HDFC Bank Share Price Plunges After Analysts Meet, Is It a Good Time to Buy?

HDFC Bank, India’s largest private sector lender, witnessed a sharp decline in its share price on Wednesday, September 20, 2023, after the bank held an analyst and institutional investor meeting on Monday, September 18, 2023. The bank’s stock fell by over 4% to close at Rs 1,562.65 on the BSE, wiping out Rs 39,090 crore from its market capitalization.

HDFC Share Price Falls

The bank’s management shared its guidance and outlook on various aspects of its business, including the impact of the merger with its parent company HDFC Ltd., which was completed in July 2023. The merger created the largest financial conglomerate in India, with a combined balance sheet size of over Rs 18 lakh crore and a customer base of over 10 crore.

However, the merger also brought some challenges and uncertainties for the bank, which were highlighted by the management and reflected in the views of various brokerage firms that attended the meeting. Some of the key issues that weighed on the investor sentiment were:

• A negative impact of Rs 9,000 crore on the net worth of the merged entity due to policy harmonization and accounting changes. This resulted in a 4% reduction in the book value per share and a lower return on equity for FY24.
• Pressure on the net interest margin (NIM), which is expected to decline by 25 basis points in FY24 and 15-20 basis points in FY25-26 due to excess liquidity and lower yields on HDFC’s loan book. The management expects the NIM to stabilize at around 4% in the medium term.
• A higher cost-to-income ratio due to accounting changes, such as upfronting of sourcing costs for HDFC’s loans instead of amortizing them over time. The management expects the cost-to-income ratio to be around 40% in FY24 and improve gradually thereafter.
• A sharp increase in non-performing assets (NPAs) in HDFC’s corporate loan book, which rose from 2.9% in March 2023 to 6.7% in June 2023. The management attributed this to the stress in some sectors due to the COVID-19 pandemic and said that most of these NPAs are well-provisioned and secured.

Brokerages Downgrade HDFC Bank’s Stock Rating and Target Price

Following the analyst meeting, several brokerage firms revised their ratings and target prices for HDFC Bank’s stock, citing the near-term challenges and uncertainties. Some of the notable revisions were:

• Nomura downgraded HDFC Bank from ‘buy’ to ‘neutral’ and cut its target price from Rs 1,970 to Rs 1,800. It cited four negative surprises from the meeting: lower net worth, lower NIM, higher cost-to-income ratio, and higher NPAs.
• Kotak Institutional Equities reduced its target price from Rs 2,050 to Rs 1,935 and maintained its ‘buy’ rating. It lowered its earnings estimates for FY24 and FY25 by 11.9% and 7.9%, respectively, factoring in the merger-related adjustments.
• Investec cut its target price from Rs 2,000 to Rs 1,900 and retained its ‘buy’ rating. It trimmed its earnings estimates for FY24 and FY25 by 8% and 6%, respectively, reflecting the lower net worth and NIM.
• Edelweiss Securities reduced its target price from Rs 2,100 to Rs 1,950 and maintained its ‘buy’ rating. It revised its earnings estimates for FY24 and FY25 by 7% and 5%, respectively, taking into account the higher cost-to-income ratio and NPAs.

Is HDFC Bank Still a Good Investment?

Despite the near-term headwinds and volatility, most analysts remain positive on HDFC Bank’s long-term growth prospects and competitive advantages. They believe that the bank has a strong franchise, a diversified portfolio, a robust capital position, resilient asset quality, and a proven track record of delivering consistent returns.

Some of the factors that support HDFC Bank’s long-term growth potential are:

• A strong retail banking business that contributes over 90% of its fee income and has a low NPA ratio of 1.37%. The bank has a dominant market share in segments such as credit cards, personal loans, auto loans, and payment products.
• A growing commercial banking (MSME) business that caters to the needs of small and medium enterprises across India. The bank has a market share of over 10% in this segment and expects to grow it further by leveraging its product and digital capabilities.
• A strategic merger with HDFC Ltd., which creates synergies and cross-selling opportunities across products and customer segments. The merger also enhances the bank’s access to low-cost deposits from HDFC’s customers and improves its liquidity position.
• A focus on technology and digital transformation enables the bank to offer superior customer experience, operational efficiency, and innovation. The bank has invested heavily in upgrading its IT infrastructure, enhancing its data analytics, and launching new digital platforms and solutions.

Therefore, HDFC Bank’s stock may offer an attractive opportunity for long-term investors who are willing to overlook the short-term challenges and uncertainties. The bank’s stock is currently trading at a price-to-earnings ratio of 23.6, which is lower than its five-year average of 26.9. The bank’s stock also offers a dividend yield of 0.7%, which is higher than its five-year average of 0.6%.

This post HDFC Bank Share Price Plunges After Analysts Meet, Is It a Good Time to Buy? was originally published at Finance Crave