HDFC Bank’s Recent Merger Sparks Caution, Yet Analysts Remain Optimistic

HDFC Bank’s stock has seen a decline of over six percent in the last three sessions following the bank’s analyst meeting to discuss the details of its merger with HDFC. The drop is attributed to near-term concerns surrounding asset quality, excess liquidity, and net worth. While most brokerages maintain a positive outlook on HDFC Bank, they advise caution in the short term, with some lowering their target prices.

Key Points Highlighted by Brokerages:

1. Asset Quality and Earnings Impact: Analysts anticipate a potential impact on asset quality metrics, including an increase in non-performing loans (NPLs) from HDFC’s real estate portfolio. Earnings estimates and Net Interest Margins (NIMs) may also be affected by factors like Interest on Cash Reserve Ratio (ICRR) and excess liquidity.
2. Impact on Net Worth and Book Value Per Share: The merger with HDFC is expected to result in changes to net worth, with one-time adjustments. However, most of these adjustments are considered non-cash and transitional in nature, causing some weakening in Book Value Per Share (BVPS).

Brokerage Recommendations:

• Kotak Institutional Equities has reduced its target for HDFC Bank’s stock to Rs 1,850. They mention a reduction in net worth to accommodate policy and accounting changes. The bank’s NPLs in the parent entity are higher than expected, but further negative surprises are anticipated to be negligible.
• Bernstein maintains an ‘outperform’ rating with a target price of Rs 2,300 per share, noting that the addition of excess liquidity will impact the return on assets (RoAs) in FY25. They expect a marginal worsening of asset quality metrics but anticipate re-rating to take some time.
• Macquarie has an ‘outperform’ rating with a target price of Rs 2,110 per share.
• Citigroup has a ‘buy’ rating but has reduced the target price from Rs 2,200 to Rs 2,160 per share, highlighting HDFC Bank’s focus on affordable housing and infrastructure loans.
• Goldman Sachs maintains a “Buy” rating with a target price of Rs 2,051 per share. They note the bank’s decision to withdraw I-CRR, which could impact around Rs 400 crore.
• UBS has a ‘buy’ rating with a target price of Rs 1,900 per share, emphasizing the need for clarity on the merged balance sheet.
• Jefferies maintains a ‘buy’ rating with a target price of Rs 2,030 per share, highlighting the impact on NIMs due to higher liquidity.

HDFC Bank’s stock performance:

HDFC Bank’s stock has experienced a 1.82 percent decline over the past six months, while the Nifty Bank index has shown a return of 13.68 percent over the same period.