Shares of HDFC Bank fell 4 per cent lower today after the bank’s management provided negative guidance on RoA, net worth and asset quality due to accounting changes from IND-AS to IGAAP, credit policy harmonization, and DTL (demand and time liabilities) reserve, among other factors.

The stock opened 1.8 per cent lower on Wednesday at ₹1,599, falling further to an intra-day low of ₹1,560.40. The stock later pared some losses to end at ₹1,566 on the NSE, 3.9 per cent lower than the previous close.

At an analyst meet, the private sector lender guided for a one-time impact of 5 per cent or ₹20,000 crore on the net worth of the combined entity due to various one-off charges and alignment. The net worth declined to ₹1.12-lakh crore post the merger in July, from ₹1.34-lakh crore as of March 2023.

“It may miss near-term 1.9-2.1 per cent merged ROA (return on assets) guidance but Credila gain could save it,” Macquarie Research said in a note adding that RoA could be lower by 10-15 bps for the next 2-3 quarters.

Analysts cautious

The brokerage firm, however, continued to maintain a ‘outperform’ rating on the stock while highlighting that lower profitability over a longer term due to the merger remains a key risk.

Analysts flagged excess liquidity, of around ₹1-lakh crore, being carried on from HDFC as the main issue, which could lead to about a 20-25 bps margin compression in FY24 and 15-20 bps in FY25-26. RoE (return on equity) is seen reverting to pre-merger levels by FY26.

“The management highlighted that this implies a margin hit of 20-25 bps on the pro forma merged entity estimates of 3.7-3.8 per cent. As a result, we lower our NII estimates,” Motilal Oswal Securities said, pegging loan growth for the rest of FY24 at 12 per cent and at a CAGR of 17 per cent thereafter.

NPA in home loans

HDFC Bank also reported a surge in non-performing housing loans, with the NPA ratio of the home loan portfolio at 6.7 per cent as of July 2023, much higher than 2.9 per cent as of March 2023. The increase was due to more prudent delinquency recognition by the bank as compared with erstwhile HDFC.

“There are certain non-individual accounts that the bank’s risk assessment is not comfortable in holding,” CFO Srinivasan Vaidyanathan said at the meet adding that the bank holds sufficient provisions with PCR of 74 per cent as of July. As of March, HDFC’s loan book was over ₹6-lakh crore, of which ₹1.15-lakh crore were wholesale loans.

Overall gross NPA ratio rose to 1.4 per cent from 1.2 per cent and net NPA ratio to 0.4 per cent from 0.3 per cent for the merged entity. 

Brokerages cut the price target to ₹1,800-2,030 from ₹1,925-2,100 earlier, expecting Q2 FY24 to be a weak quarter for the bank with subdued margins and elevated credit costs. However, most of them retained a ‘buy’ or ‘neutral’ rating on the shares on expectations that the merger will help the bank build a more diversified and robust franchise and increase the customer base. Further, the bank’s technological edge and robust distribution are seen boosting cross-selling and healthy business growth.

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