HDFC Bank slips 2%; stock weak for third straight day, nearing 52-week low

In Q2, HDFC Bank's NIMs were under pressure, primarily because of the excess liquidity on the books.

Shares of HDFC Bank continued to reel under pressure, down 2 per cent at Rs 1,460.55 on the BSE in Thursday’s intra-day trade. The stock of largest private sector bank was trading lower for the third straight day, and has slipped 4 per cent during this period. It was quoting close to its 52-week low of Rs 1,448.75 touched on October 28, 2022.

Earlier this year, HDFC Ltd merged into the bank, which according to analysts, had a noticeable impact on HDFC Bank’s asset quality. Gross non-performing assets (NPAs) as a percentage of gross advances increased to 1.34 per cent as on September 30, 2023, from 1.17 per cent on June 30.

On the day of the merger — July 1 — the ratio was 1.41 per cent, which later dipped. The net interest margin, which stayed above 4 per cent for many years, declined to 3.4 per cent on total assets in the July-September period. This was mainly due to higher cost of funds of HDFC Ltd. CLICK HERE FOR FULL REPORT

Meanwhile, going forward, the bank expects margins to gradually normalise, led by better growth, loan mix and absence of (incremental cash reserve ratio) ICRR impact. Proceeds of the HDFC Credila stake sale too should boost PPoP in H2, thus supporting further improvement in RoA, analysts said.

Analysts at Emkay Global Financial Services had retained a BUY rating on HDFC Bank with target price of Rs 2,100/share (valuing the core bank at 2.8x its Sep-25E ABV + subsidiary/investment value at Rs 192/share). The merger drag, they had said in a post result note, should soon ease, along with the merger synergies being beneficial in the long-run.

"Further, HDFC Bank’s stable Management (vs KMB undergoing Mgmt transition, which typically leads to business/valuation softness, as seen in HDFCB earlier), and better return profile & valuation (2.1x vs. KMB’s 2.2x FY25E ABV) offer a good bet from the medium-to-long term perspective. The long-awaited listing of HDB Financial Services should be another catalyst for the stock, going ahead," the brokerage firm said in Q2FY24 result update.

NIMs, according to a note by KR Choksey Shares and Securities, were under pressure during the quarter, primarily because of the excess liquidity on the books. "Thus, HDFC Bank is expected to restructure its borrowing mix and strive for higher deposit growth in coming quarters to regain its NIMs levels, as the bank believes that the worst is over in terms of margin compression," it said.

The brokerage firm expects HDFC Bank to re-rate on the back of a strong balance sheet, improved opportunities for business growth with healthy CET, improving margin outlook in the long term; and an adequate cushioning in terms of provisions with stable asset quality.

"We retain our Buy rating on the stock with an unchanged price target of Rs 1,900 as valuations are reasonable and have priced in all the barring factors that could weigh down the earnings trajectory of the merged entity. The probability of further de rating is very bleak,” brokerage firm Sharekhan had said in a recent result update note.