On Sep 26, we downgraded our long-term recommendation on
) to Underperform from Neutral. This was based on the company's
persistently rising operating expenses.
Why the Downgrade?
Increasing operating expenses remain a major cause of concern at
HDFC Bank. In particular, we are concerned about the impact of
rapid rise in compensation expenses. A continuous increase in
operating expenses is expected to drag down the company's bottom
line in the coming quarters.
Moreover, like most of the Indian banks, HDFC Bank will likely
encounter higher cost of funds as it would be necessary for the
company to raise deposit rates to meet the increasing loan
demand. This is expected to keep margins under pressure.
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The estimate for HDFC Bank has been declining ever since it
reported fiscal first-quarter 2014 results. The Zacks Consensus
Estimate for fiscal 2014 has gone down 9.8% to $1.75 per share.
The Zacks Consensus Estimate for 2015 has also declined 5.1% to
$2.22 per share. With both these downward revisions, the company
now has a Zacks #4 Rank (Sell).
Moreover, the changing regulatory landscape could adversely
affect growth at HDFC Bank. The company's ability to offer loans
may be limited by regulatory restrictions on capital adequacy.
Further, though HDFC Bank's growth pipeline for both retail and
corporate sectors remains solid, competition has been
intensifying with other peers recently re-entering the retail
space after a long hiatus.
Other Stocks to Consider
Better-performing foreign banks worth considering include
Banco Bilbao Vizcaya Argentaria, S.A.
Grupo Financiero Galicia S.A.
Sumitomo Mitsui Financial Group, Inc.
). All these stocks carry a Zacks Rank #1 (Strong Buy).