MFs Acquired ₹42,000 Crore in HDFC Bank Shares in H1 2024

In the first half of 2024, Mutual Funds acquired HDFC Bank shares worth over ₹42,000 crore, even as foreign investors slightly reduced their holdings in India's largest bank by Market Capitalization.

In June alone, mutual funds purchased 4.09 crore shares of HDFC Bank, valued at ₹6,887 crore. This marked the sixth consecutive month of substantial buying, with previous monthly acquisitions as follows: May - ₹7,600 crore, April - ₹1,886 crore, March - ₹4,600 crore, February - ₹8,432 crore, and January - ₹12,884 crore.

Among individual schemes, ICICI Prudential Mutual Fund was the largest buyer, acquiring shares worth approximately ₹10,750 crore. Quant Mutual Fund and HDFC Mutual Fund followed, purchasing shares valued at around ₹7,754 crore and ₹5,683 crore, respectively. Other notable buyers included Kotak Mutual Fund and Nippon India Mutual Fund, with purchases worth ₹4,917 crore and ₹4,765 crore, respectively.

Conversely, Canara Robeco Mutual Fund was the largest seller, offloading shares worth ₹790 crore. HSBC Mutual Fund and Baroda BNP Paribas Mutual Fund sold shares valued at around ₹524 crore and ₹155 crore, respectively.

In 2023, Mutual Funds bought over ₹70,000 crore worth of HDFC Bank shares, compared to about ₹23,800 crore in 2022 and ₹11,768 crore in 2021.

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As of the June 2024 quarter, foreign ownership in HDFC Bank stands at 54.83%, below MSCI's 55.5% requirement for a weightage increase. This results in over 25% 'foreign room' in the stock, essential for inclusion at its full market-cap weight.

HDFC Bank's weight in the MSCI Emerging Markets index is 3.8%. The decline in foreign ownership could lead to potential inflows, with MSCI's decision on the weight increase expected on August 13. Nuvama Research predicts that if HDFC Bank qualifies, it could attract $3-4 billion in inflows by the end of August. Despite continuous buying by mutual funds, HDFC Bank share price dropped nearly 6% in the first half of 2024 and 5% in 2023 due to weaker earnings.

The stock has underperformed for two years, even amid a rally in Indian equities, primarily due to consistent EPS downgrades following missed guidance and changes in rate cycle dynamics. The management's 'no guidance' policy has received mixed reactions but is seen as favorable amid macro uncertainties. In FY24, HDFC Bank reported a lower Net Interest Margin (NIM) of 3.4% while the credit deposit ratio was 105%. Analysts believe the FY25 EPS expectations are low enough to potentially end the downgrade cycle, which is crucial for the stock's recovery.

Recently, Bank of America (BofA) downgraded HDFC Bank's stock to 'neutral' from 'buy,' reducing the target price from ₹1,850 to ₹1,830 per share. BofA expects the stock's risk-reward to remain narrow over the next 12 months and anticipates potential catalysts to emerge only in FY26, citing concerns about a shallow rate cut cycle delaying HDFC Bank's NIM recovery.