Shares of HDFC Bank climbed nearly 2% in early trade on Monday as investors cheered the RBI's decision to allow Life Insurance Corporation (LIC) to acquire up to 9.99% stake in the country’s largest private lender in terms of market capitalisation. On January 25, the Reserve Bank of India (RBI) gave the nod to LIC of India to buy an additional 4.8% shares in HDFC Bank, taking its stake to 9.99%. With this, LIC of India will become the largest shareholder in the private lender.

Snapping previous session losses, HDFC Bank shares opened higher at ₹1,453.95, up 1.3% against the previous closing price of ₹1,435.30 on the BSE. In the first two hours of trade so far, the banking heavyweight rose as much as 1.9% to ₹1,462.85.

At 11:10, HDFC Bank shares were trading 1.2% higher at ₹1,452.60, while the market capitalisation stood at ₹11.03 lakh crore. On the volume front, 12.5 lakh shares changed hands over the counter compared with two-week average of 20 lakh stocks.

“We would like to inform you that the Reserve Bank of India (RBI) vide its letter dated January 25, 2024 addressed to Life Insurance Corporation of India (LIC), has accorded its approval to LIC for acquiring aggregate holding up to 9.99% of the paid-up share capital or voting rights of HDFC Bank,” the lender said in a BSE filing on last Thursday.

As per the exchange filing, LIC has been advised by the RBI to acquire the majority shareholding in the bank within a period of one year i.e. by January 24, 2025. “Further, LIC must ensure that the aggregate holding in the Bank does not exceed 9.99% of the paid-up share capital or voting rights of the bank at all times,” it noted.

The latest shareholding pattern on the BSE showed that the LIC of India currently owns 5.19% stake in the lender. At the end of December quarter, FIIs/FPIs hold 52.29% stake in the bank, while mutual funds and insurance companies own 19.45% and 9.07% shares, respectively.     

HDFC shares corrected 15% post Q3

In the last seven sessions, HDFC Bank shares have fallen nearly 15% after the lender reported lower than expected earnings in the third quarter ended December 31, 2023. On January 17, the bank’s shares nosedived 8.5%, recording its biggest single-day drop as investors turned cautious after Q3 earnings.

The bank posted a 33.54% year-on-year (YoY) rise in standalone net profit at ₹16,372.54 crore in Q3 FY24, compared with ₹12,259.49 crore in the same quarter last year, which was largely in line with Street estimates. Net interest income (NII) rose 23.9% YoY to ₹28,470 crore, which fell short of analyst’s estimates of 25%.The net interest margin (NIM) remained stable sequentially at 3.6% and there was compression on a YoY basis. 

Post Q3 earnings most analysts remain bullish on the stock, but cautioned about deposit growth which remained sluggish amidst tight liquidity conditions and stiff competition.

Axis Bank has given “Buy” call on the stock post Q3, with an upgraded target price of ₹1,975 per share, citing that current valuations are attractive given HDFC Bank’s ability to deliver a healthy 21% CAGR earnings growth over FY24-26E.

“We believe deposit mobilisation will remain an uphill task given tight liquidity and stiff competition. While margin pressures will persist, improvement in NIMs will be largely driven by shifting portfolio mix towards retail lending. Gradually improving cost ratios and benign credit cost given the unabated focus on credit quality will support RoAs as margins face headwinds. NIM recovery remains a key re-rating trigger,” the brokerage said in its report released post Q3.

BNP Paribas-led brokerage Sharekhan also remained constructive on the bank, saying the bank's NIM progression would be the key focus area in the near to medium term. It maintained a ‘Buy’ rating on the stock, with an unchanged target price of ₹1,900. "We believe the bank would have to slow down loan growth in the near term to navigate the liability-side transition. However, we remain constructive on the bank with a mid to long-term perspective," it said in a research note.

LKP Securities also recommended ‘BUY’ with a price target of ₹1,762, saying that the bank’s superior underwriting practices, adequate coverage and strong capital position make HDFC well placed. “HDFC Bank is expected to overcome the merger overhangs gradually led by healthy balance sheet growth; much higher provision then regulatory requirement in the balance sheet; best in class underwriting and risk management practices,” it said in a report.

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