India's HDFC Bank shows most upside among large Asia-Pacific bank stocks

Shares of India's HDFC Bank Ltd., along with several large Chinese lenders, have the highest implied upside among peers in Asia-Pacific, indicating that they are trading below analysts' targets.

HDFC Bank, India's biggest lender by market capitalization, has a potential upside to price target of 38.8%, more than three times the 12.9% median possible upside for the region's 20 largest banks, an S&P Global Market Intelligence analysis shows. The bank's buy strength, representing the proportion of buy and overweight analyst recommendations, was 90%, against a median of 78.6% for its top 20 peers in Asia-Pacific by market capitalization.

Implied upside is the percentage difference between a company's current stock price and where analysts have set targets for the price to go.

China Construction Bank Corp. had the second-highest implied upside at 33.6%, followed by its domestic peers Postal Savings Bank of China Co. Ltd., Industrial and Commercial Bank of China Ltd. and China Merchants Bank Co. Ltd. in the top 5. In total, half of the 20 largest Asia-Pacific banks showed an implied upside greater than the group's median.

HDFC Bank's strong profitability, low dividend payouts and an increase in the share of low-risk mortgages in its loan book will support its solid capitalization, S&P Global Ratings said Dec. 22, 2023. The bank's superior net interest margins and a decline in loan loss provisions will help its profitability to remain significantly better than the industry average, the rating agency said.

Further, the bank's return on average assets (ROAA) will remain largely stable at close to 2.0% over the next two years, compared to the estimated sector's ROAA of about 1% in fiscal 2024, it added.

Other major banks with an implied upside above the 20-bank group's median of 12.9% are India's ICICI Bank Ltd., DBS Group Holdings Ltd., Bank of China Ltd., Agricultural Bank of China and Bank of Communications Co. Ltd., Market Intelligence data show.

– Click here to download a spreadsheet with data featured in this story. – Click here to read our recent analysis of Australian banks' loan-staging data under IFRS 9 accounting standards.

Overpriced

All four largest Australian banks by market cap have negative implied upside to their price targets, indicating the stocks might be overpriced.

Commonwealth Bank of Australia, the largest among the four by market capitalization, has an implied upside of negative 22% and a buy strength of zero, the data shows. Westpac Banking Corp. and National Australia Bank Ltd. have implied upside of negative 9% and 8.4%, respectively, while ANZ Group Holdings Ltd.'s implied upside was negative 4.5%.

In a Feb. 9 report, CFRA Equity Research analyst Siti Salikin set a 12-month target price of A$115 for CBA with a Hold rating, compared to the bank's share price of A$116.24 as of market close the same day, citing the bank's strong domestic franchises.

"Similar to the industry, macro headwinds could put pressure on loan growth, margin, and quality of lending portfolio, but we think CBA is well placed to manage the challenges supported by its well-diversified business mix (both lending and funding composition), healthy balance sheet, and capital position," Salikin said.

Australian banks face declining net interest margins and intense competition for deposits in 2024, putting potential pressure on their profitability, analysts told Market Intelligence in December 2023. ANZ's net income, for instance, is expected to fall to A$6.48 billion in the fiscal year ending Sept. 30, 2024, from A$7.41 billion in the prior-year period.

CBA is expected to report net income of A$9.58 billion for its fiscal year ending June 30, 2024, down from A$10.16 billion in 2023. The biggest Australian lender by assets reported that its net income in the first half of the fiscal year fell 3% to A$5 billion.