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On Aug 19, 2013, we reaffirmed our Neutral recommendation on HDFC Bank Ltd. (HDB - Analyst Report). This was based on the company’s strong fiscal first-quarter 2014 results, in spite of the rise in operating expenses.

Why Neutral?

HDFC Bank’s fiscal first-quarter (ended Jun 30) net profit of INR18.44 billion ($0.33 billion) rose 30.1% year over year. Results benefited from increased revenues, partially offset by higher operating expenses. Moreover, the company reported significant growth in deposits and loan balances.

Following the earnings release, the Zacks Consensus Estimate for fiscal 2014 advanced 2.2% to $1.88 per share over the last 30 days. However, for fiscal 2015, the Zacks Consensus Estimate fell 3.8% to $2.26 per share over the same time-frame. Hence, HDFC Bank currently carries a Zacks Rank #3 (Hold).

HDFC Bank remains focused on maintaining robust earnings growth through conservative risk management techniques and low-cost funding. Additionally, the Retail Banking segment is expected to be the main driver for future growth. With its extensive branch network and strong brand equity, the company has been able to gain a large share of the retail credit market.

Increase in operating expenses is a major concern for HDFC Bank, as it is expected to drag the company’s bottom line in the coming quarters. Further, the company’s ongoing expansion will likely lead to deterioration in asset quality.

Other Foreign Banks Worth Considering

Better performing foreign banks include Mitsubishi UFJ Financial Group, Inc. (MTU - Analyst Report), Barclays PLC (BCS - Analyst Report) and The Bank of Nova Scotia (BNS - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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