Balanced View on HDFC Bank - Analyst Blog

On April 2, 2014, we issued an updated research report on HDFC Bank Ltd. HDB. The bank has consistently delivered steady earnings growth over the last few years. However, we remain skeptical about the persistent rise in operating expenses.

Growth in top line driven by increase in loans and deposits remains the company's key strength. Moreover, HDFC Bank continues to invest in technology, thereby reflecting the efforts on the company's front to build world-class banking infrastructure.

The Zacks Consensus Estimate for fiscal 2014 increased 1.7% to $1.77 per share over the last 30 days. Moreover, for fiscal 2015, the Zacks Consensus Estimate advanced 1.8% to $2.27 per share over the same time period. HDFC Bank now has a Zacks Rank #2 (Buy).

HDFC Bank has been increasing its market share in India through innovative product and service offerings. Though increasing market share provides the bank exposure to the fast-growing Indian retail credit sector, random expansion often leads to deterioration in asset quality. Additionally, in the quarters ahead, HDFC Bank will likely face a further increase in expenses due to rise in funding cost stemming from higher deposit rates.

Moreover, the strict regulatory environment will likely to weigh on HDFC Bank's profitability in the long run. The higher Basel III capital requirements, to be fully phased in by March 2018, will also limit the bank's lending as well as the investment abilities.

Stocks That Warrant a Look

Other foreign banks worth considering include Banco Macro S.A. BMA, Bankinter, S.A. (BKNIY) and ICICI Bank Ltd. IBN. All these stocks sport Zacks Rank #1 (Strong Buy).