HDFC share price forms bearish flag as it lags behind the Nifty Bank Index

The HDFC Bank share price has underperformed the market this year. It has dropped by over 2% while the Nifty 50 index has jumped by over 16%. HDFC has also lagged behind its key peers since the Nifty Bank Index has jumped by 6.6%. 

Benefiting from high interest rates

HDFC and other Indian banks like Yes Bank, State Bank of India (SBI), and ICICI are benefiting from two key tailwinds.

First, India has become one of the fastest-growing countries as it seeks to become the third-biggest economy in the next decade. It is averaging an annual growth rate of 7%, while China, its neighbour and rival, has struggled to get to 5%.

India’s economic growth has led to a large increase in the number of people in the middle class in the country.

However, some data show that the economy has some issues. For example, the unemployment rate has risen to 9.2%, higher than the 8.17%, which it averaged between 8.17% and 2024. Inflation has also remained significantly higher than in the past.

The second tailwind for HDFC and other banks is that the Reserve Bank of India (RBI) has maintained a hawkish tone as it has maintained interest rates at an elevated level of 6.5% for a while. The bank has also hinted that interest rates will remain high for longer. 

Banks like HDFC benefit in a high interest rate environment because of the widening of the Net Interest Margin (NIM). This explains why most Indian banks have reported a big increase in profits in the past few years. In the most recent earnings, HDFC said that its net income margin rose to 3.7% from 3.6% in the same period last year.

However, high rates are not always good for banks as they lead to more demand for money market funds, which pay a better rate. Money market funds in India added over ₹54,014 crore in the first six months of the year. High rates also lead to more defaults by consumers.

HDFC Bank recent financial results

The most recent financial results showed that HDFC Bank’s revenues jumped by 106% to over ₹724 billion or $8.7 billion. These numbers were higher than what popular banks like Lloyds and Barclays made in the same period.

HDFC’s profitability also continued growing, reaching over ₹164.7 billion during the quarter. This growth was because of its net interest income, which surged to ₹298.4 billion because of high interest rates.

Most importantly, non-performing loans (NPL), which often rise in a high interest rate environment, retreated in the quarter to ₹26 billion. 

HDFC, the second-biggest bank in India, also has a strong balance sheet. In most periods, the best approach to look at a bank’s financial health is to focus on its Common Equity Tier 1 Capital Ratio (CET1), which looks at its assets against risk-weighted assets. In its case, HDFC has a multiple of 16.8%.

A CET1 ratio of 16.8% is higher than other popular banks. JP Morgan, one of the best banks in the US, has a multiple of less than 14. Similarly, Lloyds Bank is working to reduce its CET1 ratio to 13% by 2026. 

HDFC Bank recent news

HDFC Bank has made several headlines recently, which likely explains why its stock has retreated from its highest point this year. 

Late last month, the company rejected a deal by Mitsubishi UFJ to buy a 20% stake in HDB, its consumer lending business. The deal would have been worth over $1.7 billion. HDB has become a top Indian bank with over 16.5 million customers and over 1,727 branches.

The other important news was the decision by HDFC to take a temporary break from its partnership with Apple, the biggest company in the world. It cited the cost-to-income ratio, meaning that the relationship was not generating substantial returns compared to the amount it invested. HDFC has also planned to sell $1.2 billion of loans through a rare debt tool. 

HDFC Bank has a price-to-book ratio of 2.60, higher than most banks. In the US, Bank of America, Goldman Sachs, and Citigroup have a multiple of less than 2.

HDFC Bank share price forecast

Turning to the daily chart, we see that the HDFC stock price has moved sideways in the past few weeks.  It remains much lower than the year-to-date high of ₹1,795. 

On the positive side, the stock has remained above the 50-day and 200-day Exponential Moving Averages (EMA). 

However, it has dropped below the key support level at ₹1,698, its highest swing in December last year. It has also formed a bearish flag chart pattern shown in green. This pattern is characterized by a long flag pole and a rectangle pattern.

Therefore, the stock will likely have a bearish breakout in the coming weeks. If this happens, the stock may drop to the 200-day moving average of ₹1,575.