Shares of HDFC Bank, the country’s largest lender, dropped 4 per cent on Wednesday after the bank signalled pressure on net interest margins (NIM) and asset quality following its merger with mortgage financier HDFC Ltd, effective from 1 July.
HDFC Bank revealed that its gross non-performing asset (NPA) ratio increased to 1.4 per cent post-merger, up from 1.2 per cent at the end of the first quarter. This uptick was primarily attributable to HDFC’s high non-individual NPAs, which stood at 6.7 per cent as of 1 July.
In a report, Motilal Oswal noted that provisioning of Rs 7,600 crore was almost equally divided between general, contingent, and specific provisions. Srinivasan Vaidyanathan, HDFC Bank’s chief financial officer, stated that the bank has allocated Rs 3,800 crore towards specific provisions for NPAs, increasing the Provisioning Coverage Ratio for the former HDFC from about 40 per cent to 74 per cent.
The bank also expects its NIM to face short-term pressure due to liquidity overhang. HDFC Bank’s current NIM of 4.1 per cent is projected to decline to between 3.7 and 3.8 per cent. ICICI Securities highlighted in a note that it might take 3-4 quarters for the NIM to stabilise.
The merger also adversely impacted the net worth of the erstwhile HDFC Ltd, which fell to Rs 1,199 billion from Rs 1,340 billion. This decline was mainly due to the transition from Ind AS to Indian GAAP accounting systems and harmonisation of provisions.
Analysts at Nomura downgraded the stock to ‘Neutral,’ stating that unexpected disclosures would likely have a negative impact on the book value to price per share metric in the coming quarters.
“In our earnings per share cut of 5-9 per cent over FY24-26 and a 7 per cent reduction in book value per share, we have factored in the negative surprises from pro-forma earnings estimates of the merged entity. This will further dampen HDFC Bank’s medium-term return on assets profile,” Nomura commented.
Despite these challenges, Goldman Sachs remains optimistic about the bank’s prospects. It suggested that HDFC Bank is well-positioned to gain substantial market share in lending and deposits in the years ahead, courtesy of its expanding distribution network and strong focus on cross-selling to existing customers.