HDFC Bank stock dips 4% as Nomura downgrades rating to ‘neutral’

Shares of HDFC Bank Ltd dipped 3.94% today after foreign brokerage Nomura downgraded the lender's rating to "neutral" from "buy" earlier as the merged entity disclosed details regarding the opening balance sheet, along with other details on the merged financials.

The HDFC stock opened a gap down at ₹1,599 on the BSE, down from the previous session close of ₹1,629.05, and touched an intra-day low of ₹1,561. The stock is currently trading 10.6% down from the 52-week-high of ₹1,757.80 achieved on July 3, 2023.

"Downward adjustment to the incoming net worth of HDFC Ltd (largely due to IGAAP accounting and provisioning harmonisation) amounts to a BVPS (book value per share) cut of INR23/share for the merged entity," Nomura says in the latest note.

It adds that the net interest margin of the bank (NIMs) could see “pressure” over the next two-three quarters. HDFC Ltd’s Q2 FY24F opening book NIMs are at 2% vs 2.7% in Q1 on excess liquidity being carried post-merger.

The target price for the stock has been cut to ₹1,800 from ₹1,920 earlier, with an implied upside of 10.5% its closing price on September 18, 2023.

Nomura has highlighted four negative surprises from the analyst meeting -- net worth adjustments have a negative 4% impact on FY24F BVPS; NIM cuts of ~25bp in FY24F and 15-20bp in FY25-26F on excess liquidity, accounting adjustments; higher cost-to-income due to accounting changes; and a sharp uptick in NPAs in HDFC Ltd’s corporate loan book.

HDFC Bank says its incoming net worth will stand at ₹1.11 lakh crore (against ₹1.34 trillion as of Mar-23 i.e. lower by 16%) due to multiple factors like provisions, IGAAP alignment, tax-related adjustments, and dividend payout.

Further, while the bank did not mention any changes to its loan growth outlook, Nomura remains "watchful" of any near-term impact arising out of pressure to maintain elevated liquidity levels.

HDFC Bank and parent HDFC announced the merger in July 2023, forming India's largest private bank.

What other agencies say:

JM Financials

JM Financials has retained a 'buy' recommendation on the stock, with the current price target of ₹1,850 (13.6% upside), down from its previous target price of ₹1,900.

"As we incorporate these details into our estimates, our “below consensus” FY24/FY25e EPS have been slightly tweaked (1-2% change) while we adjust our BVPS expectations lower given the lower opening net worth of HDFC Ltd. Maintain BUY with a target price of INR 1,850," says JM Financials.

Prabhudas Lilladher

Gaurav Jani, research analyst, Prabhudas Lilladher, says the bank's FY24 performance would be “muted” given a sharp fall in NIM. "However, as high-cost liabilities of HDFCL are replaced over FY24-26E, NIM would improve leading to likely healthy earnings CAGR."

Also, driven by excess liquidity, NIM for Q2 FY24E could dip sharply by 40bps to 3.6%; however, as loan growth picks up and liquidity is utilised, NIM would normalise to 3.88% by Q4 FY24E.

ICICI Securities

ICICI Securities says HDFC Bank's net interest margins are likely to “decline” near term due to additional liquidity. It has maintained a 'buy' rating on the HDFC Bank stock, with an unchanged target price of ₹2,000.

"The hit on opening net worth is slightly higher than our initial estimates and the pressure on near-term NIM also appears higher than initially envisaged," says ICICI Securities note.