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In early trade on the Bombay Stock Exchange (BSE) today, HDFC Bank witnessed a substantial decline of more than 4% in its share price. This downturn came in the aftermath of a series of mixed evaluations by brokerage firms following the bank’s analyst and institutional investor meeting, which occurred on September 18th. The stock’s opening price stood at ₹1,599, marking a notable deviation from its previous closing value of ₹1,629.05. The day’s trading activity saw HDFC Bank shares drop by 4.02% to reach ₹1,563.50. Consequently, the bank’s market capitalization (mcap) dipped to approximately ₹11.8 lakh crore on the BSE.
Over the past year, HDFC Bank shares have exhibited a notable underperformance compared to the benchmark Sensex index. While HDFC Bank shares recorded a modest increase of 4%, the Sensex demonstrated a robust gain of approximately 13% during the same period. Notably, the stock achieved its 52-week high of ₹1,757.80 on July 3rd this year and its 52-week low of ₹1,365.05 on September 30th of the preceding year on the BSE.
In a concurrent development, the Reserve Bank of India (RBI) granted its approval for the reappointment of Sashidhar Jagdishan as HDFC Bank’s Managing Director and Chief Executive Officer, extending his tenure for an additional three years until October 26, 2026.
During its analysts’ meeting, HDFC Bank highlighted the potential short-term challenges involving the net interest margin (NIM), net worth, and asset quality, primarily stemming from its merger with parent company Housing Development Finance Corp. (HDFC). Chief Financial Officer Srinivasan Vaidyanathan conveyed that NIM could contract by 25 basis points (bps), attributed to the cumulative impact of incremental cash reserve ratio (CRR) and surplus liquidity. Prior to the merger, HDFC had accumulated an excess liquidity buffer of nearly ₹1 trillion.
In the wake of the analysts’ meeting, global brokerage firm Nomura downgraded HDFC Bank’s stock rating from ‘buy’ to ‘neutral’ while revising the target price downward from ₹1,970 to ₹1,800. Nomura cited four unexpected developments from the meeting:
1. Negative Impact on Net Worth: Net worth adjustments were indicated to exert a negative 4% influence on FY24F BVPS (book value per share).
2. NIM Reduction:NIM reductions of approximately 25 bps in FY24F and 15-20 bps in FY25-26F due to excess liquidity and accounting adjustments.
3. Higher Cost-to-Income: An increase in cost-to-income was foreseen due to accounting changes related to upfront sourcing costs under IGAAP for HDFC as opposed to amortization under IndAS.
4. Rise in NPAs:A substantial surge in non-performing assets (NPAs) in HDFC’s corporate loan portfolio.
Nomura reflected these developments in its EPS (earnings per share) reductions of 5-9% over FY24-26F and BVPS reductions of around 7%, thereby impacting HDFCB’s medium-term RoA (return on assets) profile, which is expected to range from 1.7% to 1.8% over FY24-26F. This further highlights the pronounced contrast with ICICI Bank’s RoA profile, which is anticipated to reach 2.2% over the same period.
However, Goldman Sachs maintained its ‘buy’ recommendation for HDFC Bank with a target price of ₹2,051, signaling a potential upside of 26%. Goldman Sachs emphasized the bank’s favorable positioning to gain significant market share in lending and deposits over the coming years, attributed to its expanding distribution network and robust cross-selling efforts.
The investment bank anticipated sector-leading earnings growth of 17% for FY23-26E and superior return ratios, with an average ROA and ROE of approximately 2% and 16%, respectively, over FY24-26E. This outlook is underpinned by a high degree of earnings visibility. Moreover, Goldman Sachs did not anticipate the bank’s need for capital infusion for at least the next eight years due to reduced capital consumption, stemming from improved risk density and enhancing ROEs.
In concluding remarks, Goldman Sachs underscored the stock’s current trading status, which positions it at one standard deviation below the mean, adjusting for the sum-of-the-parts (SOTP) value of its group businesses. Consequently, Goldman Sachs maintained its ‘buy’ rating on HDFC Bank and expected it to command a premium valuation multiple, approximately 20 times FY24-FY25E EPS and 2.8 times FY24-FY25E BVPS.
Domestic brokerage firms also weighed in on the matter. Motilal Oswal Financial Services maintained a ‘buy’ rating on the stock with a target price of ₹1,950, reflecting a potential gain of 20%. The brokerage firm asserted that the merger between HDFC and HDFC Bank would enable the latter to establish a more diversified and robust franchise. Furthermore, an enlarged customer base, technological prowess, and robust distribution capabilities were deemed as factors that would facilitate improved cross-selling to customers and foster healthy business expansion.
Similarly, Nirmal Bang retained a ‘buy’ recommendation on the stock with a target price of ₹1,935, translating to a potential gain of 19%. Nirmal Bang expressed long-term optimism regarding HDFC Bank. While acknowledging near-term financial volatility arising from merger-related adjustments, the brokerage firm conveyed a positive outlook for HDFC Bank’s future prospects. Key factors supporting this view included the stability of top management, a strong capital position, ample provision buffers, and historically attractive valuations, estimated at 2.6 times FY25E ABV.
Disclaimer: The perspectives and recommendations presented in this article are those of individual analysts, experts, and brokerage firms and do not necessarily reflect the views of this newspaper. Investors are encouraged to consult certified experts prior to making investment decisions.