HDFC Bk: Merger with HDFC, NIM compression near-term concerns, say analysts

HDFC Bank Q1 review: Issues with management's bandwidth in managing the balance sheet post merger remains key risks for upside, said Nomura

HDFC Bank Q1 review: HDFC Bank's steady performance in April-June quarter (Q1FY23) has underscored analysts' faith in the bank's promising long-term growth trajectory. However, merger overhang and its impact on operating expenses and return ratios may result in the stock's underperformance in the near-term, they said. Given this, select brokerages have cut their target price on the stock.

"HDFC Bank's at that phase where its superior business performance is not the driving factor for its re-rating. Investors are focused on the merger issue where we are unsure of its impact on the medium-term earnings as the liability transition has too many variables that make it harder to forecast. Clarity on regulatory dispensation becomes critical in this period to build conviction," said analysts at Kotak Institutional Equities.

Moreover, HDFC Bank was able to build a relatively differentiated book, which was backed by a solid liability franchise and resulted in superior risk-adjusted returns. However, post-merger, the book is likely to be similar to its private bank peers, making it to justify the premiums that it experienced in the past, they added.

The proposed merger between HDFC Ltd and HDFC Bank has received 'no adverse observation' from BSE, and 'no objection' from NSE and the Reserve Bank of India (RBI). The Bank has further requested the RBI for phased compliance of regulatory requirements, grandfathering of borrowing, and permission for an extra 2.2 per cent in HDFC Life to take its stake beyond 50 per cent.

While HDFC Bank is separately communicating with regulators on this, analysts await clarification and outcome regarding regulatory forbearance or stake in subsidiaries/associates (HDB Financial and HDFC Life Insurance).

"As the management did not offer any further clarity on the merger dynamics, issues with management's bandwidth in managing the balance sheet for future integration remain key risks for upside," said Nomura.

Overall, the lender's Q1 result came in largely on expected lines with a hit on asset quality due to season weakness in the agricultural portfolio. HDFC Bank reported a 19 per cent year-on-year increase in its standalone net profit at Rs 9,196 crore. On a sequential basis, however, HDFC Bank's net profit declined from Rs 10,055.18 crore in January-March.

The bank's net interest income rose 14.5 per cent to Rs 19,481.4 crore, driven by 22.5 per cent on-year growth in advances versus a growth in deposits of 19.2 per cent.

Within the loan book, retail loans grew by 21.7 per cent on-year, while commercial and rural banking loans rose 28.9 per cent on-year. Corporate and other wholesale loans grew 15.7 per cent, while overseas advances made up 3.5 per cent of total advances, the bank said.

Going forward, analysts at HSBC believe key catalysts for the stock would be continued strength in loan growth, and change in loan mix towards retail, commercial and rural banking; and improvement in NIMs, driven by changing loan mix and translation of repo-hikes into yields.

"We expect the positive impact of increasing growth momentum in high yielding retail portfolio and re-pricing of assets to start fully reflecting on margin in the coming quarters. While slippages increased during the quarter, low stress book, improving credit scenario, and high standard provisioning provides comfort on the assets quality front," said Choice Broking

Valuation and revised estimates

Analysts at Nomura have cut their target price on the stock to Rs 1,690 (from Rs 1,705), while those at ICICI Securities have cut target to Rs 1,874 from Rs 1,955. Motilal Oswal's revised target stands at Rs 1,800.

"We revise FY23/24/25 earnings per share (EPS) estimates by -1.2 per cent/-0.6 per cent/-0.8 per cent owing to lower treasury income and lower NIMs. We forecast 16.6 per cent and 16.8 per cent EPS and core book value (BV) CAGRs over FY22-25," Nomura said.

HSBC, meanwhile, revised their EPS estimates by -1.9 per cent/-0.2 per cent/2.0 per cent for FY23/24/25. ICICI Securities has cut net profit growth estimates by 2 per cent each for FY23 and FY24