---
endpoint: analytics
pattern: Financial Services
status: done
latency_ms: 197122
conversation_id: c0eec20c-8966-4e58-ad37-07e886e129f6
citations: 0
created: 2026-05-31 18:43:54Z
---

# What is the investment thesis for HDFC Bank in the current market environment?

# HDFC Bank (HDFCB IB / HDB US) — Investment Thesis in the Current Market Environment

**Source vintage note**: The latest CLSA stock-specific note in the archive is dated **20 April 2025** (post 4QFY25 results); the latest sector-level note referencing HDFCB's market price is **19 May 2025** at Rs1,933.7 [8]. Both are within the corpus's recency window. The CLSA analyst is **Piran Engineer** (CLSA India Private Limited), publishing under the CLSA parent (not CLST).

---

## 1. Headline Call

| Item | Value |
|---|---|
| Rating | **OUTPERFORM** (upgraded from Hold on 20-Apr-2025) [1] |
| Target Price | **Rs 2,200** (raised from Rs 1,785) [1] |
| Last reference market price | Rs 1,906.55 (18-Apr-2025) → Rs 1,933.7 (19-May-2025) [8] |
| Implied upside (from May-19 ref) | ~14% |
| Valuation methodology | Residual Income model on parent (CoE 12.8%) + SOTP for subsidiaries; PB multiple raised from 2.1x to 2.4x on rolled-forward FY27 book [7] |

---

## 2. The Core Thesis

CLSA's framing is explicit: **"HDFC Bank is the best run bank with a track record of strong growth and profitability for over two decades. With merger-related baggage being shed faster than expected, we believe that the worst phase of balance sheet correction is over, and the outlook for HDFCB is better."** [4]

The thesis turns on **three interlocking inflection points** that have moved from headwind to tailwind over the past two quarters:

### (a) Balance-sheet correction is largely complete
Post the July 2023 HDFC Ltd merger, HDFCB inherited a bloated Loan-to-Deposit Ratio (LDR) of 104%+ that forced four consecutive quarters of below-system loan growth (0.5%–1% QoQ on average) [2]. In 4QFY25, LDR fell to **96.5%** (down 173bp QoQ and 792bp YoY from 104.4%) [3] and loan growth re-accelerated to **+4% QoQ / +5% YoY** with absolute loans at Rs 26.2tn [3]. With the RBI now in a more accommodative stance, the explicit LDR-reduction pressure on management eases — CLSA expects LDR to fall only modestly further to ~94% by end-FY26 [2].

### (b) Loan growth is set to converge with system from FY26
Management has reiterated intent to grow **at least in line with the system in FY26** (vs being ~6ppt slower than the system in FY25) [1]. CLSA models **13% loan growth in FY26** and **15–16% thereafter** [2] — i.e. the four-quarter underperformance is treated as a one-off post-merger digestion phase rather than a structural growth deceleration.

### (c) NIM has bottomed and turns supportive
- Reported NIM on assets was stable at **3.5%** in 4QFY25 (vs ~3.4% trough in 2QFY24-4QFY24) [3].
- The Feb-2025 repo rate cut had **not yet flowed through** in 4QFY25; full impact will be visible from 1QFY26 [2].
- On 12-Apr-2025, HDFCB cut its savings deposit rate by 25bp — the first such cut in nearly five years — which partially offsets asset-yield compression from the repo cut [1][2].
- CLSA now models a cumulative **75bp repo cut** (vs 50bp earlier), trims FY26-27 PAT by 2–3%, but expects NIM to recover to **3.7%** by FY27-28 from 3.6% in FY26 [6].

---

## 3. Quantitative Backbone — Why CLSA is Comfortable Paying 2.4x FY27 PB

### Forecast snapshot (CLSA estimates)
| Year to 31 Mar | FY24A | FY25A | FY26CL | FY27CL | FY28CL |
|---|---|---|---|---|---|
| Net profit (Rs bn) | 608.1 | 672.8 | 695.0 | 831.9 | 954.0 |
| EPS (Rs) | 80.0 | 87.9 | 90.8 | 108.7 | 124.7 |
| EPS growth (%) | — | +9.8 | +3.3 | +19.7 | +14.7 |
| **NIM (%)** | 4.0 | 3.6 | 3.6 | 3.7 | 3.7 |
| **ROA (%)** | 2.0 | 1.8 | 1.7 | 1.8 | 1.8 |
| **ROE (%)** | 16.9 | 14.3 | 13.1 | 14.1 | 14.4 |
| **Loan growth (%)** | 55.2* | 5.4 | 13.0 | 15.0 | 16.0 |
| **LDR (%)** | 105.4 | 97.4 | 94.8 | 94.0 | 93.2 |
| PE (x) | 23.8 | 21.7 | 21.0 | 17.5 | 15.3 |
| PB (x) | 3.3 | 2.9 | 2.6 | 2.3 | 2.1 |

