HDFC Bank Margins Fall More Than Expected After Merger: ICICI Securities

The decline in adjusted book value and net worth of the HDFC Bank Ltd. merged entity proved to be higher than anticipated, according to ICICI Securities Ltd.'s Jai Prakash Mundhra.

“While there was a negative development in terms of the net worth adjustment and margin commentary, it was honestly unknown in the run up to the merger,” Mundhra, vice president at ICICI Security, told BQ Prime.

HDFC Bank met with sell-side analysts on Monday to share the pro forma financial results of the merged entity, Housing Development Finance Corp. and HDFC Bank, for the first quarter of FY24.

Shares of the bank declined over 4% on Wednesday, marking the sharpest decrease since May 2023.

There are accounting differences between HDFC and HDFC Bank, with the former following IND-AS and the latter adhering to Indian GAAP accounting standards, Mundhra said. As a result, adjustments had to be made in various aspects, including dividend distribution, fees, and cost reporting. While these adjustments were expected, their magnitude exceeded initial expectations, he said.

The commentary on net interest margins was disappointing, as the margin dropped from 2.7% to 2% for the merged entity on day zero, surpassing street expectations, he said.

Mundhra expects the margins to bottom out in the second quarter and subsequently stabilise. This stabilisation will occur as liquidity is utilised, and the impact of the incremental cash reserve ratio recedes, he said.

ICICI Securities maintains a 'buy' rating on HDFC Bank with an unchanged target price of Rs 2,000.

Shares of HDFC Bank were trading 0.15% higher at Rs 1,566.05 apiece, compared with a 0.60% decline in the benchmark Nifty 50 as of 11:15 a.m.

Of the 47 analysts tracking the bank, 44 maintain a 'buy' rating, while three recommend a ‘hold,’ according to Bloomberg data. The average 12-month consensus price target suggests an upside potential of 27.7%.