what is happening with hdfc bank key insights from analyst meet
HDFC Bank is a financial giant and now boasts a place in the top 10 largest banks in the world (after its merger with parent HDFC Ltd.). But the stock has been underperforming for quite some time now. In this short blog, we will look into what is happening with the bank and where it is headed.
HDFC Bank recently hosted an analyst meeting to shed light on the merged financials, and there are interesting takeaways for investors. The bank is making significant adjustments, impacting net worth due to policy realignments, accounting changes, and dividend payouts. Here's a closer look at what the meeting revealed and its implications.
The bank stated that non-performing loans (NPL) in the parent entity were higher than anticipated. Nevertheless, it's expected that further negative surprises will be minimal.
Gross NPL increased slightly by 20 basis points (bps) to 1.4%, and net NPL remained largely unchanged at 0.4%. After the merger, gross and net NPA ratios increased by 20 and 10 basis points, respectively.
HDFC Bank disclosed several significant financial adjustments, primarily regulatory in nature. Net worth has been affected by a 15% reduction due to accounting policy realignments, better coverage ratios, dividend payments, and other factors.
Let’s under one important thing. HDFC Ltd. had a lower NIM compared to HDFC Bank. You may ask why! This is because HDFC bank can have a huge pool of money in its current and savings account but HDFC Ltd. could not. And due to the merger, NIMs are being dragged down.
NIM for the merged entity in Q1FY23 was 3.7-3.8%, while HDFC Ltd. stood at 2.7%. This is the first time HDFC Bank's NIM has been below 4% in almost a decade.
ROA is also getting a beating due to the merger. The bank has seen a 10-20 bps impact on ROA following the merger.
So it seems the bank's journey towards re-rating may take some time as it navigates the net interest margin (NIM) transition and strives to establish a clear differentiation strategy – an aspect that still leaves some uncertainty.
On the positive side, the bank today announced that it will launch a new app and website for the users. This was long due because HDFC Bank looks archaic compared to its tech-savvy peers like ICICI Bank, Axis, and Kotak Bank.
Well, when unexpected bad news comes, the market reacts negatively to it. Impact on NIM and ROA was expected but the slight increase in NPA due to higher NPL was a surprise. The stock dropped by more than 3% next day. As the company will need some time to settle things down after going through one of the biggest mergers in India, the participants have started to look somewhere else (at least for a while).
Currently, HDFC Bank trades at historically low valuations.
For the first time in more than 10 years, ICICI Bank is trading at a higher P/B multiple compared to HDFC Bank.
If we look at the fundamental side, there are no significant issues at the moment. In Q1FY24 Results the overall loan growth was 16% and was decent. Missing retail loan growth came back to 18%.
Deposit growth was also decent. Overall deposits grew by 10-12% while HDFC Bank grew its deposits by 19%. New branches will certainly help the bank ramp up deposits. The bank has enough capital adequacy and strong profitability.
NPAs have risen slightly and the primary pain points are NPL of HDFC Ltd. and agri loans. Other loans continued to show stable quality.
However, it feels like the primary concern for the investors is the hit on the ROA and ROE because of the merger.
Most of the brokerages have maintained their positive rating but modified the target price. Below is the table of TPs along with the rating.
HDFC Bank is undergoing significant adjustments and challenges at the moment. So the stock may continue to underperform for a while. However, the bank has maintained a positive outlook, with opportunities for growth and improvement on the horizon. We feel that the downside is limited as the bank is trading at a historically low valuation but investors can look for better opportunities till the dust settles in this finance behemoth.
