The bank’s leadership emphasized that HDFC Limited’s cost-to-income ratio, as per IGAAP accounting standards (on a pro forma basis), stood at 19% for both the first quarter of FY24F and the entire fiscal year FY23. This figure represents a significant increase compared to the previously reported 10% cost-to-income ratio under IndAS standards.
On Wednesday, HDFC Bank witnessed a dip of approximately 4% in its share prices, following the release of crucial information regarding the merged entity’s opening net worth and associated details, marking a significant development for India’s largest private sector lender.
In response to these updates, Nomura has adjusted its rating for the stock to a neutral stance, accompanied by a revised target price of Rs 1,800. Similarly, Kotak Institutional Equities has made an adjustment in its fair value target for the stock, lowering it to Rs 1,850. These actions by prominent financial institutions reflect the evolving dynamics in the market. Stay informed for further updates on this matter.
Nomura reports that HDFC Bank’s current trading multiple stands at 2.5 times its one-year forward BVPS, adjusting for its subsidiaries. This valuation aligns closely with that of ICICI Bank, even though HDFC Bank exhibits a relatively lower growth trajectory in loans and return on assets (RoA). As a result of this assessment, we have adjusted our target price (TP) for HDFC Bank to Rs 1,800. This revised TP is derived from a valuation of 2.5 times the Jun-25F BVPS, which is notably similar to ICICI Bank’s valuation at 2.8 times. Furthermore, it’s worth highlighting that HDFC Bank’s subsidiaries contribute significantly, adding Rs 201 per share to its overall value.
Here are the top 4 negative takeaways from HDFC Bank’s analyst meet:
1) Asset Health Post-Merger
Following the merger, there has been a noticeable decline in asset quality metrics. The Gross Non-Performing Asset (GNPA) ratio for the combined entity has risen from 1.2% to 1.4%, while the net Non-Performing Assets (NPAs) have increased from 0.3% to 0.4%. Although the NPA level in the parent entity exceeded expectations, Kotak Equities assures that any additional adverse developments should be minimal. This evaluation sheds light on the post-merger asset health.
2) Net Interest Margins (NIMs)
In Q1, the merged entity displayed a robust net interest margin (NIM) of 3.7-3.8%, with HDFC contributing 2.7%. A noteworthy development emerged during a recent bank discussion: when accounting for the excess liquidity held by HDFC Ltd as of June-end, the NIM profile, based on a 2QFY24 starting point, decreased to 2%. This adjustment had a substantial impact, reducing HDFC Ltd’s NIM profile by 70 basis points (bps) and consequently affecting the NIM of the merged entity by 25bps. This dynamic shift in interest margins highlights the changing financial landscape within the organization.
3) Financial Strength
HDFC’s financial strength witnessed a dip, with its net worth falling to Rs 1.12 trillion in July, down from Rs 1.34 trillion as of March. This decline can be attributed to several factors, including accounting changes from IND-AS to IGAAP, credit policy harmonization, and DTL reserve adjustments. These adjustments collectively had a 4% negative impact on our model’s FY24F BVPS estimates, as noted by Nomura. Furthermore, when factoring in the interim dividend paid out by HDFC Ltd in Q1, the impact on FY24F BVPS rises to 6%. Stay informed about the company’s financial performance as these changes unfold.
4) Operating Expense Ratios
The management of HDFC Limited has drawn attention to the cost-to-income ratios, which stood at 19% in both 1QFY24F and FY23 under IGAAP accounting, a significant increase from the previously reported 10% under IndAS. With HDFC Bank projected to report approximately 25 basis points weaker Net Interest Margins (NIMs) in the future, this elevated cost-to-income profile is likely to persist. This shift in expense ratios is worth monitoring for potential implications on the bank’s financial performance. Stay tuned for updates on this development.