*FY24 loan growth distorted by merger. Source: [6]

### 4QFY25 Print — Operating Confirmation
| Rs bn | 4QFY24 | 3QFY25 | 4QFY25 | YoY % |
|---|---|---|---|---|
| Net interest income | 291 | 307 | 321 | +10.3 |
| Operating profit | 293 | 250 | 265 | -9.4 |
| Provisions | 135 | 32 | 32 | -76.4 |
| **PAT** | **165** | **167** | **176** | **+6.7** |
| Loans | 24,849 | 25,182 | 26,196 | +5 |
| Deposits | 23,798 | 25,638 | 27,147 | +14 |
| **GNPL ratio (%)** | **1.2** | **1.4** | **1.3** | +9bp |
| **NNPL ratio (%)** | **0.3** | **0.5** | **0.4** | +10bp |
| ROA (%) | 1.9 | 1.8 | 1.8 | -2bp |

Source: HDFCB, CLSA [3]

### Valuation Construction (Residual Income Model)
| Component | Value (Rs bn) | Contribution | Avg ROE | CoE |
|---|---|---|---|---|
| FY25 net worth | 5,014 | 33.8% | — | — |
| PV of RI FY26-30CL | 497 | 3.4% | 14.5% | 12.8% |
| PV of RI FY31-40CL | 3,206 | 21.6% | 18.0% | 12.8% |
| Terminal value | 6,118 | 41.2% | 19.4% | 12.8% |
| **Total value of firm** | **14,836** | **100%** | | |
| Value per share | 1,939 | | | |
| **+ Subsidiary value** | **259** | | | |
| **Target price (rounded)** | **Rs 2,200** | | | |

Source: [7]

---

## 4. Asset Quality — The "Pristine" Anchor

Asset quality is the silent thesis-pillar that supports the premium multiple:
- GNPL ratio 1.3%, NNPL ratio 0.4% in 4QFY25 [3]
- Credit cost collapsed to **0.5%** in 4QFY25 (vs 2.2% in 4QFY24, the merger-impact quarter), with provisions down 76% YoY [3]
- Provision/loans modelled at just 0.4–0.6% over FY26-28 [6]
- This stands in marked contrast to the unsecured-driven asset-quality stress visible at peers in the sector — CLSA flags HDFCB and SBICARD as the credit-card outperformers (23–25% spends growth, driven by both card additions and spend-per-card) [10 — see note]

---

## 5. Catalysts (per CLSA)

**Upside drivers** [5]:
1. **Improvement in deposit accretion** — 4QFY25 saw Rs 1,509bn of deposit accretion, the best print since 4QFY24's Rs 1,658bn [3]. Continued momentum here drives both loan-growth ceiling and LDR normalization.
2. **Repo rate cuts** — CLSA models cumulative 75bp; bond markets are pricing another 50bp [9]. Asymmetric beneficial because (i) immediate transmission to TD costs lags loan repricing only modestly, and (ii) the savings-rate cut already taken absorbs ~25bp of the giveback.
3. **NIM recovery** — Mix-shift away from high-cost borrowings (down from 24.8% of NDTL at 2QFY24 to 16.8% at 3QFY25, then 5,479/total liabs at 4QFY25 — a 17% YoY decline in absolute borrowings) is structurally NIM-accretive [3].

**Risks to flag (CLSA caveat, not formal downside)**:
- The CASA recovery story is **not mechanical from rate cuts** — CLSA's separate 19-May-2025 analysis shows CASA ratios improve materially only when TD rates fall below ~6%, requiring further 50bp of repo cuts AND another 20-30bp TD-rate cut [9]. HDFCB's CASA was particularly hit by the merger (with HDFC Ltd's term-deposit-heavy liability profile) and the recovery to historical 38–40% is gradual rather than imminent.
- A re-acceleration in unsecured stress could lift provisions above the 0.4-0.6% modelled range.

