HDFC Bank's NIM to remain under pressure in near term, shares decline 4%; Nomura double-downgrades stock
HDFC Bank share price: The lender said in its update that the merged entity's net interest margin, or NIM (on total assets), has declined to 3.7–3.8 per cent (as already indicated by management earlier) from 4.1 per cent for the standalone bank in 1QFY24.
HDFC Bank share price: Shares of HDFC Bank were on investors' radar on Wednesday, September 20, after its Analyst Meet. The lender said in its update that the merged entity's net interest margin, or NIM (on total assets), has declined to 3.7–3.8 per cent (already indicated by management earlier) from 4.1 per cent for the standalone bank in 1QFY24.
Further, due to the impact of excess liquidity of Rs 1 trillion in e-HDFC’s balance sheet towards June-end and the incremental cash reserve ratio (ICRR), the NIM is expected to see further compression of 25–30 basis points (bps). The bank expects NIM to improve in a few quarters, led by excess liquidity’s deployment on the lending side, repayment of some borrowings of e-HDFC switch-over with deposits, and a changing business mix towards retail assets.
Following this, Nomura has double-downgraded HDFC Bank stock to neutral from buy. The target price has been cut to Rs 1,800 from Rs 1,970 earlier. The shares of the lender ended 4 per cent lower at Rs 1563.90 on the BSE.
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Other Key Highlights
Among other key highlights, HDFC Bank's merged entity loan growth has moderated to 13 per cent due to an 18 per cent YoY decline in e-HDFC’s wholesale book. "Management has guided about reducing this book further in FY24 before it starts growing it again in the coming years," Nirmal Bang Securities said in its note dated September 20.
Further, HDFC Bank’s (merged entity) asset quality witnessed a marginal deterioration, with GNPA/NNPA increasing from 1.2 per cent / 0.3 per cent in 1QFY24 to 1.4 per cent / 0.4 per cent as of July 1, 2023. This was due to the wholesale book NPAs of e-HDFC increasing from 3.7 per cent as of March 31, 2023, to 6.7 per cent post-merger on account of some assets moving from stage 2 to stage 3.
What other brokerages say
Among foreign brokerages, JP Morgan has maintained an 'overweight' rating on the stock. However, the target price has been cut to Rs 1,900 from Rs 2,000. Jefferies has maintained 'BUY' on the stock. However, it has cut the target price to Rs 2,030 from Rs 2,100 earlier.
Among domestic brokerages, InCred Equities says that it is concerned about the probable margin compression and volatility in the asset quality profile of HDFC Bank in the near term. However, the healthy provision coverage provides some relief.
"We believe HDFC Bank has enormous growth opportunity post-merger of HDFC amid the bank’s competitive edge in mortgage financing business as well as a probable cross-selling opportunity to existing HDFC customers. We also appreciate HDFC Bank’s expanded presence, which will allow it to maintain market penetration-led growth. HDFC Bank remains our top stock pick with a target price of Rs 2,000 (nearly 2 per cent plus return on assets (ROA) and 16 per cent return on equity or RoE)," it said.
The brokerage has retained an 'ADD' rating on the stock. "We have valued the standalone bank at nearly 2.7x FY25F adjusted book value (ABV) and its subsidiaries at Rs 200/share. Downside risks: slower-than-expected growth and a weak profitability trend post-HDFC merger," it added. Adjusted book value, also known as modified book value, measures the net value of a company after liabilities and assets have been adjusted to reflect fair market value.
IDBI Capital has maintained 'BUY' on the stock with a target price of Rs 2,000.