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<\/p>\nWeakness in HDFC Bank’s net interest margin (NIM) might have bottomed out in the July-September quarter (Q2-FY24), analysts said on Tuesday, as most of the merger-related one-time adjustments have been done.<\/p>\n
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The bank, they believe, should be able to grow from here on, allowing the stock to reverse its underperformance.<\/p>\n
“The weak NIM print was not unexpected given the merger and regulatory impact caused by the incremental cash reserve ratio (ICRR; 5-10 bps for the quarter).<\/p>\n
“The regulation on ICRR, however, has now been withdrawn, which should result in it reversing in Q3-FY24,” said analysts at Kotak Institutional Equities.<\/p>\n
In the recently concluded quarter, the lender reported NIM of 3.6 per cent on interest earning assets (IEA), and 3.4 per cent on total earnings assets.<\/p>\n
The management, however, expects margins to normalise gradually.<\/p>\n
Analysts believe the best approach to forecast NIM trajectory would be to compare the loan yields and cost of funds differential with ICICI\/Axis Bank and build the NIM convergence cycle based on growth trajectory for the bank and re-pricing of the erstwhile HDFC Ltd borrowings.<\/p>\n
However, as these variables are challenging to forecast, the estimates are unlikely to be accurate.<\/p>\n
Nonetheless, analysts at Prabhudas Lilladher expect NIM to improve from 3.66 per cent in Q2-FY24 to 3.77 per cent in Q4-FY24.<\/p>\n
“Overall FY24 earnings performance would be muted, given the sharp fall in NIM in Q2.<\/p>\n
“However, as per our calculations roughly 43 per cent of erstwhile HDFC Ltd liabilities (high-cost) are expected to be replaced by FY26, which should translate to NIM improvement from 3.57 per cent to 3.72 per cent over FY24-26,” they said in a result review report.<\/p>\n
Meanwhile, the more-than-expected contraction in HDFC Bank’s NIM led to slight hit on core-operating profit at Rs 22,700 crore for the quarter, while cost-income ratio stood at 40.4 per cent (down 240 bps QoQ).<\/p>\n
On the contrary, loan book saw a healthy growth of 4.9 per cent QoQ, while deposits grew 5.3 per cent QoQ.<\/p>\n
Asset quality witnessed marginal deterioration with some of HDFC Ltd’s wholesale loans in the restructured\/stage-2 category being classified as Gross Non-Performing Loans.<\/p>\n
Net profit grew 33.7 per cent QoQ\/50.6 per cent YoY to Rs 15,976 crore, and the net interest income (NII) increased by 30.3 per cent to Rs 27,385 crore.<\/p>\n
“We expect sequential improvement in HDFC Bank’s core earnings momentum as NIMs recover gradually.<\/p>\n
“We believe that current valuations adequately capture the merger related pangs and should alleviate concerns regarding compression of return on assets (RoAs) over the medium-term. As HDFC Bank’s liabilities momentum sustains, we expect the stock to revert its recent underperformance,” said analysts at JM Financial.<\/p>\n
At the bourses, shares of HDFC Bank climbed 1.8 per cent intraday before closing 0.77 per cent higher. By comparison, the benchmark S&P BSE Sensex gained 0.39 per cent.<\/p>\n
The stock, however, has underperformed the market by delivering returns of -8.2 per cent\/-7.5 per cent\/6.5 per cent over the past 3 months\/6 months\/12 months as against the Sensex’s return of -0.2 per cent\/10.87 per cent\/13.72 per cent, respectively, during the period.<\/p>\n
Going ahead, analysts believe sustained RoA\/RoE growth, stable management, and valuation comfort make it a good bet over the medium-to-long term.<\/p>\n
The long-awaited listing of HDB Financial Services should be another catalyst for the stock, they said.<\/p>\n
“HDFC Bank has made a good beginning after the merger, and given a huge pace of capacity building, we believe that there are levers in place to sustain this momentum in business growth.<\/p>\n
“Margins are likely to recover gradually, which, along with improved operating leverage should improve return ratios.<\/p>\n
“We estimate HDFC Bank to deliver a CAGR of 18 per cent\/20 per cent in loans\/deposits and a 21 per cent CAGR in earnings over FY24-26, translating into RoA\/RoE of 2 per cent\/17.4 per cent by FY26,” said Motilal Oswal Financial Services.<\/p>\n