HDFC Bank Analyst Meet: 4 negative surprises lead to cut in share price targets

Brokerages, which attended HDFC Bank's analyst meet to discuss the HDFC-HDFC Bank merger accounting and related topics, were a bit disappointed with a 17 per cent drop in net worth due to accounting changes and policy harmonisation. They cited a hit on net interest margin (NIM) due to excess liquidity, a drop in return on asset (RoA) on merged basis and increase in non-performing loans due to non-individual loan portfolio of HDFC while lowering their target prices on the stock. 

Net-net, analysts are concerned about the probable margin compression and volatility in the asset quality profile of HDFC Bank Ltd in the near term. But the bank's healthy provision coverage provides some relief, they said.

"There is a reduction in net worth to account for policy, accounting alignments and dividend payout. The NPL in the parent entity is higher than expected but further negative surprises should be negligible. Re-rating is some time away as the bank has to work through the NIM transition and build its thesis of differentiation, which we are still less certain about," said Kotak Institutional Equities.

This brokerage has cut its target on the stock to Rs 1,850 from Rs 1,925 earlier.

Nomura India, which has downgraded the HDFC Bank’s target to Rs 1,800 from Rs 1,970 earlier, said net worth adjustments will have a negative 4 per cent impact on its estimated FY24 book value per share.

It estimates NIM cuts of 25 basis points (bps) in FY24 and 15-20 bps in FY25-26 on excess liquidity and accounting adjustments. Besides, it estimated higher cost-to-income due to accounting changes including upfronting of sourcing costs under IGAAP for HDFC against amortisation under IndAS. Also, the foreign brokerage suggested a sharp uptick in NPAs in HDFC Ltd’s corporate loan book.

"Our EPS cuts of 5-9 per cent over FY24-26F and BVPS cuts of 7 per cent largely factor in these, in our view. This depresses HDFC Bank's medium-term RoA profile further and the gap versus ICICI Bank's 2.2 per cent RoA profile is even starker now. Further, while bank did not mention any changes to its loan growth outlook, we remain watchful of any near-term impact arising out of pressure to maintain elevated liquidity levels," Nomura India said.

Antique Stock Broking sees earnings and book value to get revised lower by mid-high single digits. It has cut its target on the stock to Rs 1,925 from 2,025 earlier.

Phillip Capital said the merger strategically fit HDFC Bank’s product basket. As the benefits accrue over a period, the intermittent period will see merger-related costs in the form of pressure on margins and cost to income ratio.

"The return on equity is expected to moderate in near terms owing to low leverage of the parent, however we expect RoA to sustain at 1.8-1.9 per cent level. We remain constructive from medium to long term perspective. We have cut our estimate for FY24E/25E owing to re-statement of opening networth and NIM compression due to excess liquidity," it said.

This brokerage has maintained its 'Buy' call on the stock with a revised target of Rs 1,880 from Rs 1,960 earlier.

Motilal Oswal Securities said it was conservative in its projections and estimated FY24 NIM to be at 3.75 per cent, which is in line with the pro forma merged estimates. That said the impact on net worth from the transition to IGAAP, credit policy harmonisation and other factors has led to a slight cut in the brokerage's book value projections.

"Besides, the drag from excess liquidity, ICRR and continued unwinding of the non-individual loan portfolio of HDFC Ltd will further impact margins and earnings," it said while suggested a revised target of Rs 1,950.

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