Funding Pressure Mounts

HDFC Bank's business update for the March quarter shows a clear gap between its loans and deposits. Gross advances rose 17% year-on-year to about Rs 25 lakh crore, driven by strong retail and SME lending. However, total deposits grew slower, reaching roughly Rs 23.5 lakh crore. This widening gap pushed the credit-deposit ratio up to 106-108%. High ratios like this often mean banks rely more on costly wholesale funding, which can squeeze profit margins.

The drop in the Current Account Savings Account (CASA) ratio to 37-38% from 38-39% in the previous quarter highlights the difficulty in attracting low-cost deposits. Across the industry, CASA ratios have fallen sharply. Private banks saw their CASA ratio drop from 47% to 37.2% by December, forcing them to use more expensive term deposits and certificates of deposit, which offer higher yields. This funding environment creates challenges for profitability, even as loan growth remains healthy.

Valuation Drop and Peer Gap

Investors have reassessed HDFC Bank, leading to a significant drop in its valuation premium compared to competitors. As of early April, HDFC Bank traded at a forward price-to-book (P/B) ratio of about 1.8 times. This is notably lower than ICICI Bank's P/B of roughly 2.65 and Axis Bank's competitive valuation. The bank's stock has corrected sharply, falling around 25% year-to-date by March and trading near its 52-week low. Its price-to-earnings (P/E) multiple is also lower than its historical average, sometimes falling below ICICI Bank and Axis Bank. The bank's market value has recently decreased by about Rs 1.7 lakh crore as investor sentiment shifted.

Governance Concerns Spark Scrutiny

Investor concerns have also been fueled by governance issues, including the sudden resignation of former part-time chairman Atanu Chakraborty in mid-March. Chakraborty cited a mismatch with the bank's values, particularly concerning the delayed response to the AT-1 bond mis-selling scandal originating from its Dubai branch. This scandal involved allegedly mis-selling high-risk bonds to NRI clients. The Dubai Financial Services Authority (DFSA) took regulatory action, including restricting new customer onboarding. Three senior executives were terminated. Chakraborty criticized management for initially treating the issue as a mere 'technical lapse' instead of a conduct problem, noting it took eight years for accountability actions. This period contrasts with the more stable governance seen at its main rivals.

Analyst Views Mixed

Despite the stock's fall and governance issues, some analysts see potential value. JPMorgan recently upgraded HDFC Bank to 'Overweight,' citing an attractive risk-reward balance and a 16-year low in its forward P/B multiple. Analyst price targets range from Rs 1,010 to Rs 1,240, suggesting possible upside. JPMorgan anticipates a recovery in loan growth and improved return on assets as expensive borrowings are replaced by cheaper deposits. However, other analysts remain cautious. Some rate the stock 'Reduce,' pointing to ongoing margin pressure from competition and the valuation of its subsidiaries. How well the bank boosts deposit growth and stabilizes its funding will be key for future profitability and investor confidence.