Business News/ Markets / Stock Markets/  Brokerages bullish on HDFC Bank stock following RBI's clarifications on its proposed merger

Brokerages bullish on HDFC Bank stock following RBI's clarifications on its proposed merger

HDFC Bank has received clarification from the RBI regarding its proposed merger with HDFC. Read on to know what the clarification is and what brokerages have to say about it:

Should you buy HDFC Bank Ltd following RBI's clarifications on merger plans? Here's what brokerages say; check details (Bloomberg)Premium
Should you buy HDFC Bank Ltd following RBI's clarifications on merger plans? Here's what brokerages say; check details (Bloomberg)

HDFC Bank Ltd, recently announced that the banking regulator, Reserve Bank of India (RBI) has provided some clarifications regarding its proposed merger with the Housing Development Finance Corporation (HDFC). 

The RBI's explanations is in response to the bank's request for a number of relaxations to speed up the merger process, which is expected to become official by July this year.

For the first year, the RBI has permitted calculating the adjusted net bank credit (ANBC) by only taking into account one-third of the outstanding loans of HDFC Ltd as of the amalgamation's effective date in order to satisfy the priority sector lending (PSL) criteria. Over the following two years, HDFC Ltd will consider the final two-thirds of its portfolio.

From the merger's effective date forward, HDFC Bank has to adhere to the current standards for cash reserve ratio (CRR), statutory liquidity ratio (SLR), and liquidity coverage ratio (LCR) ratio without any changes.

Following this news development, four brokerage houses are bullish on the HDFC Bank stock and has recommended it a 'buy' rating. On Monday, the stock began trading on a positive note but later declined, giving up a large portion of the morning gains. On the technical front, analysts remain positive about the stock. 

"Overall trend is positive but currently the stock is in a consolidaton phase. Traders should maintain positive bias, and should use dips to go longs. 1,650 - 1,640 is the support zone whereas 1,730 is resistance," said Rajesh Bhosale - Equity Technical and Derivative Analyst, Angel One.

Additionally, prior to the effective date, the RBI has given HDFC Bank or HDFC Ltd permission to increase their shares in HDFC Life and HDFC Ergo to more than 50%. Currently, HDFC Ltd owns 49.9% of HDFC Ergo and 48.7% of HDFC Life.

Shares of HDFC Life Insurance Company Ltd jumped 7% higher on Monday's trading session. According to Bhosale, the stock  stock prices started with a huge gap up opening backed with strong volumes.

The stock was trading at high volume of 17.4 million with price gain of 5.10, according to trendlyne. 

Let's look at what the four brokerages have to say about the RBI's important clarification for the merger.

ICICI Direct Research

The brokerage firm claims that the RBI's clarification mainly ends the uncertainty about merger outlines and is therefore still positive. Further, it stated that liabilities management decision of grandfathering is dependent on RBI approval, which is to be sought on the effective date.

"HDFC Bank is expected to deliver higher than industry growth with  of about 2% in FY25E. We remain positive and retain our 'buy' rating on the Return on assets (RoA) stock. We value HDFC Bank at about 2.5 times FY25E ABV (post merger) and 155 for subsidiaries and revise our target price to 2,050/share from 1,970 earlier," said the brokerage. 

Nuvama Institutional Equities

The brokerage claims that the street was not building in expectation of the RBI's relaxation of the PSL regulations. CRR, SLR, and LCR have not been lowered, and neither was it expected. Although the underlying assets for affordable housing may still be eligible for general category priority sector loans, HDFC's infrastructure bonds will not automatically be classified as infrastructure bonds for HDFC Bank. 

The mortgage loans offered by HDFC are based on PLR; however, after a merger, the mapping may change to external benchmark lending rate (EBLR)/Marginal Cost of Lending Rate (MCLR) only with the client's consent.

"While we expect near-term pressure on c we retain ‘Buy/So’. It has garnered incremental market share of 20.5% of system deposits in FY23 against outstanding share of 10.5%. We see the deposit franchise growing more valuable in FY24 when asset and deposit growth, not margins, will be key earnings drivers," said the brokerage in its report.

Motilal Oswal  

The bank benefits from the PSL compliance easing because it lowers costs and supports profitability in the first few years following the merger, believes the brokerage. Additionally, HDFC Life no longer has a major issue thanks to the approval to increase the shareholding in subsidiaries to more than 50%, which will also guarantee total alignment between the interests of the bank and the life subsidiary. 

"We believe that the requirement to meet the SLR, CRR, and LCR right from the effective date of merger would be manageable, given the increased focus on garnering liabilities. We further believe that these forbearances offer reassurances that the merger is progressing as planned and would likely be finalised as per the indicated timelines. Our strong recommendation to 'buy' HDFC Bank stock remains unchanged and we retain our target price of 1,950," said the brokerage.

Elara Securities (India) Pvt Ltd

One of the brokerage's top recommendations in the banking sector is HDFC Bank. The brokerage claims that due to the merger's transitional nature and unpredictability of expenses, it is difficult to estimate the exact impact of the merger outcome.

"We, in our estimates, have factored in the entire impact of PSL shortfall in FY24. With this dispensation, the PSL cost, if any, may be felt only in FY25. Thus, as a result of consequent changes, we upgrade our FY24E earnings 2%," said the brokerage

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Updated: 24 Apr 2023, 10:23 PM IST
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