HDFC Bank Limited (HDB) in Mumbai is the largest private-sector bank in India, with a presence in more than 2,900 cities in the country. The bank operates in five segments: Treasury; Retail Banking; Wholesale Banking; Other Banking business; and Unallocated.

Shares of HDB have slumped 3.8% in price over the past year because the bank’s increasing non-performing assets have been alarming investors. 

Furthermore, the bank’s profit margins came in shy of analyst expectations in its fiscal second quarter, ended June 30, 2021, causing investors to recoil from the bank.

So, here is what could shape HDB’s performance in the near term:

Increasing Non-Performing Assets

HDB’s gross non-performing assets increased 24.1% year-over-year to Rs.170.99 billion ($2.30 billion) for its fiscal second quarter, ended June 30, 2021. Its NPAs came in at Rs.5.49 billion ($73.75 million), up 67.3% from the same period last year. And its percent of gross NPAs to gross advances increased 11 basis points from the prior-year quarter to 1.47%. In comparison, its percent of net NPAs to net advances increased 15 basis points from the year-ago value to 0.48%.

Stable Profits

HDB’s total income increased 6.7% year-over-year to Rs. 367.71 billion ($4.94 billion). Its net profit increased 16.1% from the same period last year to Rs.77.30 billion ($1.04 billion). However, HDB’s quarterly profit fell short of the Rs 80.72 billion ($1.08 billion) consensus estimate.

Legal Investigation

New York-based law firm Pomerantz LP is currently investigating whether certain officers and/or directors of HDB have engaged in securities fraud or other unlawful practices. This comes in after the bank reported an increase in its non-performing assets and declining asset quality in its fiscal second quarter, ended June 30, 2021.

Stretched Valuation

In terms of forward non-GAAP P/E, HDB is currently trading at 25.22x, which is 114.2% higher than the 11.78x industry average. Its 1.15 forward non-GAAP PEG ratio is 18.8% higher than the 0.97 industry average.

In addition, the stock’s 8.29 forward Price/Sales multiple is 134% higher than the 3.54 industry average. And its 3.78 trailing-12-month Price/Book and Price/Cash Flow multiples of 3.78 and 18.13, respectively, compare with the 1.31 and 8.97 industry averages.

POWR Ratings Reflect Uncertainty

HDB has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

HDB has a C grade for Growth. The bank’s trailing-12-month revenues increased 8.1% year-over-year. However, the company’s trailing-12-month ROE declined 7.1% from the same period last year, in sync with the Growth grade.

Of 97 stocks in the C-rated Foreign Banks industry, HDB is ranked #52.

In total, we rate HDB on eight distinct levels. Beyond what we have stated above, we have rated HDB for Momentum, Sentiment, Value, Stability, and Quality here.

Bottom Line

The Reserve Bank of India (RBI) imposed a ban on HDB to prevent it from issuing credit cards for eight months toward the end of 2020, citing frequent outages. This caused HBD to lose its position as India’s biggest credit card issuer. However, the central bank lifted the ban last August, following which HDB announced its plans to issue 300,000 cards through 2022. This should allow HDB to regain its position as the leading credit card issuer in the country, thereby boosting its profit margins. However, we think investors should wait until the bank’s NPAs fall before investing in it.

How Does HDFC Bank Limited (HDB) Stack Up Against its Peers?

While HDB has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, OFG Bancorp (OFG), Barclays PLC (BCS), and UBS Group AG (UBS), which have a B (Buy) rating.

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