HDFC Bank Shares Fall As It Expects Asset Quality To Worsen, Margins To Narrow

Shares of HDFC Bank Ltd. fell the most in over four months after its management warned about widening bad loan ratios and narrowing margins after the merger with Housing Development Finance Corp.

The gross non-performing asset ratio of India's largest private bank is likely to widen to 1.4% as of July 1, compared to 1.2% as of June 30, Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, told analysts on Monday. In a presentation, the bank also noted that the net NPA ratio will rise to 0.4% from 0.3% at the end of the first quarter.

The rise in bad loans is owing to HDFC's non-retail housing loan portfolio, where the gross bad loans are at 6.7% as of July 1.

Additionally, the bank is likely to see a compression in net interest margins owing to the liquidity surplus from the mortgage financier. As of June 30, HDFC Bank reported an NIM of 4.3%, which is likely to fall to 3.9–4% post-merger.

"This excess liquidity, along with the ICRR (incremental cash reserve ratio), will drag near-term NIMs... The impact will normalise in FY25 as liquidity gets deployed and ICRR ends this month," Jefferies said in a note on Tuesday.

Shares of the private lender fell as much as 4.05% intraday to Rs 1,563.1, the most since May 5, 2023, before paring losses to trade 3.72% lower at Rs 1568.4 apiece. That compares to a 0.83% decline in the NSE Nifty 50.

The stock has fallen 3.65% on a year-to-date basis. Total traded volume so far in the day stood at 5.5 times its 30-day average. The relative strength index was at 38.3.

Of the 47 analysts tracking the company, 44 maintain a 'buy' rating and three recommend a 'hold', according to Bloomberg data. The average 12-month consensus price target implies an upside of 27%.