HDFC twins' stocks tank 20% each in 9 trading sessions: What analysts say

Total mcap erosion pegged at Rs 2.72 trillion; HDFC Bank falls for ninth straight day, down 3.73% to Rs 1,343.3. HDFC sheds 5.5% to Rs 2,138.7

The sharp drop in shares of HDFC Bank and parent Housing Development Finance Corp (HDFC) has stunned the Street. Since their merger announcement on April 4, both the stocks have tanked close to 20 per cent each and have seen combined market cap erosion of Rs 2.72 trillion. On Tuesday, HDFC Bank fell for a ninth straight day, declining 3.73 per cent to Rs 1,343.3. Meanwhile, HDFC fell 5.5 per cent to end at Rs 2,138.7.

Analysts say the sharp fall is on account of sharp pullback by foreign portfolio investors (FPIs) due to concerns around the merger. Also, weak quarterly numbers posted by HDFC Bank have also led to concerns around the growth outlook and whether the stock can continue to command high premiums in terms of price-to-book (P/B).

Last week, HDFC Bank reported a 23 per cent year-on-year growth in net profit to Rs 10,055 crore for the three months ended March 31, 2022. The bank reported a 21 per cent year-on-year loan growth, but that did not translate into stronger net interest income (NII), which grew at 10.2 per cent year-on-year but were three percentage points below estimates.

Net interest income reflects the difference between the revenue generated from a bank's interest-bearing assets and the expenses associated with paying its interest-bearing liabilities.

The net interest margin (NIM) of the lender stood at 4 per cent, a decline of 10-basis points sequentially. The lowest margin in several quarters saw analysts slashing the earnings growth estimates for the next two financial years.

Net interest margin (NIM) reveals the amount of money that a bank is earning in interest on loans compared to the amount it pays in interest on deposits.

"NIM (on average assets) declined 10bps q-q owing to adverse loan mix (higher secured versus unsecured, higher wholesale versus retail, a higher mix of better-rated credit) and management traded away for growth and associated costs," said Nomura in a note.

Analysts have raised concerns that the proposed merger with HDFC could reduce NIMs further and put upward pressure on cost of funds.

"Amalgamation of HDFC into HDFC Bank is likely to impact the cost of funds of HDFC Bank as there is around Rs 2.8 trillion of debt in the balance sheet of HDFC. The cost of debt is lower than the cost of deposit of HDFC Bank. Therefore, investors expect the cost of HDFC bank funds to go up post-merger. In Q4FY22, HDFC Bank reported slower NII growth and lower NIMs. The merger can reduce the NIMs further," said Ajit Kabi, analyst, LKP Securities.

VK Vijayakumar, chief investment strategist of Geojit Financial Services said there are some concerns regarding the marginal hit to the profitability of the merged entity due to higher statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements.

With the latest crash, the P/B multiple of HDFC Bank has declined to 3.1 times from 4.4 times six months ago and that of HDFC has come off to 2.37 times from 3.3 times six months ago.

"The weakness in HDFC twins after the merger announcements is due to sustained selling by FPIs and shorting by speculators exploiting the FPI positioning in the stocks. From the valuation perspective, HDFC twins are attractively valued, the short-term technical weakness notwithstanding," said Vijayakumar.

Analysts said the bank would outperform the sector in the long run.

"In our view, the bank is well equipped to handle the deposit mobilisation prior to the merger date. They are aggressive in branch opening too. We believe the stock price movement is momentary and the superior asset quality and lower provision are likely to keep the shareholder's return intact. In the mid-run, the stock can witness some pressure, but it may outperform the sector in the long run," said Kabi.