The HDFC Bank Conundrum: Fear Of Missing Out

A few things have not worked out for India's largest private sector bank — HDFC Bank Ltd. Analysts, though, might argue it is little more than a few things. To begin with, the merger didn't bring the synergies and scale expected by the street. It is taking its own time!

The burden of the merger was so overwhelming that the management didn't anticipate issues with respect to asset quality, deposits and advances growth and possibility of regulatory friction due to higher loan-to-deposit ratio.

One can argue either ways here that a merger of such magnitude and that too with the largest housing finance company may not be as seamless as envisaged on paper. But things didn't go as planned and, at worst, the communication to the street was disappointing. A lesson well learned in time by the management for course correction.

Country's largest private bank is slowing its credit growth to below 7% in order to bring the loan-to-deposit ratio to below 90%, a level it enjoyed pre-merger. It is bringing down the inherited HDFC corporate book, securitising loans in this process. It is looking to aggressively grow its deposits, which are likely to moderate in the third quarter due to seasonal factors.

The bank has guided for lower than industry growth for its credit in FY25, and this could be the case for the next 4-6 quarters till it achieves loan to deposit ratio of below 90%.

The monetisation of HDB Finance through the Rs 12,500-crore IPO will bring focus back to the bank which will get the needed capital for growth.

In July 2023, at the time of the merger, the combined weightage of HDFC Bank was expected to be around 15%, i.e. 8.9% for HDFC Bank Ltd. and 6.1% for HDFC Ltd. Both were considered marquee, but the merger faltered early this year after asset quality concerns and bank guiding for slowdown in credit growth. This coupled with asset book consolidation issues meant the stock started to underperform. From an anticipated 15% weightage on the Nifty, the largest private bank has now a weightage of around 12.6%.

HDFC Bank has risen just 3% since July 3, 2023 in comparison, while the Nifty rose 22% during the same period. The outperformance is since May 2024 when it gained over 15.7%, largely on the back of restoration of the free float weights by MSCI Indices in phases. This has led to major global portfolio realigning to MSCI Index weights and subsequently increased demand for the stock. Domestic mutual funds have also increased exposure to the stock for fear of missing out or FOMO in this run-up. That is evident from the higher delivery-based buying in the stock in the last few months.

Mutual Funds have stocked up HDFC Bank shares since May this year. They net acquired over 5.71 crore shares worth over Rs 10,000 crore since April end.

No one wants to miss out when HDFC Bank starts to run!