HDFC Bank Ltd., India’s largest private lender, saw its share prices fall by more than 4 percent in Wednesday’s trading after brokerage firms expressed mixed views on the stock following the bank’s meeting of analysts and institutional investors on Monday (September 18th).
Nomura downgraded the stock to ‘Neutral’ and lowered its price target, while domestic brokerages Kotak Institutional Equities and Investec cut price targets on the stock.
Management’s guidance on key metrics including margins and net worth turned down investors as HDFC Bank shares fell on strong volume action.
The fall in HDFC Bank shares not only dragged down the Bank Nifty but also the broader Nifty50. While the former was down 0.63 percent around 9:40 am, the latter was down 109.65 points or 0.54 percent at 20,023.65.
Brokerage firm Nomura has downgraded HDFC Bank Ltd., India’s largest private lender, to neutral from its previous buy rating. It has also lowered the lender’s price target to Rs 1,800 from Rs 1,970 earlier.
The revised price target still implies a potential upside of 10.5 percent from Monday’s (September 18) closing prices.
Nomura mentions four negative surprises after the mega merger between HDFC Bank and HDFC that are behind the credit rating downgrade. Here are the four:
First, the post-merger equity adjustments will have a negative impact of 4 percent on the lender’s book value per share in FY 2024. As a result, Nomura has revised HDFC Bank’s FY 2024 earnings per share (EPS) estimate -2026 by 5 to 9 percent and book value per share estimates over the same period by 7 percent.
Second, net interest margin (NIM) estimates have been reduced due to excess liquidity and accounting adjustments. Nomura expects this pressure on NIM to continue for another two to three quarters. The brokerage has lowered its NIM estimate by nearly 25 basis points for fiscal 2024 and by 15-20 basis points for fiscal 2025-2026.
Third, there is a higher cost-to-income ratio due to the accounting changes. Nomura is building to a cost-to-income ratio of 40 percent for fiscal 2024, up from 38 percent previously, and maintains its projection of 39 percent to 40 percent for fiscal 2025-2026. The cost-to-income ratio is calculated by dividing operating expenses by operating revenues and is expressed as a percentage.
Finally, a sharp increase in non-reforming assets (NPAs) in HDFC Ltd’s business portfolio. HDFC Bank held an analyst meeting on Tuesday, September 19, where it was stated that HDFC Ltd’s individual gross NPA ratio. for the June quarter stood at 1 percent, compared to 0.75 percent in March, while the non-individual gross NPA ratio declined. a sharp spike from 2.9 percent in March to 6.7 percent in June.
Kotak cut its target to Rs 1,850 from an earlier target of Rs 1,925, though it maintained a buy stance.
“There is a reduction in assets due to policy, accounting adjustments and dividend distribution. NPLs in the parent are higher than expected, but further negative surprises should be negligible. A revaluation will take some time as the bank needs to work through the NIM transition and build its differentiation thesis, which we are still less certain about,” the broker added.
Meanwhile, Investec maintained a ‘Hold’ position on the counter while lowering the target price from Rs 1,735 to Rs 1,690.
Despite management’s comments, top foreign brokers Morgan Stanley, Macquarie and Jefferies were positive on the shares.
Morgan Stanley remained ‘overweight’ on HDFC Bank shares and placed the price target at Rs 2,110. It said the disclosed post-merger net worth was lower than estimates and margins are likely to remain impacted in the near term given the excessive liquidity drag and incremental CRR imposed by RBI.
Macquarie maintained an ‘Outperform’ rating on the stock for a target price of Rs 2,110. Jefferies has revised down its price target to Rs 2,030 from Rs 2,100, citing a slightly higher-than-expected impact on net interest margins (NIMs).
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