What's wrong with HDFC Bank?

HDFC Bank, which is the largest private bank in India, is going through its worst week ever! Its stock has fallen over 10% in a week!!!

2023 began poorly for the stock as inflation rates in America were well above the US Fed’s targets. Hawkish comments from the Fed made market sentiments uncertain. Moreover, analysts suggest that the reopening of Chinese markets prompted FIIs to pull money out of India and pump money into China.

As such, Indian markets and HDFC fell during the first half of January. HDFC fell over 3% before buying began once again with HDFC on top of the buying list. Levels below Rs 1,600 proved a good buying opportunity as Bulls took over the scrip and drove the price up to Rs 1,700!

However, before the stock could climb any further, Hindenburg’s malicious report on the Adani Group tanked Indian markets as investors began panic selling. HDFC lost over 4% in two days before the price stabilized and investors resumed buying.

Although the US Fed increased interest rates on 1st February to tackle the persisting inflation rates, the markets survived the rate hike as the move was initially positive. However, the sentiment reversed mid-February as the US Fed’s meeting signaled further rate hikes. Moreover, the Russia-Ukraine war completed 1 year as Russia issued a nuclear threat!!

This spooked markets globally as indices tumbled. HDFC followed suit as the stock fell from Rs 1,678 down to its support at Rs 1,578.35 in two weeks, marking a loss of almost 6%! Investors had accepted the HDFC-HDFC Bank merger plan as market sentiments improved in early March but the US Banking Crisis eroded trust in banking stocks globally.

HDFC lost 6% in less than 2 weeks in the global selling rout. Trading remained fairly muted throughout the remainder of March, but April brought about a sharp reversal in investor sentiment as the Nifty began climbing once again. By early May, HDFC Bank had hit a new lifetime high of Rs 1,734.45!

However, the stock fell a record 6% in a single day when MSCI, the index aggregator reported that it would use an adjustment factor of 0.5x against the expectation of 1x to account for the weightage of the combined HDFC entity in a global index. This meant that contrary to the prior belief of an inflow of around $3 billion, HDFC Bank would witness an outflow of $150-200 million!!

Although the stock was making its way back to Rs 1,680 per share, the stock fell through its support at Rs 1,645.35 when the stock turned ex-dividend. While the Nifty 50 was making its way back to the 18,800 level, HDFC’s stock declined 4% in a month!

However, the Rs 1,578 mark was a strong support level for the stock as it reversed from the level and began riding the bullish wave as the Nifty 50 made its way to the 20,000 mark. The momentum, which lasted until mid-July helped HDFC reach a fresh lifetime high of Rs 1,757 per share before Bears deemed the stock too expensive and took the prices below the Rs 1,720 resistance level. By the end of July, the stock had declined due to poor loan book growth to its immediate support at Rs 1,645.35 but was sustaining at that price.

However, August brought about an immediate halt to the positive move as poor conditions of the Chinese economy and rising fears of another Fed rate hike soured investor sentiment as Bearish pressures took over all markets and investors began selling. Near the end of August, the S&P 500 lost 3% as the Nifty 50 lost 2.6% and HDFC broke its support at Rs 1,645 and retested its support at Rs 1,578.

Although September was worse for the S&P 500, Indian indices outpaced American indices as the Nifty 50 hit the 20,000 mark for the first time by mid-September. HDFC breached its resistance at Rs 1,645 only to lose it in the next session. In fact, selling pressure sent the stock through its support at Rs 1,578 as downward revisions of targets and a decline in the bank’s net worth spooked investors.

Although global sentiments were positive in September, bearish pressures in October due to the Israel-Hamas war sparked panic selling as the Nifty 50 failed to sustain at 20,000 and fell to 18,800! HDFC’s stock broke another key support and fell to its 52-week low.

However, as global sentiments improved in November, the Nifty 50 and HDFC Bank’s stock began surging rapidly. From 1st November, HDFC’s stock gained a record 17% to retest its resistance at Rs 1,720.90 as the Nifty 50 climbed to 21,700!

After the stock failed to breach its resistance, it declined to its immediate support at Rs 1,645.35. However, buyers were there and the stock was pushing back to retest its resistance, but poor earnings results ended up tanking the stock as it fell through 3 critical support levels and lost 12% in a week!!!

What’s the future outlook?

Fundamentally, the bank’s latest quarterly results don’t look very good. Although the Total Income of the bank grew 60% to around Rs 81,720 crores and Net Profit jumped 34% to Rs 16,373 crores, the Net Interest Income (NII) grew 24%, marginally lower than analyst expectations.

However, the deposit growth rate was lower and the Credit Deposit (CD) rate was higher than estimated.  The loan book grew only 4.9% sequentially while deposit rates came in at only 1.9%! Analysts expect the slowdown to result in margin pressures or a slowdown in lending, both of which could result in a de-rating of the banking sector!!

Technically, the stock is trading near its immediate support of Rs 1,477.40. The stock is trading below its 5, 20, 50, 100, and 200-day averages, and the RSI is currently at 28.99, indicating that the stock is currently oversold. 

On Wednesday, the stock fell through its immediate support at Rs 1,407, which was a strong support. However, buyers were active in the market as the price jumped back up and closed well above the previous day’s close. The stock has managed to maintain its price above the support as the level was respected.

Moreover, HDFC Bank is the largest private-sector bank in India. It is one of the three systemically important banks which support the Indian banking system. Indian banks have reported good growth in profitability and a significant decline in non-performing assets. According to Moody’s Investor Services, Indian banks are expected to report robust growth during the year due to lower provisioning and higher retail segment growth. 

Furthermore, the Modi government is all set to announce its interim budget in less than a month! The fiscal budgets have historically supported the banking industry with schemes and investments for growth, and the same is expected this time as well.

HDFC’s share fell due to underperformance, but the decline was extremely steep. With the budget so close, the stock could witness near-term weakness as it could trade around its support at Rs 1,407 until the budget after which it could reverse to climb back up.

Thus, the stock of HDFC bank, India’s largest private sector bank, could witness near-term correction but has bright mid to long-term prospects.

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