Why HDFC Bank Share Price is Falling

The MSCI index is often seen as a barometer for global investment flows.

Inclusion or an increased weight in this index can be a significant catalyst for a stock's performance.

HDFC Bank, India's leading private sector lender, was eagerly anticipated to benefit from an increased weight in the MSCI index. Much like a ship gaining momentum with added wind in its sails, the bank's stock price was steadily rising on the back of this development.

However, a surprising turn of events unfolded. Despite the actual increase in HDFC Bank's weight in the MSCI index, the stock price took a dive. This disconnect between anticipated market reaction and actual performance has left some investors puzzled.

Let's explore the factors driving the downward trajectory of HDFC Bank share price.

#1 Lower Than Expected Weight Increase

The decline in HDFC Bank share price decline was triggered by MSCI's recent announcement regarding the much-anticipated weightage increase for HDFC Bank in its Global Standard Index.

Although the increase will occur during the August 2024 review, it will happen in two stages rather than all at once. This phased approach will lead to lower-than-expected inflows from passive funds. This contributed to the drop in the bank's share price.

The second and final adjustment to HDFC Bank's index weightage is expected to take place during the November 2024 review.

However, this adjustment is contingent on the bank's foreign room remaining at or above 20%. The exact timing for this second tranche has not yet been confirmed by MSCI.

As part of the August 2024 Index Review, MSCI will increase HDFC Bank's Foreign Inclusion Factor (FIF) from 0.4 to 0.6. This change will be effective as of 2 September 2024, coinciding with the 30 August 2024, market close.

HDFC Bank is subject to a foreign ownership limit (FOL) of 74%, with an adjustment factor of 0.5. Based on the latest shareholding data, the bank's foreign room is currently above 25%, making it eligible for the upcoming weightage increase in the MSCI Index.

Domestic funds have been consistently buying shares of HDFC Bank, reflecting strong local interest in the bank's stock. Additionally, foreign institutional investor (FII) flows into India have been on the rise, potentially indicating increased interest in private banks, particularly HDFC Bank.

However, industry experts caution that if the FII shareholding in HDFC Bank drops below 55%, it could necessitate an FII headroom of 25%, which would cause the adjustment factor to move from half to full.

The decline in HDFC Bank's share price is largely due to the phased approach of the MSCI weightage increase, which could result in lower-than-expected inflows from passive funds, leading to disappointment in the market.

#2 Disappointing Quarterly Results

Even before the weight increase HDFC Bank share price was under pressure due to quarterly results.

During Q1 FY25, the bank's net profit increased 35.3% to Rs 161.8 billion (bn), on a YoY basis. The net profit of the company also increased 26.4% to Rs 298.4 bn as compared to the corresponding period last quarter.

However, investors were disappointed because of rising non-performing assets (NPAs). During the quarter under reviews on a YoY basis, the bank's gross NPAs rose 73.2% to Rs 330.3 bn, while its net NPAs rose 99.1% to Rs 95.1 bn.

This increase in NPAs has raised concerns about the bank's asset quality, leading to a decline in investor confidence. Investors are concerned about the bank's ability to maintain its asset quality leading to a decline in the share price.

What Next?

As HDFC Bank moves forward, the company is focused on achieving its long-term objectives. Despite a period of transition post-merger with HDFC Ltd, the bank aims to ensure stability in key metrics and achieve its medium to long-term goals.

Deposits remain a crucial part of the bank's strategy, and while the current numbers have fallen short of expectations, the bank is confident that it will step up its efforts at the right time.

The bank's management is committed to managing its assets and liabilities effectively, ensuring that the gaps between them remain narrow. This approach has enabled the bank to maintain its margins within a range.

HDFC Bank is also focused on optimising its borrowings, with a combination of fixed and floating rates, and hedging strategies in place.

In terms of growth plans, the bank is expected to continue its expansion, driven by its strong brand and market presence. The bank's management is confident that its contrarian approach to industry growth will pay off in the long run.

With a strong focus on deposits, asset quality, and effective management of its balance sheet, HDFC Bank is well positioned for future growth.

The bank's target is to achieve a deposit growth rate of around 10-12% in the next few years, while maintaining its net interest margin (NIM) in the range of 4.2-4.5%. The bank also aims to reduce its gross non-performing assets (NPAs) to around 1% of its total advances.

How HDFC Bank Share Price has Performed Recently

In the past five days, HDFC Bank share price has declined 1.1%. In the last month, it is down 1%.

In 2024, so far its share price is down 5.4% and it is down 0.3% in the last year.

The stock touched its 52-week high of Rs 1,791.9 on 3 July 2024 and a 52-week low of Rs 1,363.5 on 14 February 2024.

About HDFC Bank

HDFC Bank is one of India's largest private-sector banks. It was established in Mumbai in August 1994. Over the years, it has built a strong brand reputation and customer loyalty.

It has a network of 6,342 branches and 18,130 ATMs in 3,188 cities/towns.

HDFC Bank offers a diverse range of financial products and banking services to customers through a growing branch and ATM network, as well as digital channels such as net banking, phone banking, and mobile banking.

It also offers a wide gamut of commercial and transactional banking services to organisations of all sizes.

To know more about the company, you can have a look at its factsheet and its quarterly results.

You can also compare HDFC Bank with its peers.

HDFC Bank vs ICICI Bank

HDFC Bank vs SBI

HDFC Banks vs Axis Bank

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