---

## 6. Rating Trajectory — Why the Upgrade Now (not earlier)

CLSA's rating history on HDFCB encapsulates the thesis evolution:
- **Jul-2023 → Apr-2024**: U-PF (TP cut from 2,770 → 3,700* on FX/share-count adjustments, but rating bearish post-merger)
- **Jun-2024 → Jan-2025**: HLD / O-PF flip-flop on slow loan-growth print
- **15-Jan-2025**: HLD at Rs 4,710 (after the share consolidation; "in-line quarter") on continued LDR drag
- **18-Apr-2025**: **O-PF at Rs 2,200** (post-share-split equivalent; "Back to healthy performance") — driven by the loan-growth re-acceleration and balance-sheet normalization [1]

The shift from Hold to Outperform is therefore not a valuation-driven upgrade — it is an **inflection-driven upgrade** anchored in the loan-growth re-acceleration evidence in 4QFY25.

---

## 7. Synthesized View — How to Hold the Thesis

**Bull case for HDFCB at current levels:**
HDFCB is the highest-quality private-bank franchise in India (best ROA pre-merger, lowest credit cost, deepest distribution with 717 branch additions in FY25), now exiting a two-year merger-digestion phase. The Apr-2025 4QFY25 print confirmed three turning points simultaneously — loan growth re-accelerating, LDR normalizing, NIM stable-to-rising — into an accommodative RBI cycle. At 2.4x FY27 PB / 17.5x FY27 PE for a 14% ROE bank with sub-0.5% credit cost trajectory, the risk-reward is favourable [6][7]. The thesis pays off via mid-teens EPS CAGR from FY26 onward and a re-rating closer to historical mid-20s PE as the market gains confidence the merger overhang is behind.

**Bear case (negative space worth surfacing):**
The thesis depends on (a) HDFCB executing on system-level loan growth without re-bloating LDR, (b) CASA recovery actually materializing (CLSA's own analysis shows this is not mechanical and needs sub-6% TD rates [9]), and (c) ROE rebuilding toward 14–15% from the FY25/26 trough of 13–14% [6]. Note that even on CLSA's own model, FY26 ROE drops to 13.1% before recovering — a year of optically weak returns sits between now and the thesis pay-off. ROA at 1.7–1.8% remains structurally below the pre-merger 1.9–2.0%, and there is no path mapped back to those levels in the explicit forecast.

**Net**: The CLSA call is consistent with the data — an inflection trade on the highest-quality Indian private bank, with downside protection from asset-quality and capital (Tier 1 CAR 17.7%, CAR 18.1% at end-FY25 [6]), priced at a discount to its own historical PE band.

---

## Sources
[1] HDFC Bank — O-PF (Back to healthy performance), upgrade to Outperform, TP raised to Rs 2,200 — CLSA, 20-Apr-2025
[2] HDFC Bank — Loan growth +4% QoQ, deposit growth, NIM mechanics — CLSA, 20-Apr-2025
[3] HDFC Bank — 4QFY25 financial summary table (Rs 176bn PAT, LDR 96.5%, GNPL 1.3%) — CLSA, 20-Apr-2025
[4] HDFC Bank — Investment thesis statement ("best run bank…worst phase over") — CLSA, 20-Apr-2025
[5] HDFC Bank — Catalysts (deposit accretion, repo cuts, NIM) — CLSA, 20-Apr-2025
[6] HDFC Bank — Financial estimates FY24-FY28CL (EPS, ROA, ROE, PE, PB) — CLSA, 20-Apr-2025
[7] HDFC Bank — RI valuation model summary (Rs 2,200 TP build-up) — CLSA, 20-Apr-2025
[8] India Banks (The CASA-Repo affair) — Coverage companies / current prices — CLSA, 19-May-2025
[9] India Banks (The CASA-Repo affair) — No correlation between repo and CASA; sub-6% TD threshold — CLSA, 19-May-2025
[10] India Financials (May 2025: Stable month) — HDFCB credit-card spends +23–25% YoY, 275k card additions — CLSA, 24-Jun-2025

