Should investors buy, sell, or hold HDFC Bank shares after Q2? What brokerages say

Shares of HDFC Bank, the country’s largest private sector bank by assets, gained nearly 2% on Tuesday after the lender released its first earnings report post merger of the bank with parent Housing Development Finance Corp (HDFC) on July 1 in a $40-billion deal. In the first two hours of trade so far, the share price of the banking heavyweight gained as much as 1.86% to ₹1,558, against the previous closing price of ₹1,529.50 on the BSE. The market capitalisation of India’s third most valued firm, after RIL and TCS, stood at ₹11.67 lakh crore at the time of reporting.

HDFC Bank released its earnings report for the July-September quarter of the current fiscal post market hours on Monday, which topped analysts’ estimate despite lower than expected net interest income (NII). Analysts broadly remain positive on HDFC Bank’s shares with most of them lowering their target prices on the scrip. Overall, the consensus estimate represents an upside potential of 27.5% from the current trading price of ₹1,541 per share.

For Q2 FY24, HDFC Bank reported a 50% year-on-year (YoY) rise in net profit for the quarter ended September to ₹15,976 crore, beating analyst estimates. The NII, or core income, rose 30% YoY to ₹27,385 crore from ₹21,021 crore for the quarter ended September 30, 2022. Net interest margin (NIM) stood at 3.4% during the second quarter. Other income for the quarter was ₹10,708 crore compared with ₹7,596 crore in the year-ago period.

On the asset quality front, the gross non-performing assets as a percentage of total loans was 1.34% as of September 30, compared with 1.23% a year ago, and 1.17% a quarter ago. The net non-performing assets ratio was 0.35% as of September 30 compared with 0.33% a year ago. Provisions for the quarter declined to ₹2,904 crore from ₹3,240 crore a year ago.

Last month, the Reserve Bank of India (RBI) approved the reappointment of Sashidhar Jagdishan as the Managing Director and Chief Executive Officer of HDFC Bank for the next three years.

Here’s what analysts say on HDFC Bank Q2 numbers.

ICICI Securities

The brokerage has downgraded the stock to ‘Add’ from ‘Buy’ earlier, with a revised target price of ₹1,750 from ₹2,000 estimated earlier. “We see FY24 financials to be impacted by the merger and thus we see 14% YoY credit growth and 1.7% Return on assets (RoA). We see credit growth and RoA improving to 16% / 1.9% respectively for FY25. The stock trades at 2.1x FY25 ABV adjusted for ₹197 per share of subs,” it says in a report.

As per the brokerage, the merger is likely to be beneficial in the medium to long term, while it has given negative surprises on book value, asset quality, and NIM. “While Q2FY24 NIM at 3.4% is likely to have bottomed out, we are building only a gradual rise due to heightened competitive intensity and calibrated absorption of liquidity. We also see pressure on operation expenditure as the bank continues to increase distribution/headcount,” it says.

Axis Securities

The agency maintained a ‘Buy’ recommendation on the stock, while it cut the price target to ₹1,925 per share from ₹2,050 projected earlier. The brokerage in its report said that the impact on margins post the merger has been a result of higher cost borrowing of erstwhile HDFC, incremental cash reserve ratio (ICRR) (only for this quarter), and excess liquidity. However, the management is confident of recovery in margins in the coming quarters, it says.

“We remain confident in the bank’s ability to sustain its growth momentum given the enormous opportunity post the merger, in terms of a larger customer base, larger distribution network and higher cross-sell opportunities to existing HDFC Ltd. customers,” it adds.

Prabhudas Lilladher

The brokerage retained ‘Buy’ rating on HDFC Bank shares with a target price of ₹2,025 apiece, citing that it was a good quarter. “While NIM was affected (-37 basis points QoQ) by surplus liquidity, we believe margins have bottomed out as excess cash has already been drawn down which should normalise NIM in H2FY24E. Moreover, as high cost liabilities of HDFCL are replaced, NIM should enhance over FY24-26E from 3.57% to 3.72%. Due to higher fees/lower taxes, we raise FY24E core PAT by ~3%, although FY25/26E earnings remain unchanged,” it says in a report.

JM Financial

The brokerage also maintained a ‘Buy’ rating with a 12-month price target of ₹1,850 per share, saying that HDFC Bank's Q2 profits were ahead of its estimates, led by lower tax effective rate and slightly higher trading gains. “While management had earlier indicated near-term pressure on NIMs in the run-up to the merger, the actual NIM impact (NIMs 3.65% for 2QFY24, -45bps QoQ) was higher than anticipated,” it says.

Going ahead, the brokerage expects sequential improvement in HDFC's core earnings momentum as NIMs recover gradually. “We believe that current valuations adequately capture the merger related pangs and should alleviate concerns regarding compression of RoAs over the medium-term. We project RoAs of 1.9% over FY24/25 on a merged basis,” it says.

As HDFC Bank's liabilities momentum sustains, the agency expects the stock to revert its recent underperformance and believes current valuations offer attractive risk-reward for a high quality, diversified asset franchise with superior through-cycle asset quality performance.

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