HDFC Bank: Despite merger, stock may remain sideways, caution analysts

With the merger between HDFC Bank and HDFC Ltd complete, analysts said the next key monitorable for the Street would be successful resolution of merger-related hiccups, including employee-related churn and roll out of complete banking services across branches.

At the bourses, they expect the stock to perform in-line with the benchmark indices in the near-term.

"There's usually an initial period of consolidation after a merger as the entities work towards integration.

"This may lead to short-term market volatility," said Sonam Srivastava, founder and chief executive officer (CEO) at Wright Research.

AK Prabhakar, head of research at IDBI Capital, too, believes the merger-related euphoria may not be sustainable at the bourses as merger-related costs may hit its profitability.

"The stock may see some weakness post the June quarter result, and may remain sideways over the next few months.

"That said, a big correction is unlikely in the stock," he added.

Shares of HDFC Bank hit a fresh record high of Rs 1,758 apiece in the intra-day trade on Monday before settling at Rs 1,719.5, up 1.5 per cent.

Those of HDFC Ltd, too, hit a fresh one-year high of Rs 2,926, but closed at Rs 2,871, up 1.7 per cent.

The two giants helped lift the benchmark S&P BSE Sensex beyond 65,000-mark, the Nifty50 atop 19,300, and the Nifty Bank index to over 45,000 level for the first time.

These indices ended less than 1 per cent up on Monday (July 3).

From their March lows, shares of HDFC Bank have surged 11.5 per cent at the bourses, while those of HDFC Ltd 13.5 per cent.

By comparison, the Sensex, Nifty, and Nifty Bank index have advanced 11.3 per cent, 14 per cent, and 16 per cent, respectively, during the period.

On June 30, the Boards of HDFC Ltd and HDFC Bank approved the effective date of merger as July 1, 2023, and fixed July 13, 2023, as record date for determining the shareholders of HDFC Ltd, who would be issued and allotted the shares of HDFC Bank.

Morgan Stanley expects FY24 EPS growth to be at 13 per cent, lower on YoY basis, partly owing to one-time merger-related adjustments, and expects merged loan growth to accelerate from 15-16 per cent currently to 17-18 per cent in four quarters.

"While the re-rating catalyst would be strong execution on deposit growth, downside risk could be higher than expected competitive intensity on pricing of deposits/loans," it said. with an 'Overweight' rating on the stock and a target of Rs 2,110.

That said, over the medium-to-long term, analysts remain bullish on the stock.

"The near-term pressure on margins, owing to the increased share of low-yielding mortgage loans in the portfolio, could be off-set by the benefits from an improved Cost-Income ratio and benign credit costs.

"This should support the merged entity to continue to deliver RoA of around 2 per cent," said Dnyanada Vaidya, research analyst for the BFSI sector at Axis Securities.

Sector outlook

Analysts expect the upswing in HDFC Bank's shares to support the on-going rally in the Nifty Bank index, which hit a new lifetime high of 45,353 in Monday's intra-day trade.

Investors, they said, should stay put in the pack as HDFC Bank's merger might trigger a wave of consolidation in the sector, which can be beneficial from a long-term perspective.

That apart, Indian banks as a whole, analysts believe, are well capitalised, the credit cycle is benign, and profitability is at its highest level in a decade.

"While interest rates have picked up sharply over the past year, rates across product segments are not significantly higher than pre-Covid levels.

"We expect the sector credit to record a 13 per cent CAGR over FY23-25, with private banks registering a strong 18 per cent CAGR," analysts at Nomura said in a recent note.

"A broader revival in corporate capex provides further optionality.

"The key near-term challenge for the sector is deposit mobilisation, and this, too, is showing signs of a sustainable revival, aided by recent rate hikes in term deposits," it added.

ICICI Bank, Axis Bank, and IndusInd Bank are the brokerage's top picks.

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