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Balanced View on HDFC Bank

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We are have maintained our long-term ‘Neutral’ recommendation on HDFC Bank Ltd. (HDB - Free Report) . The decision is based on the company’s impressive fiscal second-quarter (September 30) results. However, continuously rising operating expenses and increasing competition in the retail space remain the major causes of concern.

HDFC Bank’s Retail Banking segment is expected to be the main driver for earnings growth going forward. Given the boom in the Indian retail credit market and HDFC Bank’s extensive branch network, the company is expected to gain significant market share in the retail credit sector.

Further, HDFC Bank’s main strategy is to enhance its market share in India’s banking and financial services areas. The company has been able to execute this plan through developing new products, conducting disciplined credit risk management and delivering exceptional service to its customers.

Additionally, HDFC Bank’s net income has been growing steadily. The bank remains focused on maintaining earnings augmentation through conservative risk-management techniques and low-cost funding while not relying much on volatile sources including trading and investment banking income.

On the flip side, the competition in the retail segment has intensified due to the re-entry of various competitors. The company mainly competes with other private banks in India such as ICICI Bank (IBN - Free Report) , UTI Bank, IDBI Bank, IndusInd Bank and state-owned banks, as well as foreign banks that have a notable presence in the country, including Citibank, HSBC Holdings Plc and Standard Chartered.

Moreover, increasing operating expenses are expected to drag down HDFC Bank’s bottom line in the upcoming quarters. Moreover, like most of the Indian banks, the bank is expected to encounter higher cost of funds as it would be necessary for it to raise deposit rates to meet the increasing loan demand.

Currently, the shares of HDFC Bank retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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