We have maintained our long-term Neutral recommendation on HDFC Bank Ltd. (HDB). The decision is based on the company’s impressive fiscal 2012 fourth quarter (March 31) 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 development of new products, conducting disciplined credit risk management as well as delivering exceptional service to its customers.
On the flip side, the competition in the retail segment has intensified due to the re-entry of various competitors after nearly two years. The company mainly competes with other private banks in India such as ICICI Bank (IBN), 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 (HBC) and Standard Chartered.
Additionally, increasing operating expenses are expected to drag down HDFC Bank’s bottom line in the upcoming quarters. Also, the company could face higher operating costs due to high rate of inflation and the recent ratings downgrades by Moody’s and S&P.
Moreover, we anticipate the continuously expanding branch network to drive growth in deposits and loans. Nevertheless, HDFC Bank is still exposed to the threats related to higher cost of funds.
Currently, the shares of HDFC Bank retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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