HDFC Bank Vs Axis Bank: CLSA sees up to 60% upside potential in one

The brokerage argues that investors have focused almost entirely on pressure on net interest margins (NIMs), while paying far less attention to stronger corporate loan growth, lower operating costs, improving asset quality and easing credit costs. “There has been too much focus on one ratio, NIM, without enough attention to the overall picture. We believe the share price correction is unwarranted,” CLSA added.

CLSA on HDFC Bank

CLSA has maintained its ‘Outperform’ rating on HDFC Bank with a target price of Rs 1,200, implying an upside of 60.3%.

The brokerage says HDFC Bank’s corporate loan portfolio has grown 19% year on year, significantly faster than the bank’s overall loan growth. While corporate loans typically generate lower yields than retail and MSME loans, CLSA argues that investors have overlooked the benefits that accompany this mix.

According to the brokerage, corporate lending carries lower incremental operating costs because it is largely a business-to-business segment. It also points out that most of these loans are extended to AA and AAA-rated borrowers, resulting in negligible credit costs beyond standard asset provisioning.

“Corporate loans would typically yield 100-200 basis points lower than retail and MSME loans. However, corporate loans come at lower incremental operating costs and better asset quality,” the brokerage notes.

CLSA also says these loans carry a 20% risk weight, much lower than retail loans, allowing HDFC Bank to improve its CET-1 capital position despite faster corporate loan growth.

“While corporate loans are quite NIM-dilutive, they may be only marginally RoA-dilutive. More importantly, they are still EPS-accretive,” the report adds.

CLSA on Axis Bank

CLSA has also retained its ‘Outperform’ rating on Axis Bank with a target price of Rs 1,550, implying an upside of 25.6%.

The brokerage says Axis Bank’s corporate loan book has expanded 38% year on year, well ahead of its overall loan growth. It argues that the market reaction following the June-quarter results has overlooked the earnings support from this business mix and instead centred almost entirely on margin compression.

HDFC Bank Vs Axis Bank: CLSA lists out valuation gap

The brokerage notes that both HDFC Bank and Axis Bank are trading at 1.4-1.5 times one-year forward price-to-book, representing a discount of around 35% to ICICI Bank.

“Since the results, both stocks are down about 8% and their price-to-book discount to ICICI Bank has expanded to around 35%. This discount is at or near an all-time high for HDFC Bank and Axis Bank, which we believe will narrow as investors appreciate their tactical strategy,” CLSA says.

Corporate lending has not come at the expense of retail loans

CLSA disagrees with the view that HDFC Bank and Axis Bank have increased corporate lending by sacrificing retail loan growth.

The brokerage says retail loan growth for both lenders has remained at around 8% year on year for the past few quarters. It argues that the difference with ICICI Bank is explained primarily by mortgages, while growth in non-mortgage retail loans remains broadly similar across the three banks.

“Some investors believe these banks are growing corporate loans at the cost of retail lending. We don’t think that’s the case. For both players, retail loan growth has remained unchanged at 8% year on year for a few quarters now,” according to the report.

Operating costs and slippages deserve equal attention

CLSA says another aspect receiving far less attention is the improvement in operating efficiency and asset quality.

According to the brokerage, operating expense growth at HDFC Bank and Axis Bank has remained in the mid-single digits, while ICICI Bank has reported low double-digit operating expense growth during the past few quarters.

The report also says gross and net slippage ratios have declined across large private sector banks because of higher corporate loan growth and tighter risk selection. While these factors have weighed on NIMs, they have also contributed to lower credit costs.

“Investors are penalising banks for delivering lower NIMs but not rewarding them for delivering lower slippages,” CLSA says.

CLSA sticks with positive view despite estimate cuts

CLSA says it has reduced its profit after tax estimates by 1% for HDFC Bank and 2-4% for Axis Bank. Consensus earnings estimates have also been lowered by 1-2% for HDFC Bank and 3% for Axis Bank following the June-quarter results.

Despite those revisions, the brokerage has retained its positive stance on both lenders.

“We reiterate our positive stance on both names,” CLSA says.

Conclusion

CLSA believes the market has attached disproportionate importance to pressure on net interest margins while overlooking factors that continue to support earnings, including faster corporate loan growth, lower operating expenses, better asset quality and improving slippages. Although the brokerage has modestly lowered its earnings estimates after the June-quarter results, it continues to see the current valuation discount of HDFC Bank and Axis Bank to ICICI Bank narrowing as the market gives greater weight to the broader operating picture rather than a single performance metric.

Disclaimer: The brokerage views, target prices, and stock ratings presented above are for informational and educational purposes only and do not constitute an offer, solicitation, or personal recommendation to buy, sell, or hold any security. Stock market investments are subject to market risks, and price targets or return projections are based on analyst assumptions that may not materialize. Readers are advised to evaluate their risk appetite and consult a SEBI-registered financial advisor before making any investment decisions.

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