complete any reorganisation promptly, allowing the team to focus on execution in terms of gaps to be covered.

Jefferies said HDFC Bank has lagged peers on LCR retail deposit growth, 12 per cent against 15 per cent for ICICI Bank and 14 per cent for SBI, despite offering competitive rates.

"It had a slower start on FCNR-B deposits, but made a strong comeback, mobilising $11-12 bullion within two months (c.8-9 per cent market share; these are 3 per cent of total deposits and 8 per cent of LCR non-retail deposits). This should help the bank to refinance high-cost deposits/borrowings at slightly lower rates," Jefferies said.

Jefferies said HDFC Bank has seen higher growth in corporate & secured lending segments and share of loans to PSUs in total credit has risen
over the past year. These, along with repricing of loan rates downwards has been a drag on NIM.

"Like most large banks, HDFC Bank could benefit from any rate hikes as c.70 per cent of loans are linked to EBLR/floating, but a reclaribration of the risk profile towards higher risk-adjusted segments like SME/Business banking loans, gold loans, unsecured personal could support ROA expansion," Jefferies said.