Is Merger bringing down HDFC’s growth

Nomura, a foreign broking firm, downgraded its rating on HDFC Bank to Neutral due to certain developments related to the merged entity involving HDFC Bank and HDFC Ltd. Here are the key points from the report:

1. Accounting Adjustments: The downgrade was prompted by accounting adjustments related to the merged entity’s net worth. These adjustments, largely due to IGAAP accounting and provisioning harmonization, resulted in a decrease in the book value per share for the merged entity. Specifically, there was a cut of Rs 23 per share in the book value.
2. Target Price Cut: As a result of the above adjustments, Nomura reduced its target price for HDFC Bank from Rs 1,920 to Rs 1,800. This new target price suggests a 10 percent upside from HDFC Bank’s closing price on September 18.
3. Net Interest Margins (NIM): Nomura also expressed concerns about the potential pressure on net interest margins (NIM) over the next two to three quarters. This is attributed to the fact that HDFC Ltd’s Q2FY24 opening book NIMs stood at 2 percent, which is lower than the 2.7 percent reported in Q1FY24. This change is primarily due to excess liquidity carried over post-merger.
4. NIM Estimates: Nomura adjusted its net NIM estimates, reducing them by 25 basis points in FY24 and 15-20 basis points in FY25-26. One basis point is equivalent to one-hundredth of a percentage point.
5. Cost-to-Income Estimate: The broking firm also increased its cost-to-income estimate for FY24F to 40 percent, up from 36 percent previously.
6. Earnings per Share (EPS): Nomura lowered its earnings per share (EPS) estimates, with a 9 percent cut in FY24F and approximately 5 percent cuts in FY25-26F.
7. Return on Assets (ROA): The report noted that the FY24 return on assets estimate is now 1.7 percent, down from the earlier estimate of 1.9 percent. However, it is expected to gradually improve to 1.8 percent in FY25-26F.

In summary, Nomura’s downgrade of HDFC Bank to a Neutral rating is based on concerns related to the merged entity’s book value, potential NIM pressure, and adjustments to various financial estimates. Investors should consider these factors when evaluating their investment decisions regarding HDFC Bank.