Brokerage firm Prabhudas Lilladher has lowered its HDFC Bank target price to ₹1,040 from ₹1,100, citing softer net interest income and a shift in the loan mix. While the bank reported missed core profit estimates, analysts highlighted efficient operating expense control and stable asset quality as key positives for long-term outlooks.
Prabhudas Lilladher has updated its outlook on HDFC Bank, revising the target price to ₹1,040 from the earlier ₹1,100. This adjustment follows a quarter where the bank’s core profit before provisions and contingencies fell 1.6% short of brokerage estimates. The variance was largely driven by lower-than-anticipated net interest income and fee growth.
Impact of Changing Loan Mix
A central factor influencing the bank's margins is the ongoing transition in its loan book composition. Over the past year, the share of retail loans has decreased from 53% to 49%, reflecting a strategic shift toward corporate lending. Because corporate loans typically carry lower interest rates than retail segments, this migration has caused overall loan yields to compress. Even though the bank successfully reduced its cost of funds by 50 basis points year-on-year, the pressure on interest margins remains a primary focus for analysts.
Operational Efficiency and Asset Quality
Despite the margin pressure, the bank managed to outperform expectations regarding its core profit after tax. This was achieved through rigorous control over operating expenses, which improved relative to the bank's total assets. Furthermore, the bank’s asset quality remains stable, a trend that provides some relief against the backdrop of margin compression. Analysts noted that potential impacts from expected credit loss provisioning are currently viewed as immaterial, suggesting that the underlying credit health remains resilient.
Valuation and Future Outlook
To account for these developments, the brokerage has trimmed its net interest margin estimates for FY27 and FY28 by an average of 7% and 3%, respectively. Additionally, the valuation multiple applied to the stock has been adjusted to 2.1x from 2.2x. While these revisions reflect a more cautious near-term view on profitability, the firm maintains a positive long-term perspective. The bank is currently focusing on digital transformation initiatives aimed at enhancing productivity and reducing costs. For investors, the key monitorables moving forward will be the trajectory of net interest margins as the loan mix continues to evolve and the bank’s ability to maintain its asset quality amid the shift toward corporate lending.