HDFC Bank’s Outlook Set to Improve in 12-18 Months, Says Nitin Aggarwal of Motilal Oswal

In the wake of HDFC Bank’s recent merger with HDFC Ltd, which led to a dip in its book value and prompted several brokerages to lower their ratings and target prices, Nitin Aggarwal of Motilal Oswal Financial Services remains optimistic that the stock will see a positive re-rating in the next 12-18 months. Aggarwal emphasized that the long-term investment thesis for the stock remains robust, with a clear path for the merged entity to achieve a 2 percent Return on Assets (ROA) by FY26. He anticipates a gradual improvement in earnings and believes that the liquidity influx from HDFC Ltd will play a pivotal role in driving business growth. Aggarwal also commended the HDFC group for its consistent execution in delivering returns.

Despite the merger-related challenges, Aggarwal finds the current valuation of 2.6 times price-to-book value for the bank attractive. However, he acknowledges that the execution of the merger, given the substantial size of the resulting entity, remains a critical factor to monitor closely.

Aggarwal highlighted that deposit growth will be a key metric to watch, considering the bank’s strong performance in Q1 followed by a slightly softer Q2. He noted that competition in the banking sector will persist, making the bank’s performance in deposits and advances crucial indicators of the merged entity’s growth potential and margins.

For the immediate quarter, Aggarwal suggests taking a cautious approach with HDFC Bank, primarily due to the excess liquidity accumulated post-merger. The deployment of this liquidity remains uncertain and warrants observation, according to Aggarwal.

On September 18, Nomura, a foreign brokerage firm, downgraded its rating on HDFC Bank to Neutral following an analyst call where details of the merged entity were disclosed. Nomura cited a downward adjustment to HDFC Ltd’s net worth, primarily due to accounting and provisioning harmonization, resulting in a reduction of Rs 23 per share in the book value per share for the merged entity. Additionally, the firm anticipates pressure on net interest margins (NIM) over the next two to three quarters, as excess liquidity from the merger affects NIMs.

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