HDFC Bank investors await more clarity on proposed merger with HDFC

It is a good sign that the National Company Law Tribunal has allowed HDFC Bank to hold a shareholders’ meeting on November 25 to get approval for the proposed merger.

This is encouraging but analysts say the merger is hurting investor sentiment in HDFC Bank. Shares of the bank have lost 2% so far in FY23, compared to a 9% gain in the Nifty Bank index.

“While we remain positive on the bank, the near-term issue of merger will remain a significant overhang as we need clarity on the various arrangements required for a smooth transition,” analysts at Kotak Institutional Equities said in a report. on 17 October.

Coming to Q2, HDFC Bank saw an improvement in key metrics. The bank’s net interest margin rose 10 basis points sequentially to 4.1%. One basis point is 0.01%. Gross Non-Performing Assets (NPAs) stood at 1.23% while Net NPAs stood at 0.33%, both of which declined by 5 bps and 2 bps, respectively, on a sequential basis.

The loan book grew 23% y-o-y (y-o-y) due to growth in corporate and retail loans, followed by strong growth in commercial and rural banking loans.

However, according to analysts at Macquarie Capital Securities (India), the 19% year-on-year growth in deposits could have been better. “We believe the merger with HDFC and 20%+ year-on-year is critical to sustaining strong 20%+ credit growth in the medium term. While the bank has actually increased retail deposits by over 20% and bulk deposits have led to lower overall growth, the challenge is to sustain this deposit growth for several quarters,” he said.

In addition, HDFC Bank’s operating expenses grew 21% year-on-year and its cost-to-income ratio stood at 39% in the second quarter. Analysts expect costs to remain largely high on account of branch expansion and aggressive hiring. The bank said in the call that the branch opening process in H2FY23 will be expedited. In H1FY23, the bank has opened 157 branches.

“The cost-to-ratio may increase slightly, but with overall revenue growth supported by improved margins and steady credit growth, we expect earnings momentum to remain strong. “Treasury losses are likely to moderate, which will help absorb any increase in operating costs along with controlled credit costs,” said Nitin Agarwal, analyst at Motilal Oswal Financial Services.

Certainly, the positive developments regarding the merger will boost investor sentiment. Shares of HDFC Bank are down 16% from the 52-week high seen on 18 October 2021.