HDFC Bank Shares Plunge 4% After Analysts Meet, Nomura Double-Downgrades Stock

HDFC Bank shares fell nearly 4 per cent on BSE on Wednesday after brokerage firms showed their mixed response to the stock after the bank’s analyst and institutional investors meeting on 18 September. The stock opened at Rs 1,599 against the previous close of Rs 1,629.05 and plunged over 4.02 per cent to Rs 1,563.50 in Wednesday’s session so far.

The market capitalization (mcap) of the country’s second-largest bank declined to Rs 11.86 lakh crore on the BSE. HDFC Bank shares have underperformed the BSE Sensex in the last year. The stock has jumped by around 4 per cent while the Sensex has climbed over 12 per cent in the period.

On the BSE, the stock touched its 52-week high of Rs 1,757.80 on 3 July this year, and its 52-week low of Rs 1,365.05 on 30 September 2022.

The gross non-performing asset (NPA) ratio of India’s largest private sector bank is expected to widen to 1.4 per cent as of 1 July, compared to 1.2 per cent as of 30 June this year, chief financial officer (CFO) Srinivasan Vaidyanathan told analysts on Monday. The bank also said that the net NPA ratio will increase to 0.4 per cent from 0.3 per cent at the end of the first quarter.

The increase in bad loans is due to HDFC’s non-retail housing loan portfolio, where the gross bad loans are at 6.7 per cent as of 1 July.

HDFC Bank is expected to witness a decline in net interest margins (NIM) owing to the liquidity surplus from the mortgage financier. It reported an NIM of 4.3 per cent on 30 June, which likely to slip to 3.9-4 per cent post-merger.

Normura India has double-downgraded HDFC Bank stock to neutral from buy and slashed target price to Rs 1,800 from Rs 1,970 earlier. The foreign brokerage firm said net worth adjustments will have a negative 4 per cent impact on its estimated FY24 book value per share.

Nomura expects NIM cuts of 25 bps in FY24 and 15-20 bps in FY25–26 on excess liquidity and accounting adjustments. Moreover, it suggested a higher cost-to-income ratio due to accounting changes, including the upfronting of sourcing costs under IGAAP for HDFC against amortisation under IndAS. It also suggested a sharp increase in NPAs in HDFC Ltd’s corporate loan book.

"Our EPS cuts of 5-9 per cent over FY24-26F and BVPS cuts of 7 per cent largely factor in these, in our view. This depresses HDFC Bank's medium-term RoA profile further, and the gap versus ICICI Bank's 2.2 per cent RoA profile is even starker now. Further, while the bank did not mention any changes to its loan growth outlook, we remain watchful of any near-term impact arising out of pressure to maintain elevated liquidity levels," Nomura India said.

On the other hand, Goldman Sachs retained a ‘buy’ call on the stock with a target price of Rs 2,051, implying a 26 per cent upside potential. The US-based brokerage believes that the bank is well placed to gain significant market share in both lending and deposits over the next few years due to its expanding distribution network and its strong focus on cross-selling to existing customers.

"We forecast sector-leading earnings growth of 17 per cent in FY23-26E and superior return ratios (average ROA and ROE at nearly 2 per cent and about 16 per cent, respectively, over FY24-26E) with a high degree of earnings visibility," Goldman Sachs said.

Motilal Oswal Securities said it was conservative it its projections and estimated NIM in FY24 to be at 3.75 per cent, which is in line with the pro forma merger estimates. The cut in the brokerage firm’s book value projections is due to the impact on net worth from the transition to IGAAP, credit policy harmonisation, and other factors.

It suggested a revised target of Rs 1,950. "Besides, the drag from excess liquidity, ICRR, and continued unwinding of the non-individual loan portfolio of HDFC Ltd will further impact margins and earnings," the firm said.