HDFC Bank may face margin, net worth hit
2 min read 20 Sep 2023, 12:55 AM ISTNet interest margin may narrow 25bps due to the combined effect of incremental cash reserve ratio and excess liquidity, analysts cited chief financial officer Srinivasan Vaidyanathan as saying
PremiumMUMBAI : HDFC Bank Ltd expects a worsening of net interest margin (NIM), net worth and asset quality in the short term following its merger with parent Housing Development Finance Corp. (HDFC), analysts who attended a meeting with a top bank executive said.
NIM may narrow 25 basis points (bps) due to the combined effect of incremental cash reserve ratio (CRR) and excess liquidity, analysts cited chief financial officer Srinivasan Vaidyanathan as saying at the meeting. Before the merger, HDFC had built an excess liquidity buffer of close to ₹1 trillion.
Some analysts expect the bank’s earnings in the second quarter to lower due to these changes. The merged entity’s margin is estimated to have fallen to 3.7-3.8% at the end of June 2023 compared to the bank’s standalone margin of 4.1% in the same period. Foreign brokerage Macquarie said this could have an impact on the bank’s near-term return on assets (RoA).
“RoA could be lower by 10-15bps in the near term. It will take around 2-3 quarters for the bank to recover its RoA as per management," said Suresh Ganapathy, head of financial services research, Macquarie Capital Securities (India) Pvt. Ltd.
HDFC Bank told analysts that non-performing assets (NPA) on HDFC Ltd’s real estate book jumped to 6.7% as of 1 July 2023 from 2.9% on 31 March. The merged entity’s gross non-performing asset (NPA) is therefore higher at 1.4% as of 1 July, compared to the bank’s gross NPA of 1.2% in June. Analysts said this is because the bank applies stricter standards to recognize the housing finance company’s book.
Vaidyanathan also mentioned a one-time hit of ₹20,000 crore due to erosion in HDFC Ltd’s net worth on account of one-off charges like deferred tax liability, impact of incremental cash reserve ratio, and alignment to the new Indian accounting standards.
According to an investor presentation on its website, HDFC’s net worth, which earlier stood at ₹1.34 trillion as of 31 March 2023, will now be lower at ₹1.11 trillion as of 1 July under the IGAAP financial reporting standards after its merger with the bank.
“Normalized RoAs seem to be 1.8%-1.9%, and as business normalizes, core PPP growth could see strong traction in FY25. Overall, the near term seems less exciting, but the base is formed, and from here on execution on liabilities and NIMs would be key for re-rating," Antique Stock Broking said in a note.
“The HDFC Bank stock slipped below its 100-day moving average in the previous session. With the addition of open interest by 3.1%, the stock has witnessed a short build-up, indicating more weakness ahead. Those who are already short of trade should keep a stop loss of around ₹1,660 for a downside target of ₹1,575. If it doesn’t hold those levels, it could correct further to ₹1,535, said Rajesh Palviya, senior vice president, research, and head of technical and derivatives at Axis Securities.
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