HDFC Bank - Discloses Merged Entity Networth And Other Key Metrics: Motilal Oswal
Q2 FY24 to mark a weak start; RoE to revert to pre-merge levels by FY26E.
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Motilal Oswal Report
HDFC Bank Ltd. management at its analyst meet highlighted the baseline net worth, margins, asset quality and other key metrics of the merged entity. Following are the key takeaways from the meeting –
Housing Development Finance Corporation Ltd.’s net worth declined to Rs 1.12 trillion in July 2023 from Rs 1.34 trillion as of March 2023 due to accounting changes from IND-AS to IGAAP, credit policy harmonization, deferred tax liability reserve and other factors.
The huge liquidity build-up at HDFC affected margins by 70 basis points to 2.0% as of Day-0 of the merged entity. The management highlighted that this implies a margin hit of 20-25 bp on the pro forma merged entity estimates of 3.7-3.8%. As a result, we lower our net interest income estimates.
The merged entity’s opening loans and advances stood at Rs 22.2 trillion as of July 01, 2023 and we estimate the same to grow by 12% over the remaining 9M FY24 and then at a 17% compound annual growth rate in the upcoming years.
Asset quality ratios have deteriorated after the merger, with the gross non-performing asset ratio increasing to 1.4% from 1.2% and the net non-performing asset ratio rising to 0.4% from 0.3% for the standalone bank. Provision coverage ratio will be broadly stable at 74% (75% for standalone HDFC Bank).
The pro forma merged entity’s return on asset/return on equity sustained at 1.9%-2.0%/16% in Q1 FY24; however, Q2 FY24 appears to be a weak quarter with subdued margins and elevated cost ratios (pro forma merged at 40% for Q1 FY24). We reduce our profit after tax/book value estimates by ~5%/~3% and lower our target price to Rs 1,950 (2.7 times FY25E adjusted book value plus Rs 206 from subs).
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