HDFC Bank Ltd., India’s largest private lender, saw a decline of over 4 per cent in share prices in Wednesday’s trade after brokerage firms expressed their mixed views on the stock post the bank’s analyst and institutional investor meeting on Monday (September 18).
Nomura downgraded the stock to ‘Neutral’ and slashed the target price while domestic brokerages Kotak Institutional Equities and Investec cut the price targets on the stock.
The management’s guidance on key metrics including margins and net worth turned investors down as HDFC Bank shares fell amid strong volume action.
The fall in HDFC Bank shares dragged not just the Bank Nifty but the broader Nifty50 as well. While the former was down 0.63 per cent around 9:40 am, the latter was lower by 109.65 points or 0.54 per cent and trading at 20,023.65.
Brokerage firm Nomura has downgraded HDFC Bank Ltd., India’s largest private lender, to neutral from its earlier rating of buy. It has also cut 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 per cent from Monday’s (September 18) closing levels.
Nomura has cited four negative surprises after the mega HDFC Bank-HDFC merger behind its downgrade. Here are the four:
Firstly, the networth adjustments after the merger has a negative 4 per cent impact on the lender’s financial year 2024 book value per share. As a result, Nomura has cut HDFC Bank’s financial year 2024-2026 Earnings per Share (EPS) estimate by 5 per cent to 9 per cent and book value per share estimates by 7 per cent over the same period.
Secondly, net interest margin (NIM) estimates have been cut due to excess liquidity and accounting adjustments. Nomura expects this pressure on NIM to persist for another 2-3 quarters. The brokerage has cut its NIM estimate by nearly 25 basis points in the financial year 2024 and by 15-20 basis points over the financial year 2025-2026.
Third is a higher cost-to-income ratio due to the accounting changes. Nomura is building in a cost-to-income ratio of 40 per cent for the financial year 2024 compared to 38 per cent earlier, and maintaining its 39 per cent to 40 per cent projection over the financial year 2025-2026. The cost-to-income ratio is calculated by dividing the operating expenses by the operating income and is shown in percentage terms.
Lastly, a sharp uptick in non-reforming assets (NPAs) in HDFC Ltd.’s corporate book. HDFC Bank held an analyst meeting on Tuesday, September 19, where it mentioned that HDFC Ltd.’s individual gross NPA ratio stood at 1 per cent for the June quarter compared to 0.75 per cent in March, while non-individual gross NPA ratio saw a sharp spike from 2.9 per cent in March to 6.7 per cent in June.
Kotak slashed the target to Rs 1,850 from an earlier target of Rs 1,925 though it maintained a buy stance.
“There is a reduction in net worth to account for policy, accounting alignments and dividend payout. The NPL in the parent entity is higher than expected but further negative surprises should be negligible. Re-rating is some time away as the bank has to work through the NIM transition and build its thesis of differentiation, which we are still less certain about,” the brokerage added.
Meanwhile, Investec maintained a ‘Hold’ on the counter while cutting the target price to Rs 1,690 from Rs 1,735.
Notwithstanding the management commentary, top foreign brokerages Morgan Stanley, Macquarie and Jefferies took a favourable view on the stock.
Morgan Stanley remained ‘Overweight’ on HDFC Bank stock and placed the price target at Rs 2,110. It said that the disclosed net-worth post-merger was lower than the estimates and margins are likely to remain impacted in the near term given the excess 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 its price target downwards from Rs 2,100 to Rs 2,030 citing a tad more than expected impact on net interest margins (NIMs).
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