Weighed by earnings hit, HDFC Bank may not perform in near-term: Analysts

Shares of HDFC Bank tumbled 3.7 per cent on the National Stock Exchange (NSE) on Wednesday after the pro-forma financials of the merged entity highlighted higher than expected hit on net worth

HDFC Bank Analysts' meet: The stock of HDFC Bank, which has shed 4 per cent so far this calendar year, may continue to underperform the markets in the near-term, brokerages cautioned on Wednesday.

By comparison, the benchmark Nifty50 has soared 10 per cent year-to-date (YTD) in CY2023, while the Nifty Bank has advanced 5.7 per cent.

The warning comes after the management's disclosed pro-forma financials of the merged entity highlighted higher than expected hit on net worth, return ratios, and margins.

As per their estimates, the net worth addition from erstwhile HDFC Ltd is lower by 15 per cent due to alignment in accounting policies; Gross non-performing loans are marginally higher by 20 bps at 1.4 per cent and net NPL is largely unchanged at 0.4 per cent; and given the huge liquidity build-up from erstwhile HDFC Ltd, (roughly Rs 1 trillion of borrowings), net interest margins (NIM) compressed by 70bp on July 1 as against 2.7 per cent margin in Q1-FY24.

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.

"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 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.

At the bourses, shares of HDFC Bank hit an intraday low of Rs 1,560 apiece on the National Stock Exchange (NSE)., before closing 3.87 per cent lower at Rs 1,566 per share.

The Nifty50, meanwhile, ended 1.15 per cent lower, and the Nifty Bank index slipped 1.3 per cent.

Here's what key brokerages said:

Nomura | Neutral | Target: Rs 1,800

The brokerage has revised its target price on the stock to Rs 1,800 as it struggles to see upside over the next 12 months on the back of RoA and loan growth pressures.

HSBC | Buy | TP: Rs 1,930

Management's guidance of 1.9-2 per cent RoA post-merger does not account for the 25-30bp NIM impact due to the additional liquidity. Accounting for that, the RoA/RoE would underperform this guidance for the next three-four quarters, and trend between 1.7-1.9 per cent over Q2-FY24-Q1-FY25, it said.

"We cut our earnings estimates by 7.1/2.6/2.7 per cent for FY24/25/26, respectively, and trim BVPS estimate by 5.8-7.3 per cent for FY24-26. We expect the stock to underperform in the near-term," it added.

Goldman Sachs | Buy | TP: Rs 2,051

The brokerage believes the bank is well poised to gain substantial market share in both lending and deposits over the next few years on the back of an expanding distribution network as well as its strong focus on cross-selling to existing customers.

Phillip Capital | Buy | TP: Rs 1,880

The return on equity is expected to moderate in near term; however, it expects RoA to sustain at 1.8-1.9 per cent level. It has cut its NII, core PAT, and RoA estimate for FY24/25 by 8/4 per cent, 11.6/6 per cent, and 21/6 bps, respectively.

Kotak Institutional Equities | Buy | TP: Rs 1,850

The brokerage sees low probability of a de-rating in multiple from hereon with adequate disclosures on key headline items.

"To get closer to the best-in-class metrics that HDFC Bank has been associated with, it would require an improvement in the NIM profile. The choice is to slow down growth and focus on improving the liability profile or to have a gradual improvement but deliver higher-than-industry average loan growth," it added.

The bank has an undifferentiated loan growth, a temporary weaker liability profile, and similar credit costs, which would make it harder to trade at multiples that it has traded in the past.

Antique Stock Broking | Buy | TP: Rs 1,925

It has lowered the target price, valuing the core bank at 2.7x FY25 BV. While the merger accounting could create some volatility in the near-term earnings, but core PPP (like to like) could accelerate in FY25. Execution on liability management would be key for re-rating.