 "HDFC, HDFC Bank")
Shares of the country’s largest lender HDFC Bank fell 4 per cent on Wednesday after the management indicated pressure on net interest margin (NIM) and asset quality after the merger with HDFC Ltd.
HDFC Bank said its gross non-performing asset (gross NPA) ratio increased to 1.4 per cent from July 1 (date of the merger) compared to 1.2 per cent before the merger at the end of the first quarter.
This was mainly due to high non-individual non-performing loans of HDFC, which was 6.7 per cent as on July 1.
“The provisioning undertaken as a part of credit policy harmonisation at Rs 7,600 crore is almost equally distributed between general, contingent and specific provisions,” Motilal Oswal said in a report.
According to HDFC Bank’s chief financial officer (CFO) Srinivasan Vaidyanathan, the bank has provided Rs 3,800 crore towards specific provisions for NPAs. It, therefore, hiked the provisioning coverage ratio (PCR) for the erstwhile HDFC from nearly 40 per cent to 74 per cent.
NIMs are also expected to come under pressure for the largest private sector lender in the near term due to liquidity overhang.
HDFC Bank’s NIM was 4.1 per cent and is likely to come down to 3.7-3.8 per cent due to additional liquidity to shore up the liquidity coverage ratio.
“There is likely to be 20-25 basis points (bps) additional pressure on NIM in the near term. The receding drag from incremental cash reserve ratio (CRR) and spike in NPA (for e-HDFC book in Q1FY24) along with loans / deposits re-pricing should result in NIM stabilising post Q2FY24,” ICICI Securities said in a note.
“However, it could take 3-4 quarters for NIM to normalise,” the note added.
Vaidyanathan noted the negative impact of the merger on the net worth of the erstwhile HDFC as it dropped to Rs 1,199 billion from Rs 1,340 billion.
As a result, the net worth of HDFC Bank is likely to be impacted more than expected due to the merger. This was mainly due to transitioning to the Indian GAAP accounting system and harmonisation of provisions.
Analysts at Nomura have downgraded the stock to ‘neutral’, saying that the ‘negative surprises’ from the disclosures will adversely impact the scrip’s book value-to-price per share (BVPS) metric over the next few quarters.
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“Our earnings per share (EPS) cut of 5-9 per cent over FY24-26 and BVPS cut of 7 per cent factor in the negative surprises from pro-forma earnings estimates of the merged entity. This depresses HDFC Bank’s medium-term return on assets (RoA) profile further and the gap vs ICICI’s 2.2 per cent RoA profile (FY24-26F) is even starker now. Further, we remain watchful of any near-term impact on loan growth arising out of pressure to maintain elevated liquidity levels,” the brokerage said.
Goldman Sachs, however, said the bank is well poised to gain substantial market share in both lending and deposits over the next few years. This is on the back of an expanding distribution network as well as its strong focus on cross-selling to existing customers.
